DATE: 20041119

DOCKET: C40632

COURT OF APPEAL FOR ONTARIO

RE:

MINCOM CORONA REALTY INC. (Respondent/ Plaintiff) v. MINCOM REALTY SYSTEMS INC. (Appellant/Defendant)

BEFORE:

DOHERTY, MOLDAVER and GILLESE JJ.A.

COUNSEL:

Geoffrey D.E. Adair, Q.C.

for the appellant

Mitchell B. Rosenblatt

for the respondent

HEARD: ORALLY

RELEASED:

November 12, 2004

November 12, 2004

On appeal from the judgment of Justice Eugene B. Fedak of the Superior Court of Justice dated July 24, 2003.

E N D O R S E M E N T

[1] The appellant and respondent entered into a franchise agreement in February 1996. The respondent was given the right to use the appellant’s name and system in the course of the sale of real estate in what was referred to as “the Hamilton area”. Under the agreement, the Hamilton area included Burlington, however, the appellant was given six months in which to offer the Burlington area to a separate franchisee, failing which the Burlington area would be included in the respondent’s franchise area. The agreement was for a five-year period and the respondent had the option to renew it for a further five years.

[2] The appellant breached the franchise agreement by entering into a franchise agreement with a third party for the Burlington area after the six months had expired.

[3] The respondent became aware of the breach in February 1998, two years after entering into the franchise agreement. The respondent elected to carry on with the franchise agreement until the end of the five-year period. It chose not to renew the agreement.

[4] The appellant challenges the damage assessment only. In our view, the damages awarded at trial cannot stand.

[5] The trial judge awarded $50,000.00 for lost profits. This amount represented the profit that the trial judge held would have been earned by the respondent in the Burlington area had that area not been improperly given to a third party and had the respondent pursued the real estate business in that area as it had planned to do.

[6] The respondent failed to prove any lost profits. Neither the evidence of the gross commissions earned by the third party who went into the Burlington area, nor the evidence of the respondent’s own gross commissions in the Hamilton area offered any basis upon which an informed determination of the respondent’s potential lost profits could be made. The respondent’s financial statements to which we were referred in oral argument also do not provide any basis upon which an assessment of the respondent’s loss of potential profits in the Burlington area could be made. There should have been no award for lost profits.

[7] The trial judge ordered the royalties paid by the respondent to the appellant during the five years under the terms of the franchise agreement returned to the respondent. He erred in doing so. The respondent chose to continue with the franchise agreement and, under that agreement, the royalties were owed when commissions were earned. In our view, the appellant’s breach had nothing to do with the respondent’s obligation to pay royalties given the respondent’s decision to continue the agreement.

[8] The trial judge concluded that the respondent substantially increased its advertising and promotion budget in the first two years of the franchise agreement. The trial judge held that the respondent did so, anticipating that it would expand into the Burlington area where it was not known, and that it would have a ten-year relationship with the appellant. We think there was evidence to support these findings.

[9] The appellant’s breach of the franchise agreement effectively foreclosed the respondent’s expansion into the Burlington area and, for all intents and purposes, precluded the exercise of the five-year option. Given the appellant’s breach of the franchise agreement, some part of the added expenses for advertising and promotion spent by the respondent in the first two years of the agreement is properly regarded as a wasted expense. The trial judge held that fifty percent of the additional costs were recoverable as damages. We would defer to his assessment as to the percentage of the expenses which should be regarded as wasted. However, on the figures provided to this court from the trial record, the increase in the advertising and promotion expenditures in the first two years of the franchise agreement was $72,000.00. Using the trial judge’s figure of fifty percent, we would award $36,000.00 for wasted expenses.

[10] The respondent paid a flat licensing fee at the commencement of the franchise agreement. The trial judge held that the entire fee was recoverable. We disagree. It may be that some part of the relatively small fee was attributable to the Burlington area and, therefore, could be recovered when the appellant, in breach of the agreement, franchised the Burlington area to a third party. No attempt was made at trial to quantify the part of the licensing fee which could be attributable to the Burlington area. This court is in no position to attempt that quantification. Consequently, there should be no recovery of any part of the licence fee.

[11] The trial judge also awarded punitive damages in the amount of $25,000. In doing so, he said:

By “purposefully” choosing the ambiguous wording in Schedule B, Mincom [the appellant] acted in bad faith. I find that its conduct was contrary to standards of honesty, reasonableness and fairness.

[12] This finding is based on a misapprehension of the evidence. The ambiguous wording in Schedule B was chosen by the representatives of the respondent, and not by the appellant. In light of this significant misapprehension in the evidence, the trial judge’s award of punitive damages cannot stand. The award will be set aside.

[13] The order made at trial will be varied. The total damage award will be reduced to $36,000.00. Prejudgment interest on this amount should run from the date of the breach, since that amount had been spent by the respondent prior to the breach.

[14] The appellant is entitled to his costs on appeal on a partial indemnity basis. Counsel agree that an appropriate figure is $13,966.43, inclusive of disbursements and G.S.T.

“Doherty J.A.”

“M.J. Moldaver J.A.”

“E.E. Gillese J.A.”