DATE: 20050630
DOCKET: C39693, C39708 and C41167
COURT OF APPEAL FOR ONTARIO
MACPHERSON, CRONK and LANG JJ.A.
B E T W E E N :
COUNTRY STYLE FOOD SERVICES INC.
Plaintiff (Appellant)
Alan J. Lenczner, Q.C. and Estée Garfin,
for the appellant, 1176847 Ontario Limited
- and -
1304271 ONTARIO LIMITED, MARC MESIC and ZELJKO VUKOVIC
Arnold H. Zweig,
for the appellant (respondent), Country Style Food Services Inc.
Defendants (Respondents)
AND BETWEEN:
1304271 ONTARIO LIMITED, MARC MESIC and ZELJKO VUKOVIC
Plaintiffs by Counterclaim (Respondents)
Wolfgang W. Kaufmann,
for the respondents, 1304271 Ontario Limited, Marc Mesic and Zeljko Vukovic
- and -
COUNTRY STYLE FOOD SERVICES INC. and 1176847 ONTARIO LIMITED
Defendants by Counterclaim (Appellants)
- and -
1176847 ONTARIO LIMITED
Third Party (Appellant)
Heard: January 19 and 21, 2005
On appeal from the judgments of Justice Sandra Chapnik of the Superior Court of Justice dated February 11, 2003 and November 26, 2003.
CRONK J.A.:
I. Introduction
[1] This case concerns the obligations owed among a landlord, a franchisor and a franchisee in circumstances where a retail shopping mall developed by the landlord, in which the franchisee operated a coffee and donut shop franchise on premises leased from the landlord, was redesigned by the landlord without prior notice to the franchisor and the franchisee and in a manner said to have damaged the franchisee’s business. We are required to consider whether the landlord’s original site plan for the mall, which was attached to the leases entered into by the parties, constituted an actionable misrepresentation concerning the layout and configuration of the mall, whether the redesign of the mall and associated construction activities by the landlord derogated from the grant of the leased premises, and whether the franchisor breached a duty of good faith owed by it to the franchisee. We are also required to address the franchisor’s claim against the franchisee for unpaid rent and related charges, the franchisee’s damages claim against the franchisor and the franchisor’s claim for contribution and indemnity from the landlord.
[2] Following trials before Chapnik J. of the Superior Court of Justice, the landlord and the franchisor were found liable to the franchisee for misrepresentation, derogation from the grant and, in the case of the franchisor, for breach of a duty of good faith. The trial judge awarded the franchisee damages in the amount of $400,000 as against both the landlord and the franchisor, dismissed the franchisor’s claims against the franchisee, and found the landlord liable to fully indemnify the franchisor for the monies owed to the franchisee. The landlord and the franchisor both now appeal to this court.
[3] For the reasons that follow, I conclude that the landlord negligently mis-represented and the franchisor innocently misrepresented the mall development to the franchisee, occasioning damages to the franchisee; that the franchisor also breached a duty of good faith owed by it to the franchisee; that the trial judge’s assessment of the franchisee’s damages is supportable on the evidential record in this case; that the trial judge did not err, in the result, in her treatment of the franchisor’s claim for damages against the franchisee; and that the trial judge erred in finding the landlord liable to indemnify the franchisor. Accordingly, I would dismiss the appeals, save for the landlord’s appeal from the indemnification judgment, which appeal I would allow.
II. Factual Background
(1) Contractual Arrangements
(i) Headlease
[4] In July 1997, 1176847 Ontario Limited, carrying on business as Orfus Realty (the “Landlord”), obtained municipal approval of a site plan (the “Site Plan”) for the construction of a retail shopping mall on lands owned by it at the intersection of Thorncliffe Park Drive and Overlea Boulevard in Toronto, designated municipally as 62-66 Overlea Boulevard (the “Development”).
[5] Country Style Food Services Inc. (“Country Style”)[^1] owns and operates a coffee and donut shop franchise system in Ontario and elsewhere. In the spring of 1998, Country Style agreed to lease from the Landlord a building and lands in the Development for the operation of a Country Style coffee and donut shop and drive-thru facility, totalling approximately 2,488 square feet. The formal lease between the parties, dated August 20, 1998 (the “Headlease”), contemplated that the leased premises would be sublet by Country Style to a franchisee for the operation of the business (the “Overlea Franchise”).
[6] The leased premises were defined under the Headlease as the “Land and Building”. The terms “Land” and “Building” were defined, in turn, with reference to the Site Plan:
1.01 – Meaning of Certain Terms
In this Lease and in the Schedules to this Lease:
(2) “Building” means the building located on the Land and every addition thereto;
(5) “Lands” means the lands at the north east corner of Overlea Boulevard and Thorncliffe Park Drive, Toronto (formerly East York), outlined in blue on the
plan attached hereto as Schedule “A”, … and municipally known as 66 Overlea Boulevard, East York, Ontario.
[7] During the term of the Headlease, Country Style was obliged to pay “minimum rent” to the Landlord on a monthly basis and, as “additional rent”, a proportionate share of the annual cost of all common area maintenance expenses (“CAM”) for the Development, plus the operating and maintenance costs and taxes for the premises leased by Country Style.
[8] The Headlease also addressed the permitted and prohibited uses in the Development, and the required use of Country Style’s premises. Country Style agreed that it would use the leased premises only “for the business of a Country Style Store with drive-thru and seating and the sale of all products sold in its majority of stores from time to time”, subject to the compliance of such uses with applicable municipal building and zoning by-laws.
[9] For its part, and provided that Country Style was not in default under the Headlease, the Landlord agreed not to lease space or to permit the use or occupancy of premises in the Development for stipulated food service uses that were competitive with Country Style’s business. However, the Landlord was permitted to rent specific premises to a specialty sandwich shop and other premises within the Development to businesses specializing in identified food services, including fast food services, so long as these did not operate from a free standing building or include a drive-thru. The Headlease also contained a covenant by the Landlord for the quiet enjoyment of the leased premises.
(ii) Site Plan
[10] Schedule “A” to the Headlease consisted of the Site Plan. It identified three proposed buildings in the Development: a 12,131 square foot ‘L-shaped’ retail building at the southwest corner; a 2,500 square foot Country Style donut shop and drive-thru facility to the east of the ‘L-shaped’ building; and a 3,559 square foot Burger King restaurant at the northeast corner of the Development.
[11] The Site Plan also visually depicted the location and size of the entrances to the Development, the interior roadways in the Development, the number and location of planned parking spaces (including those in the vicinity of Country Style’s premises), and the traffic flow and access to Country Style’s drive-thru. As relevant to these proceedings, there were two main entrances to the Development shown on the Site Plan: (i) from Thorncliffe Park Drive on the west, in the vicinity of the proposed ‘L-shaped’ retail building; and (ii) from Overlea Boulevard, on the south. Importantly, an access road running from the Thorncliffe Park Drive entrance almost directly to the Country Style drive-thru was also identified on the Site Plan.
(iii) Franchise Agreement and Sublease
[12] Marc Mesic became a Country Style franchisee in 1992 when he acquired a franchise on Airport Road in Mississauga. Zeljko Vukovic, Mesic’s brother-in-law, worked for Mesic at this facility.
[13] Mesic was interested in acquiring another Country Style franchise and placed his name on a waiting list for available locations. When the Overlea Franchise became available, Country Style provided Mesic with a sketch of the site and, together with Vukovic, Mesic ‘walked the site’. At that time, the Development was fully constructed in accordance with the Site Plan, save for the ‘L-shaped’ building and the Country Style coffee and donut shop.
[14] Mesic and Vukovic both testified at trial. Mesic said that he was attracted to the Overlea Franchise because it enjoyed many similarities to his Airport Road franchise and it was surrounded by a large industrial development to the north and by commercial and residential developments in the area. Vukovic indicated that the location of the Overlea Franchise was conducive to attracting business from the industrial, office and residential areas surrounding the Development. He said that he found the site appealing, that the entrances and parking lots on the site were “very smooth, very easy flowing” and able to accommodate truck traffic without disrupting other customer traffic, and that the Thorncliffe Park Drive entrance led “right into my [drive-thru]”.
[15] Mesic and Vukovic decided to acquire the Overlea Franchise. On July 9, 1998, 1304271 Ontario Limited (“130 Ontario”), a company owned by Mesic and Vukovic,[^2] entered into a franchise agreement with Country Style whereby it acquired the right to own and operate the Overlea Franchise (the “Franchise Agreement”). The cost of the Overlea Franchise was approximately $300,000, consisting of a franchise fee of $35,000, equipment costs of $175,851 and leasehold improvement expenses of about $88,381. In addition, 130 Ontario agreed under the Franchise Agreement to pay royalty payments to Country Style and to make contributions to Country Style’s advertising expenses on a monthly basis.
[16] Also on July 9, 1998, 130 Ontario entered into a sublease with Country Style concerning the premises leased by Country Style under the Headlease for the operation of the Overlea Franchise (the “Sublease”). Under the Sublease, 130 Ontario agreed to pay to Country Style monthly “minimum rent”, “percentage rent” based on the gross sales of the Overlea Franchise calculated in accordance with a formula set out under the Sublease and, when due, “additional rent”, including all royalties, advertising fees and other amounts payable under the Franchise Agreement. 130 Ontario also agreed to use and occupy the leased premises for the operation of a Country Style donut shop “and for no other purpose” and Country Style covenanted in favour of 130 Ontario for quiet enjoyment of the leased premises.
[17] A copy of the Headlease, including the Site Plan, was attached to the Sublease and provided to the Franchisees’ solicitors prior to the execution of the Franchise Agreement and the Sublease. The Headlease was mentioned in several parts of the Sublease. For example, paragraph 12 stated, in part, “Lessee acknowledges that Lessor holds rights of possession to the premises by virtue of a lease, attached as Schedule “A”, between the Headlandlord as stated therein and Lessor.” As well, paragraph 8(o) of the Sublease stipulated:
The Lessee covenants to pay all charges, costs, assessments, taxes and expenses of any kind whatsoever otherwise payable by the Lessor herein pursuant to the provisions of the head lease [sic] attached hereto as Schedule “A” and further to assume all obligations of the Lessor pursuant to the provisions of the said Head Lease [sic], attached hereto.
[18] 130 Ontario’s covenants and agreements under the Franchise Agreement were incorporated by reference into the Sublease and vice versa. As well, Country Style was granted the right to terminate both agreements if 130 Ontario defaulted on its obligations under either.
[19] The Headlease and the Sublease were silent as to the authority of the Landlord to alter the layout and configuration of the Development or to change the Site Plan itself. This is significant because, in the absence of such provisions, the Landlord claims that it was free to alter the Development and the Site Plan at will, so long as it did not breach the provisions of the Headlease, including the ‘prohibited uses’ provisions to which I have referred.
[20] As is not uncommon in franchise arrangements, the corporate debt of 130 Ontario under the Franchise Agreement and the Sublease was secured by the personal guarantees of its principals, Mesic and Vukovic.
[21] The Overlea Franchise opened for business on July 24, 1998. The Development was then fully constructed, save for the ‘L-shaped’ building. For the next year, the Franchisees paid all rents, royalty payments and other charges due to Country Style.
(2) Redesign of the Development
[22] In July 1999, the Landlord commenced construction to redesign several features of the Development. The construction lasted until April 2000, a period of about nine months. The changes to the Development were described by the trial judge in this fashion:
The Thorncliffe Park entrance was closed off completely for 4 to 6 weeks; the paving and curbs that had previously been constructed, were torn up. The new access entrance, placed to the south, stood four feet narrower than the original entrance and closer to the lights at Overlea Drive and Thorncliffe Park Road. The parking area (and thus access to the Country Style drive-thru) was altered to lead straight through the mall to the east side of the property. Instead of constructing the L-shaped building, two back-to-back convenience strip mall buildings were built to incorporate fast food and convenience-type stores at the northwest corner of the mall with parking in front of each.
[23] This redesign was conceived from at least January 1998, when the Landlord’s architects prepared a revised site plan, outlining proposed changes to the Development to improve its marketability. By mid-June 1998, a new firm of architects had prepared an outline for the redesign of the Development in accordance with the revised site plan and, by mid-July (shortly after the execution of the Franchise Agreement and the Sublease and prior to the execution of the formal Headlease), the architects had met with municipal authorities to discuss the redesign. Coincident with the July opening of the Overlea Franchise, the Landlord was marketing the redesigned Development to prospective tenants.
[24] The Landlord provided no prior notice to Country Style or the Franchisees of the planned redesign of the Development or of any proposal to alter the Site Plan.
[25] When construction started, the Franchisees and Country Style promptly objected, maintaining that the construction and the redesign would adversely affect the business of the Overlea Franchise. Country Style initially viewed the Landlord’s activities as “unacceptable” and, according to the Franchisees, told Mesic that it would deal with the Landlord. However, the construction and the redesign continued unabated. Conse-quently, the Franchisees began to withhold rent and other payments owed to Country Style under the Franchise Agreement and the Sublease. By the spring of 2000, approximately $147,800 in arrears had accumulated. Nonetheless, Country Style continued to make all payments due to the Landlord under the Headlease. In so doing, it reserved its right to claim damages from the Landlord.
[26] When the Landlord’s construction activities drew to a close in the spring of 2000, Country Style and the Franchisees reached an interim agreement whereby Country Style agreed to forbear on the enforcement of its rights against the Franchisees if the withheld payments were paid to the Franchisees’ solicitors, in trust, pending resolution of the dispute. The Franchisees paid the sum of $147,800.56 to their solicitors in trust (the “Trust Funds”) and agreed to resume payments to Country Style effective May 1, 2000.
[27] During the next year, the Franchisees made all payments due to Country Style. But, in May 2001, they again stopped making the required payments and fresh arrears began to accumulate. By February 2002, these new arrears totalled $71,514. Once again, Country Style continued throughout to make all payments owing to the Landlord under the Headlease, when due.
(3) Litigation
[28] In October 2001, Country Style sued the Franchisees, seeking recovery of all accrued and outstanding payments owed to it, an order enforcing the terms of the Franchise Agreement and the Sublease and declaring those agreements to be at an end, and damages in the sum of $500,000, amongst other relief.
[29] Perhaps not surprisingly, Country Style’s lawsuit triggered a plethora of litigation among the parties.
[30] The Franchisees defended the action, denying any default by them and any indebtedness to Country Style. They also counterclaimed against Country Style[^3], seeking damages in the sum of $1 million for breach of contract and the further sum of $1 million for breach of duty, together with interest and costs. Ultimately, the Franchisees amended their counterclaim to include a claim against Country Style for damages for misrep-resentation and to add the Landlord as a defendant.
[31] As against the Landlord, the Franchisees sought damages in the sum of $1 million for misrepresentation and deceit, based principally on the assertion that the Site Plan constituted a misrepresentation as to the layout and configuration of the Development. They pleaded that the Landlord owed a duty to them “to provide truthful and accurate information” concerning the Development and “to disclose its plan to revise the Site Plan”. They also claimed entitlement to rescind the Franchise Agreement and the Sublease and, as against both the Landlord and Country Style, “damages equal to all amounts expended or lost by the [Franchisees] in connection with the [Overlea Franchise]”.
[32] In its defence to the counterclaim, the Landlord denied any representation to the Franchisees regarding the Development, claimed that it had honoured its “legal obligation” to Country Style, and maintained that it had “no knowledge of [the Franchisees’] intentions, inducements or motivation in leasing [the Overlea Franchise premises]”.
[33] Three important events occurred thereafter.[^4] First, Country Style pleaded in defence to the Franchisees’ counterclaim:
- However, the Plaintiff denies that the changes [to the Development] were material especially in relation to the [Overlea Franchise] premises and denies that the changes to the site plan and to the plaza resulted in any damages to the [Franchisees].
In the alternative, Country Style sought contribution and indemnity from the Landlord.
[34] Second, Country Style commenced a third party action against the Landlord, seeking contribution and indemnity for any amounts that might be found due and owing by it to the Franchisees in the Main Action (the “Third Party Action”). Contrary to its pleaded position in the Main Action, in its third party claim Country Style admitted that the Landlord’s alterations to the Development “affect[ed]” the Franchisees and the Overlea Franchise and were “detrimental” to the “Country Style business” in specific respects. It also pleaded that the Landlord’s changes to the Development “were not authorized and constitute[d] a breach of the [Headlease]” and further alleged that the Landlord failed to effect agreed modifications to the redesign of the Development that would have “mitigated the losses suffered by the [Franchisees]”.
[35] Third, Country Style moved for summary judgment in the Main Action, seeking recovery of all accrued and outstanding rent and other payments owed to it by the Franchisees, amongst other relief. These payments, which consisted of the Trust Funds ($147,800.56) and the post-May 2001 payments withheld by the Franchisees ($71,514), then totalled $219,314.56. In their response to this motion, the Franchisees claimed a right of set-off against the monies owed to Country Style, based on an alleged overpayment by them of CAM, taxes and related charges.
[36] By judgment dated February 2, 2002, Gans J. of the Superior Court of Justice (the “motions judge”) granted the following relief:
i) an order that Country Style recover the Trust Funds from the Franchisees. Execution of this order was stayed pending the final disposition of the Franchisees’ counterclaim;
ii) an order that Country Style recover the further sum of $39,114 from the Franchisees on account of the post-May 2001 withheld payments, to be paid from the Trust Funds. Execution of this order was not stayed;
iii) a declaration that the Franchise Agreement and the Sublease were at an end and an order in favour of Country Style for a writ of possession concerning the Overlea Franchise;
iv) an order directing a trial of the following three issues: (i) “the counterclaim for lost profits and alleged diminution of the value of the [Overlea] franchise on the derogation issue”; (ii) Country Style’s claim for payment by the Franchisees of the balance of the post-May 2001 payments, in the sum of $32,400; and (iii) the Franchisees’ set off claim; and
v) costs in favour of Country Style in the amount of $2,500, also payable out of the Trust Funds
(the “Summary Judgment”).
[37] Thus, under the Summary Judgment, Country Style was found entitled to the aggregate amount of $189,414.56. This consisted of the Trust Funds ($147,800.56), the sum of $39,114 to be paid from the Trust Funds on account of post-May 2001 payments, plus the sum of $2,500 for costs. After payment in accordance with the Summary Judgment, the Trust Funds were reduced to $106,185.56, plus interest. These net Trust Funds were subject to a stay of execution. Country Style’s entitlement to the balance of the post-May 2001 payments ($32,400) and the Franchisees’ set-off claim and counterclaim for damages remained in issue.
[38] In its defence to the Third Party Action and Country Style’s crossclaim in the Main Action, the Landlord denied that Country Style or the Franchisees suffered any damages from the redesign of the Development, pleaded that the Headlease did not require it to carry out the Development in accordance with the Site Plan, and alleged that Country Style, by its conduct, waived or was estopped from asserting any right to object to the redesign.
[39] On February 5, 2002, the Franchisees vacated and Country Style took possession of the Overlea Franchise in accordance with the Summary Judgment. Thereafter, when Country Style attempted to sell the Overlea Franchise, it received a third party offer to purchase for the amount of $320,000. However, this sale did not close and, at the time of trial, Country Style itself was operating the Overlea Franchise.
(4) Trial Judge’s Decisions
[40] The trial judge held that the Landlord’s redesign of the Development was a derogation from the grant of the leased premises, that the Site Plan misrepresented the Development, that the Franchisees relied upon the Site Plan to their detriment, and that Country Style breached a duty of good faith owed by it to the Franchisees. The trial judge also held that the amount of the Franchisees’ overpayment for CAM and related charges was $12,000, that the value of the Overlea Franchise was “at least” $320,000, and that Country Style, by repossessing the Overlea Franchise, had “the benefit of this asset previously paid for by the franchisee” and “The value of the franchise to Country Style fully covers the [Summary Judgment] and any further amounts reasonably found to be due and owing to it. …The franchisor has, in effect, been made whole.”
[41] By judgment dated February 11, 2003 in the Main Action, the trial judge dismissed Country Style’s claim for damages against the Franchisees; made permanent the stay of execution granted by the motions judge; awarded damages to the Franchisees in the sum of $400,000, payable jointly and severally by the appellants; directed that the Trust Funds be applied in partial satisfaction of the damages so awarded; and allowed the Franchisees their costs, on a partial indemnity basis, in the sum of $90,610.44, also payable jointly and severally by the appellants.
[42] Subsequently, by judgment dated November 26, 2003 in the Third Party Action, the trial judge ordered the Landlord to indemnify Country Style for all amounts payable by Country Style to the Franchisees in the Main Action, including costs and interest. She also ordered the Landlord to pay Country Style’s costs of the Third Party Action, following assessment.
III. Issues
[43] There are three main issues:
(1) whether the trial judge erred by finding liability of the appellants on the basis of (i) misrepresentation; (ii) derogation from the grant; and (iii) in the case of Country Style, breach of duty of good faith;
(2) whether the trial judge erred in her treatment of the Summary Judgment (i) by modifying or “overriding” it, absent jurisdiction to do so; (ii) by making per-manent the stay of execution granted thereunder; and (iii) by concluding that the value of the Overlea Franchise offset Country Style’s outstanding claim against the Franchisees; and
(3) whether the trial judge erred in granting Country Style’s contribution and indemnity claim against the Landlord.
IV. Analysis
(1) Standard of Review
[44] The standard of review applicable to the trial judge’s findings of fact is well-established. In Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235 at para. 25, the Supreme Court of Canada confirmed that appellate courts must defer to all factual conclusions of a trial judge unless the challenged finding was the product of both a palpable and overriding error. See also Waxman v. Waxman (2004), 44 B.L.R. (3d) 165 (Ont. C.A.) at paras. 291 and 300-01, leave to appeal to S.C.C. refused, [2004] S.C.C.A. No. 291 and H.L. v. Canada (Attorney General), 2005 SCC 25. Accordingly, this court cannot retry any aspect of this case. This is particularly significant where, as here, many of the arguments raised on appeal involve re-argument of the case at trial and invite the reversal of essential findings of fact made by the trial judge.
(2) Liability Findings
(i) Misrepresentation
[45] The appellants argue that the trial judge erred in law in her application of the requisite elements of the test for negligent misrepresentation. They make three submissions. First, they contend that there was no representation of fact because the Landlord never dealt directly with the Franchisees. Further, the inclusion of the Site Plan in the Headlease, they claim, was for the sole purpose of informing the Franchisees of the CAM and other charges payable by them and this narrow use of the Site Plan did not render other items depicted in the Site Plan an express term of the Headlease. Second, they maintain that the Franchisees did not rely upon the Site Plan but, rather, upon subjective conclusions about permitted uses in the Development notwithstanding that permitted and prohibited uses were express terms of the Headlease. Third, they submit that the trial judge erred by concluding that the Franchisees relied on the Site Plan to their detriment. They maintain that any interference with access to the Overlea Franchise was caused by uses permitted under the Headlease and that there was insufficient evidence of a causal link between any damages suffered by the Franchisees and the redesign of the Development. They also assert that the trial judge erred in her approach to the assess-ment of the Franchisees’ damages and in her quantification of those damages. I will consider each of these submissions, in turn.
(a) Representation of Fact
[46] The trial judge correctly identified the requisite elements of the test for negligent misrepresentation as confirmed by the Supreme Court of Canada in Queen v. Cognos Inc., [1993] 1 S.C.R. 87 at para. 33:
(1) there must be a duty of care based on a “special relationship” between the representor and the representee; (2) the representation in question must be untrue, inaccurate, or misleading; (3) the representor must have acted negligently in making said misrepresentation; (4) the representee must have relied, in a reasonable manner, on said negligent misrepresentation; and (5) the reliance must have been detrimental to the representee in the sense that damages resulted.
[47] The first element of this test, the requirement of a duty of care based on a ‘special relationship’ between the representor and the representee, was considered and clarified in Hercules Managements Ltd. v. Ernst & Young, [1997] 2 S.C.R. 165, Anns v. Merton London Borough Council, [1978] A.C. 728 (H.L.) and Kamloops (City) v. Nielson, [1984] 2 S.C.R. 2. The trial judge considered these authorities, and properly observed:
The first issue is whether there was a sufficiently close relationship between the parties that in the reasonable contemplation of the defendant, carelessness on its part might cause damage to the plaintiff. The second issue revolves around the considerations, if any, which might negate or limit the scope of the duty.
[48] The appellants do not suggest that the trial judge failed to recognize the legal principles applicable to the tort of negligent misrepresentation. Rather, they assert that she erred in her application of these principles to the facts of this case by holding that the appellants owed a duty of care to the Franchisees, that they breached these duties, and that the Site Plan constituted a representation of fact as to the layout and configuration of the Development, upon which the Franchisees could be expected to rely. I would not give effect to these submissions.
[49] Country Style acknowledges that, as a franchisor, it owed a duty of care to the Franchisees to deal honestly and reasonably with them, to give consideration to their interests as well as its own before making decisions that affected the Franchisees, and to act in good faith: see Shelanu Inc. v. Print Three Franchising Corp. (2003), 64 O.R. (3d) 533 (C.A.) at paras. 66 and 69.
[50] In contrast, by emphasizing the trial judge’s findings that the Franchisees did not deal directly with it and that all communications with the Franchisees passed through Country Style, the Landlord indirectly asserts that it did not owe any duty of care to the Franchisees. This submission flounders on the factual findings of the trial judge.
[51] Before this court, the Landlord does not contest that it alone had prior knowledge of and control over the planned redesign of the Development; that it possessed this knowledge at a time when it was completing the negotiation of the Headlease with Country Style and when Country Style, in turn, was entering into the Franchise Agreement and the Sublease with the Franchisees; that the Landlord knew that the leased premises were to be sublet by Country Style to a franchisee; that the Headlease, to the knowledge of the Landlord, included the Site Plan as an attachment; that the Landlord also knew that the Headlease, including the Site Plan, was an attachment to the Sublease; that by July 1998 the Development had been constructed in accordance with the Site Plan, save only for the construction of the ‘L-shaped’ retail building and the Country Style donut shop; and that, nonetheless, the Landlord failed to disclose the fact of the intended redesign or the details of the redesign of the Development to either Country Style or the Franchisees.
[52] Against this backdrop, the trial judge held that the Landlord possessed special and unique knowledge of the circumstances underlying the proposed redesign of the Development, that a special relationship of proximity existed between the Landlord and the Franchisees, that the Landlord owed a duty to the Franchisees to be accurate in the provision of information regarding the Development, and that no collateral considerations arose that would limit the scope of the Landlord’s duty. These holdings, which are factual findings or questions of mixed fact and law, are amply supported by the evidence and are entitled to deference from this court: Housen, at paras. 25 and 36.
[53] The trial judge also held that the information contained in the Site Plan was “inaccurate, untrue and misleading” and that by “attaching the [Site Plan] as a schedule to the Headlease without advising the franchisor [Country Style] (and through it, the franchisee) of its intention to revise the plan, the landlord acted carelessly and in a negligent manner”. The evidence also sustains these findings.
[54] The evidence established that the redesign of the Development introduced the following changes to the shopping mall from the Development depicted in the Site Plan: (i) the entrance to the mall from Thorncliffe Park Drive was relocated to a position closer to a traffic light; (ii) the key access road from Thorncliffe Park Drive, which originally led directly to the Country Style drive-thru, was altered so that it ran directly towards the Burger King facility; (iii) the nature and location of parking areas near the Overlea Franchise were changed; and (iv) the visibility of the Overlea Franchise to a critical segment of its potential customer base was diminished. In these respects, there is no question that the information in the Site Plan inaccurately depicted the Landlord’s true development plans. As observed by the trial judge, “Unfortunately, the information provided to the franchisee did not portray the true picture of the proposed development sufficient for the franchisee to make an informed decision.”
[55] Representations, of course, can take many forms. In this case, Country Style and the Franchisees were provided with a Site Plan that visually represented a retail development with a specific layout and configuration. The Landlord itself provided the Site Plan to Country Style and was aware that the Site Plan was given to the Franchisees as an attachment to the Sublease. Critically, the Landlord formed the intention to change the Site Plan and the Development before Country Style and the Franchisees entered into any leasing agreements. Yet, the Landlord took no steps to ensure that the recipients of the Site Plan did not rely on its contents in making their leasing decisions; nor, as I have said, did it inform them when it decided to alter the Site Plan and the Development. Instead, the Landlord deliberately chose to remain silent, although for some time it had a settled intention to redesign the Development.
[56] It is significant that when Mesic and Vukovic inspected the Development and considered the Site Plan, the Development was almost fully constructed. They had no way of discovering the Landlord’s plan to change the Development without disclosure by the Landlord. The trial judge made the following key factual findings: the information contained in the Site Plan was an important aspect of the Franchisees’ decision to acquire the Overlea Franchise; the Site Plan formed the “crux of this case”; “in a real sense”, the Franchisees leased not only the Overlea Franchise premises but those premises in the context of the entire Development depicted in the Site Plan; and the Site Plan provided a contextual underpinning for the lease transactions. I am not persuaded that any of these findings are tainted by error, let alone palpable and overriding error.
[57] I also do not accept the Landlord’s assertion that the Site Plan was utilized for the exclusive purpose of communicating CAM and related charges to Country Style and, ultimately, to the Franchisees.
[58] This claim is inconsistent with the terms of the Headlease and the Sublease. Under Article 1.01 of the Headlease, the leased premises were defined by reference to the Site Plan. Similarly, under paragraph 12 of the Sublease, the Franchisees’ acknow-ledgement of Country Style’s possessory right to the leased premises was articulated by reference to the Headlease, which included the Site Plan. Thus, while it is true that the Site Plan was used as a reference to establish certain financial obligations of the tenants (for example, CAM obligations), it also identified the place within the Development that the Overlea Franchise was to be constructed and its location in relation to other proposed facilities in the Development. If this was not intended to be a representation upon which the Landlord’s tenants could rely, the Landlord would have been free to alter the location of the Overlea Franchise within the Development, at will, notwithstanding the Headlease. In my view, that proposition is untenable.
[59] As I have said, the appellants emphasize that there was no express covenant in the Headlease or the Sublease requiring the Landlord to construct the Development in strict compliance with the Site Plan. They rely on Clarke’s Gamble of Canada Ltd. v. Grant Park Plaza Ltd., [1967] S.C.R. 614 to argue that, in the absence of such a restrictive covenant in a lease, an estoppel by representation against a developer can only be based upon representations made as to facts in existence, not representations of an intention to act in a certain way in the future. In my view, Clarke’s Gamble does not assist the appellants.
[60] In this case, unlike in Clarke’s Gamble, when the Franchisees inspected the site and reviewed the Site Plan, the Development was constructed in accordance with the Site Plan, save only for the L-shaped building and the Country Style donut shop. This included the entrances to the Development, internal access roads and parking. Therefore, the Site Plan represented facts that, for the most part, were in existence. In contrast, in Clarke’s Gamble, the developer abandoned the original concept for its shopping mall after construction began on certain buildings. Thereafter, it levelled the site of the enclosed mall and its adjoining stores and cut off the pilings which had been driven for the construction, taking no further action for two years. In the result, the plaintiff never occupied the leased premises and the mall, as originally conceived, was never constructed.
[61] On the facts here, I have no hesitation in concluding that the trial judge was correct to hold that the Site Plan constituted a representation concerning the layout and configuration of the Development and that, by failing to accurately disclose its real plan for the Development – by correcting the Site Plan or otherwise advising prospective tenants, including Country Style, of the plan for the redesign – the Landlord acted negligently and breached its duty to provide accurate information regarding the Development.
(b) Reliance on the Site Plan
[62] The appellants assert that the trial judge’s finding that the Franchisees relied on the Site Plan cannot be supported by the evidence. They maintain that the real basis of the Franchisees’ complaint was not that the Development, as altered, did not conform with the Site Plan but, rather, that competing fast food uses ultimately occupied the buildings constructed in the place of the ‘L-shaped’ building shown in the Site Plan, contrary to the Franchisees’ subjective and unfounded expectations. I would reject these submissions.
[63] Although neither Mesic nor Vukovic could recall specifically whether they read the Headlease or precisely when they first saw the Site Plan prior to entering into the Franchise Agreement and the Sublease, they were clear that they did see and review the Site Plan. Mesic said that he inspected the site and examined the Site Plan, noting the nature of the land uses in the area of the Development, the size and location of the entrances to the shopping mall and their vicinity to designated parking areas, the location of the interior roadways in the Development, traffic flow and access to the drive-thru, and the location and proposed uses for the ‘L-shaped’ building. As well, both Mesic and Vukovic described in their evidence the features of the Development, as constructed in July 1998 based on the Site Plan, that influenced their decision to acquire the Overlea Franchise. The trial judge accepted their evidence, concluding that Mesic and Vukovic were “exceptionally credible witnesses” whose testimony “in many respects, remains undisputed”.
[64] The Landlord relies on Mesic’s testimony that, based on what he was told by a Country Style executive, he expected the ‘L-shaped’ building to be a two-storey building containing medical offices and other non-food service uses. The Landlord correctly points out that this was not provided for in the Headlease (including the Site Plan) or the Sublease.
[65] But Mesic’s description of his complaint was a broad one. He stated, “Not saying just type of stores, I’m saying the stores, the congestion and the entrance, the road that goes in front of my store, that’s what I’m saying. I’m tying everything together.” Later in his testimony, when comparing the original Site Plan to the Landlord’s revised site plan, Mesic added:
If all these changes were not done okay, on this original site plan I wouldn’t have this traffic, this thing wouldn’t happen and this thing wouldn’t affect my business, okay, because I would have L-shape building, I would have a wide entrance, I would have a nice road, a nice traffic flow going into my drive-thru which wouldn’t really affect my business because all these professional or medical office suppose to be here, people park and they go there, they stay hour, two, whatever, they finish. …This is not what I bought. I didn’t buy this, I bought this. This is what I bought, not this.
[66] Mesic and Vukovic also testified, and the trial judge accepted, that access to the Overlea Franchise site and traffic flow to its drive-thru were critical elements in the Franchisees’ decision to proceed with the Franchise Agreement and the Sublease. The Franchisees’ understanding of these features of the Development flowed not only from their site inspection but also from their review of the Site Plan.
[67] This evidence supports the trial judge’s holding concerning the centrality of the visual depiction of the Development contained in the Site Plan to the Franchisees’ investment and leasing decisions. Any doubt in this regard is laid to rest, in my opinion, by the undisputed fact that when the Landlord’s construction began, the Franchisees objected immediately, and strongly, both to the disruption caused by the construction and to any deviation from the Site Plan.
(c) Detrimental Reliance
(1) Causation
[68] The appellants make three principal submissions in support of their contention that the Franchisees failed to demonstrate a causal link between their damages and the redesign of the Development. They submit that: (i) the Franchisees’ marketing expert, Richard Talbot, confirmed in his evidence that any actual losses sustained by the Franchisees were occasioned by inconvenience, disruption and changed customer behaviour during the construction phase of the Landlord’s activities and not by the redesigned Development; (ii) competition from a Tim Horton’s restaurant, which opened together with a Wendy’s restaurant in December 1998 less than one kilometre away from the Overlea Franchise, caused any suppression of the Overlea Franchise’s sales; and (iii) the Franchisees themselves admitted, in an affidavit sworn by Mesic in response to Country Style’s motion for summary judgment, that their losses were due to Country Style’s mismanagement as a franchisor.
[69] In my view, there was a strong evidential footing to support the trial judge’s finding that the Landlord’s “changes…to the site plan and then to the shopping centre mall had a serious detrimental effect on the [Franchisees’] business both during and after the construction phase [emphasis added]”. I say this for the following reasons.
[70] I do not agree with the appellants’ characterization of Talbot’s evidence. On my reading of his testimony, the focus of his expert opinion was that both the Landlord’s construction activities and actual changes to the Development, in addition to the change in uses introduced under the redesign, damaged the Overlea Franchise.
[71] Both sides presented evidence at trial on the issue of the materiality and impact of the redesign of the Development on the Franchisees’ business. Talbot testified that the market for the Overlea Franchise emanated from three sources: (i) one-third from surrounding residential areas; (ii) one-third from the offices and businesses in the environs of the Development; and (iii) the remaining one-third from the industrial park situated to the north of the site, on Thorncliffe Park Drive.
[72] In his report dated March 28, 2002, filed at trial, Talbot addressed the impact of the Landlord’s activities on the Overlea Franchise during and in the aftermath of the Landlord’s construction. With respect to the construction period, he reported that construction vehicles blocked and restricted access to the Overlea Franchise drive-thru and that the access road to the drive-thru from Thorncliffe Park Drive was closed for some time, leaving only the Overlea Boulevard entrance to the mall accessible by customers. He said that this “significantly reduced access and drive through [sic] business”. This was based on information provided by Mesic and Vukovic and was confirmed by them in their testimony. At trial, Talbot expanded on the impact of the lost access road during the construction phase: “So this was really a construction route. So you had to drive through a construction site to get to Country Style, and that would have had a significant impact on the business of the people coming from the business park to the Country Style location.”
[73] Talbot also provided evidence regarding the impact of the Landlord’s redesign of the Development in the post-construction phase. He offered the opinion that the redesign negatively affected one-third of the Franchisees’ market, namely, business from the industrial park on Thorncliffe Park Drive. He stressed throughout his testimony, these significant adverse impacts:
(i) the relocation of the Thorncliffe Park Drive entrance to the mall, to a position closer to a traffic light on Overlea Boulevard, caused traffic stacking at the light, a less attractive entrance to the mall for potential customers from the industrial park, and a more active traffic area on both Thorncliffe Park Drive and within the Development parking area. This contrasted with the ease of the original entrance location depicted in the Site Plan, which permitted customers accessing the site from the industrial park to turn away from the line of traffic, directly into the donut shop’s drive-thru;
(ii) the new parking introduced by the Landlord under the redesign impeded access to the donut shop and drive-thru and created congestion, confusion and inconvenience for customers, especially truckers and van drivers from the industrial park. Talbot described these conditions as creating a “chaos corner” that was “very inconvenient” and “dangerous” for drivers; and
(iii) the layout of the access road from Thorncliffe Park Drive which, as originally designed, led directly to the Country Style drive-thru, was redesigned to flow in an easterly direction towards the Burger King facility. This had two effects. It converted the turn into the Country Style drive-thru from an easy, manageable route into a sharp, “much tighter” right-angled turn and it reduced the visibility of the Overlea Franchise from the north-west side of the mall (where the industrial park was situated), making it “much more difficult to locate”.
[74] Accordingly, although Talbot’s evidence addressed the impact on the Overlea Franchise of the introduction of fast food convenience uses to the mall in the location of the previously proposed ‘L-shaped’ building, which uses (as constructed) were permitted under the Headlease, he also detailed in his testimony direct negative effects on the Franchisees’ business occasioned by other changes to the Development introduced under the redesign.
[75] Talbot also described the sales performance of the Overlea Franchise prior to, during, and after the Landlord’s construction. He testified that when the construction commenced, the sales of the Overlea Franchise “froze” and that, with some variations, once the construction was completed, “[T]hey remained flat”. He elaborated, “[T]he start of construction in my view directly impacted the growth of sales that the store could have anticipated if it had been a regular location with no new construction starting.” He also said, “This is a very obvious break in the growth pattern of this particular store.” As well, the sales pattern of the Overlea Franchise did not reflect any “rebounding” following construction.
[76] The appellants challenge this evidence, pointing out that the actual sales of the Overlea Franchise continued to climb slightly in the fall of 1999, after the commencement of the Landlord’s construction activities. But Talbot explained that this increase in sales was due to the access and visibility of the site from Overlea Boulevard: “So my feeling, you’re probably getting good sales from Overlea but not getting them off Thorncliffe. That’s why [the sales don’t] rise any more after that point.” Talbot also stated, “My belief is that the traffic did keep building over Overlea quite satisfactorily but it was at the same time losing business from the industrial park on the other side.”
[77] Talbot’s evidence also provided the basis for rejecting the appellants’ claim that the loss in sales of the Overlea Franchise was attributable to increased competition from the Tim Horton’s restaurant, rather than from the redesign of the Development.
[78] Talbot testified that the impact of the relevant Tim Horton’s facility on the Overlea Franchise was minimal: “[M]y belief there has been really no direct impact by Tim Horton’s. …if you think about the three different components of where the customers come from, the residents, for example, they are still just as likely to go to Country Style because it’s close by.” This is borne out by the sales figures for the Overlea Franchise in the six months following the opening of the Tim Horton’s restaurant. Talbot also said that, although some “leakage” of business from the Overlea Franchise to the Tim Horton’s restaurant may have occurred, representing an indirect market impact, this was rooted in the roadway, entrance and visibility changes to the Development, which I have described. Talbot concluded, “[I]f the [revised] plan had been more sympathetic towards Country Style [one would have expected at this location] that their sales would have continued to rise after construction ended.” This did not occur on a long-term basis.
[79] Finally, Talbot was cross-examined on Mesic’s statements, in his affidavit filed on Country Style’s summary judgment motion, concerning Country Style’s alleged mismanagement and the consequential deterioration in value of Country Style franchises. Talbot acknowledged this as a factor affecting the Country Style franchise system, but this did not cause him to alter his opinions regarding the impact of the redesigned Development on the Overlea Franchise.
[80] The trial judge reviewed the evidence of all the experts at trial concerning the impact of the Landlord’s redesign on the Franchisees’ business. She expressly accepted Talbot’s expertise and his evidence, as she was entitled to do. She concluded that causation was made out and, as I have indicated previously, that the redesign of the Development, as well as the Landlord’s construction activities, had a “serious detrimental effect” on the Overlea Franchise. These findings were amply supported by the evidence.
(2) Detriment: Damages
[81] The next issue raised by the appellants is that the trial judge erred in her assessment of the Franchisees’ damages. They make two points. First, succinctly stated, they contend that the basis for the trial judge’s quantification of damages is unclear and submit that, if it was anchored in the evidence of either Talbot or the Franchisees’ accountant, Albert Schwartz, it rests on unreliable, inadmissible, prejudicial or irrelevant evidence. Second, they maintain that the trial judge’s analysis of the Franchisees’ damages relates to anticipated lost profits, a non-recoverable head of damages for the tort of negligent misrepresentation, rather than to actual losses. Neither of these arguments can succeed.
[82] At trial, the Franchisees sought damages for (i) losses actually sustained; (ii) lost future profits; and (iii) diminution in the value of the Overlea Franchise. The trial judge discussed each of these in her reasons (referring to the last-mentioned head of damages as a claim for “loss of capital”). But when her reasons are read as a whole and in light of the record, I believe that she awarded damages only for those losses that she concluded were actually sustained by the Franchisees and that, in so doing, she relied on the evidence of Schwartz. I reach this conclusion for several reasons.
[83] First, while the trial judge mentioned Talbot’s evidence in her reasons concerning the Franchisees’ damages claim, she did so in the context of addressing the appellants’ contention that a causal connection between the redesign of the Development and the Franchisees’ damages had not been established. This related to the appellants’ argument that the requisite elements of the test for negligent misrepresentation were not satisfied, not to the determination of the quantum of the Franchisees’ damages, about which Talbot expressed no developed opinion nor delivered an expert report.
[84] Second, the trial judge expressly rejected the Franchisees’ claim for damages for diminution in the value of the Overlea Franchise.
[85] Third, Schwartz’s evidence concerned the financial statements for the Overlea Franchise, which his firm prepared. The balance sheet as at October 31, 2001 revealed an accumulated deficit for the years 1999 to 2001 of $207,341, a net book value of depreciated equipment and leasehold improvements in the amount of $158,669, and a value for the “franchise” (measured by the franchise fee paid by the Franchisees) net of accumulated amortization in the sum of $29,065, for a total of $395,075.
[86] I accept the Franchisees’ submission that this amount represented their claim for losses actually sustained as at October 31, 2001 and that it formed the basis for the trial judge’s damages award. This is confirmed, in part, by the following exchange between counsel for the Franchisees and the trial judge, which occurred immediately following Schwartz’s direct examination:
The Court: Before Mr. Zweig starts, you only took the witness to October 31st, 2001. And there is, as I calculate it, there is a claim, net loss of $395,075. I mean I’m subtracting the [Trust Funds].
Mr. Kaufmann: Right.
The Court: Is that your claim?
Mr. Kaufmann: That is the part of the claim that deals with the loss actually sustained. Then there is the lost profit, then there is the value of the franchise [emphasis added].
[87] Finally, the trial judge was alert to the fact that the quantification of damages flowing from a finding of misrepresentation requires an assessment of the loss actually sustained by the injured party, not the loss of anticipated future profits. She stated that the Franchisees were entitled to “rescission-like remedies in order to make them ‘whole’; more specifically, they may claim damages for all amounts expended or lost in connection with the franchised business”. The trial judge concluded her analysis of the quantum of the franchisees’ damages with this statement:
Assessing damages in this situation is hardly an exact science. The practical purpose of a damage award must be to restore the aggrieved party to the position it would have been in had the breach not occurred or the misrepresentation been made [emphasis added].
This accords with the decision of this court in Lakefield (Village) v. Black (1998), 41 O.R. (3d) 741 (C.A.) at 749.
[88] The appellants also argue that Schwartz’s evidence of the Franchisees’ actual losses was inadmissible and that the trial judge was precluded from relying upon it because Schwartz was not qualified as an expert at trial, he filed no expert report, his evidence came as a surprise thereby prejudicing the appellants and, in any event, his preparation of the key financial statements for the Overlea Franchise was based on untested factual assumptions that derived from information provided by Mesic.
[89] But the transcript reveals that no objection to the admissibility of Schwartz’s evidence was taken at trial, no adjournment of the trial was sought to permit the appellants to address or respond to his evidence, no challenge to the admissibility of the Overlea Franchise financial statements was brought, and there was no suggestion that the statements were not previously produced to the appellants.
[90] Schwartz is a chartered accountant of more than 40 years experience, including more than 10 years as the Mesics’ accountant. His evidence, which concerned the financial affairs of the Overlea Franchise, was well within the domain of his professional qualifications and expertise. In addition, the brief cross-examinations of Schwartz highlighted the suggested weaknesses in the information incorporated by him in the Overlea Franchise financial statements and in his methodology in preparing the statements, including his reliance – in some instances – on information provided by Mesic. Given these asserted frailties in his evidence, it was for the trial judge to determine what weight should attach to his testimony.
[91] I conclude that the trial judge’s assessment of damages is supported by the evidence. While the basis for this assessment and the reasoning in support of it might have been stated more clearly, it cannot be said that the assessment lacks an evidential foundation.
(d) Conclusion
[92] I conclude that the trial judge did not err in finding liability of the appellants to the Franchisees on the basis of misrepresentation. The Landlord’s use of the Site Plan, without correction or clarification, in its dealings with prospective tenants was deliberate and negligent. Although Country Style’s subsequent use and provision of it to the Franchisees was innocent, it nonetheless was a misrepresentation of the Development.
[93] That said, I do not wish to be taken as rejecting the Landlord’s forceful submission that business efficacy, especially in relations between sophisticated developers and experienced users of commercially leased properties, demands that certainty in commerce be respected. The soundness of this proposition need hardly be defended. See for example, Ronald Elwyn Lister Ltd. v. Dunlop Canada Ltd., [1982] 1 S.C.R. 726 and Morguard Trust Co. v. Lawtons Drug Stores Ltd. (1987), 84 N.B.R. (2d) 14 (Q.B.). But where, as here, the tenant enters into a lease in reliance on the developer’s representation as to the nature of the proposed development, the developer alone possesses information material to the tenant’s investment and leasing decisions that could not be obtained on reasonable inquiry by the tenant, and the developer deliberately withholds that infor-mation to advance its own commercial interests, the courts will intervene.
(ii) Derogation from the Grant
[94] As I have already concluded that the trial judge’s imposition of liability based on misrepresentation is sustainable, it is unnecessary to consider the appellants’ additional argument that the trial judge erred in law by imposing liability on the basis of derogation from the grant.
(iii) Duty of Good Faith
[95] Similarly, it is technically unnecessary to address Country Style’s challenge of the trial judge’s finding that it breached a duty of good faith owed to the Franchisees. However, given the reputational significance of this finding and its relevance to Country Style’s attack on the trial judge’s treatment of the Summary Judgment – which I discuss later in these reasons – I will address it briefly.
[96] In Shelanu, at para. 74, this court stated regarding the duty of good faith owed by a franchisor to its franchisees:
Whether or not a party under a duty of good faith has breached that duty will depend on all the circumstances of the case, including whether the party subject to a duty of good faith conducted itself fairly throughout the process [citations omitted].
[97] The trial judge was mindful of a franchisor’s obligations of good faith and fair dealing in relation to its franchisees. She correctly observed, “The relationship of franchisor to franchisee is a complex one. The franchisor’s duty of care, the duty to act in good faith, while not elevated to the status of a fiduciary, speaks to concepts of loyalty, respect and fair dealing.” I agree.
[98] In this case, the trial judge made the following findings of fact:
Initially, both Country Style and the franchisee articulated a firm resolve against the landlord’s unilateral changes to the site plan. In fact, Country Style wrote to the landlord on July 9, 1999, demanding that all construction and addition to the development be completed according to the site plan. …But, this occurred at the embryonic stage of the development; and Country Style never followed through on its threats to commence legal action…
It appears that somehow the franchisor changed its position in mid-stream and decided to side with the landlord. In my view, in its dealings with the franchisee, Country Style resembled a wolf dressed in sheep’s clothing. Its actions displayed a superficial seductiveness. It says it remained supportive of the franchisee and open to all eventualities. At the same time, it asserts that “it was not incumbent on or the responsibility of Country Style to gather evidence on behalf of the franchisee”. Maybe not, but its actions displayed a perplexing array of contradictory messages. In the end, it failed to support the franchisee and it attempted to walk the fence between the franchisee and the landlord.
Indeed, the totality of the evidence propels the conclusion that Country Style turned its back on the franchisee when the latter needed it most. For whatever reason, it did not deal with its own franchisee in good faith.
[99] These findings were grounded in the evidence. Although Country Style initially objected to the Landlord’s construction activities and its planned redesign of the Development, it took no legal steps to halt either, instead asserting in its defence to the Franchisees’ counterclaim that these activities did not occasion any damages to the Franchisees. I agree with Country Style that it was not legally obliged to commence injunction proceedings against the Landlord. But, here, Mesic testified, and the trial judge accepted, that when he complained to Country Style about the Landlord’s activities, a Country Style senior executive agreed that the Landlord was “wrong” and assured Mesic that Country Style would take legal action against the Landlord. The trial judge found as a fact that Country Style “never followed through on its threats to commence legal action” against the Landlord. This was correct in the sense that Country Style took no legal steps to prevent the construction or the completion of the redesign or to protect the Franchisees’ interests. Its Third Party Action against the Landlord was confined to Country Style’s own claim for contribution and indemnity from the Landlord.
[100] Moreover, in the Third Party Action, Country Style took a position diametrically opposed to that advanced in its defence to the counterclaim, by pleading that the redesign of the Development was detrimental to the Overlea Franchise business and that the redesign was a breach of the Headlease. Yet it did not amend its defence to the counterclaim or alter its pleaded position at trial so as to relieve the Franchisees from any part of their burden of proving damages as a result of the Landlord’s conduct. To the contrary, it aggressively supported the Landlord in resisting the Franchisees’ claim that the redesign of the Development, as reflected in the changes to the Site Plan, damaged the Overlea Franchise.
[101] The structure of the tripartite leasing arrangement in this case placed Country Style, as the party in a direct contractual relationship with the Landlord, in the best legal and business position to influence the Landlord regarding the redesign of the Development and to hold the Landlord to its obligations under the Headlease. When litigation ensued, Country Style sought to advance its own interests by denying the Franchisees’ claims, supporting the Landlord’s position in its pleadings and at trial, and confining the Third Party Action to a recovery claim that, if successful, would benefit only Country Style. These actions do not enjoy the hallmarks of fair dealing; nor do they support the conclusion that Country Style’s conduct was influenced by the interests of the most vulnerable of the involved parties, the Franchisees.
[102] Nor is it any response to the finding of breach of good faith to argue, as Country Style does, that it was legally entitled to evict the Franchisees upon their non-payment of rent and related charges or that, for a time, it agreed to forbear on the enforcement of its rights under the Franchise Agreement and the Sublease. The question is what Country Style did in relation to the Landlord given the emergent dispute. In that respect, apart from its early protestations to the Landlord, Country Style’s actions were self-interested.
(3) Trial Judge’s Treatment of Summary Judgment
[103] Country Style argues that the trial judge erred in her treatment of the Summary Judgment by modifying or “overriding” it without jurisdiction to do so, by finding that the value of the Overlea Franchise “cancelled-out” Country Style’s damages claim against the Franchisees and by making permanent the stay of execution granted by the motions judge. In my view, these arguments must fail.
[104] By the time of trial, the only part of Country Style’s claim against the Franchisees still in issue was its claim to the unpaid balance of accrued post-May 2001 rental payments, in the amount of $32,400. As well, the Franchisees’ set off claim against that amount (for overpayment of CAM, taxes and related charges) and their counterclaim for damages remained to be determined.
[105] The trial judge found that the Franchisees were entitled to a set-off in the sum of $12,000 on account of the overpayment. Country Style does not appeal that finding. Therefore, net of this set-off, Country Style’s remaining claim against the Franchisees was $20,400. However, at trial, Country Style sought to advance an additional claim for $5,400 on account of unpaid utilities charges incurred by the Franchisees during the operation of the Overlea Franchise. This claim was conceded by Vukovic during cross-examination. Accordingly, Country Style’s aggregate outstanding claim against the Franchisees at trial was $25,800, plus interest.
[106] Although I agree with Country Style that the trial judge lacked jurisdiction to modify or “override” the Summary Judgment, I do not agree that this is the effect of the trial judge’s decision. Nor do I agree that the trial judge erred by characterizing the value of the Overlea Franchise as “at least” $320,000.
[107] Neither party appealed or moved to vary the Summary Judgment. Accordingly, it finally determined the issues raised by Country Style against the Franchisees, save for the trial of the issues directed by the motions judge. The trial judge effectively recognized this, observing at the outset of her reasons relating to the Summary Judgment, “All issues have been determined concerning Country Style’s action against the franchisee except the alleged overpayment of CAM and taxes by the franchisee.” Thus, later in her reasons, when she dismissed Country Style’s “claim” against the Franchisees, it was to Country Style’s remaining claim of $25,800 plus interest, net of the $12,000 set-off to which the Franchisees were found to be entitled, that I believe the attention of the trial judge was directed. This claim was one of the specific matters upon which a trial was directed by the motions judge.
[108] In addition, after awarding the Franchisees $400,000 in damages, the trial judge stated in her reasons, “The monies held in trust may be returned to the franchisee in partial satisfaction of this judgment.” By this direction, and contrary to Country Style’s submission that the trial judge deleted from the terms of the Summary Judgment the provision granting it recovery of the Trust Funds, the trial judge credited Country Style (and, therefore, indirectly, the Landlord) with the full value of the remaining Trust Funds. It is important to remember that Country Style, prior to trial, had already obtained judgment for part of the Trust Funds ($39,114), unimpeded by any stay of execution.
[109] Consequently, the trial judge merely offset the remaining Trust Funds (approximately $106,186.56) against the Franchisees’ damages award, thereby reducing the damages payable by Country Style and the Landlord to the Franchisees. This was an unobjectionable practical approach that operated to the benefit of the appellants. That said, assuming without deciding that the trial judge had jurisdiction to make permanent the stay of execution granted under the Summary Judgment, this was neither necessary nor appropriate to effect the set-off that I believe was intended by the trial judge.
[110] There remains, then, the question of whether the trial judge erred in finding that the value of the Overlea Franchise “covered” the Summary Judgment and “any further amounts reasonably found to be due and owing” to Country Style. The trial judge held, in this regard, that Country Style’s reclaiming of the Overlea Franchise “fully mitigated” its claim against the Franchisees.
[111] In my view, in the end, little turns on this issue. Contrary to Country Style’s submission, there was evidence adduced at trial supporting the trial judge’s characterization of the value of the Overlea Franchise as “at least” $320,000. The third party offer to purchase the Overlea Franchise received by Country Style after it regained possession of the premises was in the amount of $320,000. As well, Country Style’s in-house counsel, Michael Cascone, testified at trial that the Overlea Franchise had been offered for sale at $385,000, a price equal to 60% to 70% of its annual sales volume.
[112] In the particular circumstances of this case, I also reject Country Style’s assertion that the trial judge erred by using the capital value of the Overlea Franchise to “cancel-out” Country Style’s net claim against the Franchisees. When Country Style took possession of the Overlea Franchise premises in February 2002, it also took possession of the Franchisees’ equipment, inventory and leasehold improvements. The equipment alone, according to Schwartz’s evidence, had a depreciated value of $85,272 as at October 31, 2001. This valuation was not challenged at trial. Although it appears that Country Style may have paid the sum of $50,000 to discharge a security interest in the equipment of one of the Franchisees’ secured lenders, the depreciated value of the equipment net of this payment approximated the value of Country Style’s net claim against the Franchisees for unpaid and accrued rent and related charges.
[113] As is characteristic of franchise arrangements, Country Style enjoyed the right under the Franchise Agreement to terminate that agreement upon default in payment by the Franchisees. In the event of such termination, as occurred here under the Summary Judgment, Country Style had the right to purchase from the Franchisees their existing equipment, inventory and supplies, at their then fair market value less any liens and encumbrances in determinate amounts, in accordance with a procedure set out in the Franchise Agreement. There is no suggestion that Country Style paid the Franchisees any amount for these items after it regained possession of the leased premises.
[114] In these circumstances, in my view, the trial judge was entitled to set-off any net damages owed to Country Style by the Franchisees against any sums owed by Country Style to the Franchisees. Although the trial judge referred to the reclaiming of the Overlea Franchise premises as “fully mitigating” Country Style’s claim against the Franchisees, she also stated:
The value of the franchise to Country Style fully covers the judgment and any further amounts reasonably found to be due and owing to it. Even when certain fees paid by [Country Style]are considered, there is a net surplus in its favour, of about $40,000, without taking into account the projected increase in the present value of the franchise or the overpayment of CAM and taxes discussed above [emphasis added].
[115] As I read the trial judge’s reasons, she simply recognized that the value of the assets acquired by Country Style upon the retaking of the Overlea Franchise premises (including equipment, inventory and supplies for which Country Style made no payment to the Franchisees) exceeded, and in practical terms, extinguished, any debt of the Franchisees to Country Style for unpaid accrued rent. Although the trial judge referred to this in the overall context of the “value of the franchise”, the result is the same if regard is had only to the equipment that came into the possession of Country Style. In my view, while the trial judge characterized this as relevant to ‘mitigation’, it more properly might have been referred to as a set-off.
[116] Finally, although Country Style relies on Toronto Housing Co. Ltd. v. Postal Promotions Ltd. (1982), 39 O.R. (2d) 627 (C.A.) for the proposition that only revenues generated by a landlord upon the retaking of a leased property are to be applied in mitigation of a tenant’s outstanding financial obligations to the landlord, I do not believe that this case assists. In Toronto Housing, this court did not address the question of whether the value of personal property or the capital value of leased premises might serve to set-off a damages claim in a proper case. Furthermore, the mitigation approach endorsed in Toronto Housing was a liberal one that focused on placing the plaintiff-landlord in the same position it would have been if all the covenants of the repudiated lease had been performed. Here, upon the retaking of the Overlea Franchise, Country Style came into possession of property to which it had no claim but for the retaking, the value of which, on the evidence, equalled or surpassed the value of any remaining Country Style claim against the Franchisees.
(4) Contribution and Indemnity Claim
[117] The Landlord submits that Country Style’s claim for contribution and indemnity is unsustainable at law because Country Style neither enjoyed nor pleaded any cause of action against the Landlord. Nor did it plead or seek at trial an apportionment of damages under the Negligence Act, R.S.O. 1990 c. N.1. In addition, and in any event, the Landlord asserts that Country Style waived or is otherwise estopped by its conduct from claiming contribution and indemnity from the Landlord. I believe that, in the circumstances of this case, the Landlord’s second argument must prevail.
[118] In its pleading in the Third Party Action, Country Style did not assert mis-representation, derogation from the grant or entitlement to an apportionment of damages against the Landlord. The only cause of action pleaded against the Landlord was breach of contract: “Country Style claims that the changes to the shopping centre were not authorized and constitute a breach of the [Headlease].”
[119] The trial judge found that the Landlord’s redesign of the Development constituted a breach of its covenant of quiet enjoyment to Country Style under the Headlease. This breach of contract was a justiciable cause of action available to Country Style at law and under its pleading, as framed, in the Third Party Action.
[120] The trial judge also concluded that Country Style had not formally waived any of its rights against the Landlord. However, she did not consider whether Country Style was otherwise estopped by its conduct from asserting contribution and indemnity against the Landlord. In my view, with respect, the trial judge erred by failing to address this issue.
[121] In this case, as I have mentioned, for some months prior to the completion of the Landlord’s construction activities, Country Style asserted that the Landlord’s activities were unacceptable. In so doing, Country Style expressly reserved its right to claim damages against the Landlord. Although the Landlord submits that this reservation of rights applied only to the Landlord’s construction activities, as opposed to the long-term effects of the redesign of the Development, I do not agree that the reservation of rights language used by Country Style should be interpreted so narrowly.
[122] As well, as I have also stated, in its pleading in the Third Party Action, Country Style alleged that the Landlord’s redesign of the Development was “detrimental to the Country Style business”. It acknowledged that the Franchisees had sustained losses, in an unspecified amount. These were important admissions that could only be withdrawn on consent or with leave of the court. However, in its pleading in the Main Action and in its conduct of that litigation, Country Style aligned itself fully with the Landlord, taking the position that the redesign of the Development did not damage the Overlea Franchise, that the Franchisees had not proven any damages, and that there had been no breach of contract or duty by the Landlord. Thus, Country Style’s pleaded positions were fundamentally inconsistent.
[123] Moreover, at trial, Country Style cross-examined the Franchisees’ witnesses, and led evidence on its own behalf, to support its theory of no breach of duty or contract by the Landlord and to resist the Franchisees’ asserted causes of action and damages claim. As the trial judge observed in her reasons in the Third Party Action, “The franchisor’s actions displayed a perplexing array of contradictory messages” and Country Style “attempted to walk the fence between the franchisee and the landlord”.
[124] The Landlord argues that it relied on Country Style’s position in the Main Action and that Country Style was estopped from subsequently taking a contrary position to the prejudice of the Landlord. I agree. Country Style could not ‘have it both ways’. It attempted to do so throughout the entirety of these proceedings, even arguing before this court, for example, that the Franchisees did not establish negligent misrepresentation at trial against the Landlord but that the same evidence at trial was adequate to establish misrepresentation by the Landlord in relation to Country Style. Country Style’s pleading and position in the Third Party Action undermined the liability (including causation) and damages positions vigorously advanced by it in the Main Action. In my view, it would be unjust to permit Country Style to rely, to its benefit and to the Landlord’s detriment, on these inherently conflicted positions. See Ryan v. Moore 2005 SCC 38, 2005 S.C.C. 38 at paras. 51, 68-69 and 73 and Maracle v. Travellers Indemnity Co. of Canada, [1991] 2 S.C.R. 50 at paras. 13 and 16.
[125] By the time of the trials of the Main and Third Party Actions, which long post-dated the pre-litigation correspondence between the Landlord and Country Style in which Country Style sought to reserve its rights against the Landlord, Country Style had committed to a deliberate litigation strategy from which it could not thereafter resile. Country Style did not merely claim contribution and indemnity as alternative relief against the Landlord. It elected to become an active protagonist in litigation designed to defeat the Franchisees’ claims, predicated on the affirmatively asserted position that the Landlord had no liability in contract or tort. This controls the outcome of the Third Party Action.
V. Disposition
[126] For the reasons given, I would dismiss the appeals by the Landlord and Country Style arising from the Main Action and allow the Landlord’s appeal in the Third Party Action. The Franchisees are entitled to their costs of these proceedings on a partial indemnity scale, fixed in the amount of $15,000 as agreed by all counsel, inclusive of disbursements and Goods and Services Tax, and payable jointly by the Landlord and Country Style. The Landlord is entitled to its costs of the appeal in the Third Party Action on a partial indemnity scale, fixed in the amount of $5,000, inclusive of disbursements and Goods and Services Tax.
RELEASED:
“JCM” “E.A. Cronk J.A.”
“JUN 30 2005” “I agree J. C. MacPherson J.A.”
“I agree S. E. Lang J.A.”
[^1]: The agreements at issue in these proceedings were entered into by various Country Style corporations. I refer in these reasons to these corporations, collectively, as "Country Style".
[^2]: In the remainder of these reasons, I refer to 130 Ontario, Mesic and Vukovic, collectively, as the "Franchisees".
[^3]: I refer in these reasons to Country Style's action and the Franchisees' counterclaim, collectively, as the "Main Action".
[^4]: In mid-December 2001, Country Style obtained protection under the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36. It then embarked on the active reorganization of its business, eventually closing 102 of 251 of its franchised locations. The closings did not include the Overlea Franchise.