Quizno's Canada Restaurant Corporation v. Kileel Developments Ltd. et al. Kileel Developments Ltd. et al. v. Quizno's Canada Restaurant Corporation et al. [Indexed as: Quizno's Canada Restaurant Corp. v. Kileel Developments Ltd.]
92 O.R. (3d) 347
Court of Appeal for Ontario,
Blair, Rouleau and Epstein JJ.A.
September 24, 2008
Civil procedure -- Pleadings -- Statement of defence -- Striking out -- Motion judge erring in striking paragraphs of statement of defence which were relevant and of considerable probative value on basis that they were not necessary in order to raise reasonable defence -- Plaintiff not prejudiced by allegations in statement of defence which were directly responsive to allegations made in statement of claim.
Civil procedure -- Stay of proceedings -- Motion judge erring in staying portions of counterclaim on basis that they duplicated allegations made in intended class proceeding where defendants were not parties to intended class proceeding.
The plaintiff franchisor brought an action in the context of a dispute with some of its franchisees in the Atlantic provinces. Two other franchisees had already commenced an intended class proceeding on behalf of all the plaintiff's Canadian franchisees seeking damages for alleged breach of contract, breach of duty of fair dealing and price fixing. The defendants were not parties to the intended class action. On a motion by the plaintiff, the motion judge struck large portions of the defendants' statement of defence and stayed certain portions of their counterclaim. The motion judge found that the struck paragraphs in the statement of defence were relevant and were neither frivolous, vexatious nor an abuse of process, but that the defendants could raise a "reasonable defence" without them and that their prejudicial effect outweighed their probative value. She found that the impugned allegations in the counterclaim were essentially duplicative of the allegations in the class action and that, while the defendants had not been named in that proceeding, they would be embraced by it if it were certified. The defendants appealed.
Held, the appeal should be allowed.
A defendant is entitled to plead whatever material facts it chooses in response to a plaintiff's allegations, provided they are relevant and of at least marginal probative value and their probative value is not outweighed by their prejudicial effect. It is not for the court to limit the allegations to what it considers a "reasonable defence". It was a palpable and overriding error for the motion judge to find that the allegations in the impugned paragraphs were of little probative value and prejudicial. She struck portions of the pleading that were of considerably more than "marginal probative value" to the defendants. In some instances at least, they went to the very heart of the defence. Moreover, a plaintiff cannot claim to be prejudiced when the defendant's allegations are directly responsive to allegations made in the statement of claim.
It could not be said with any confidence that the defendants would or would not opt out of the class action, and that they would or would not be bound by the findings in that proceeding. The motion judge's decision was premature. [page348]
APPEAL from order of Beth A. Allen J., [2007] O.J. No. 3769, CarswellOnt 6252 (S.C.J.) striking portions of the statement of defence and staying portions of the counterclaim.
Cases referred to 2038724 Ontario Ltd. v. Quizno's Canada Restaurant Corp. (2008), 2008 CanLII 8421 (ON SC), 89 O.R. (3d) 252, [2008] O.J. No. 833, 56 C.P.C. (6th) 88, 165 A.C.W.S. (3d) 785 (S.C.J.) [supp. reasons, 2008 CanLII 27822 (ON SC), [2008] O.J. No. 276, 168 A.C.W.S. (3d) 48 (S.C.J.)]; Asper v. Lantos (2000), 2000 CanLII 29038 (ON SCDC), 51 O.R. (3d) 215, [2000] O.J. No. 3712, 138 O.A.C. 378, 3 C.P.C. (5th) 330, 100 A.C.W.S. (3d) 48 (Div. Ct.); Clement v. McGuinty, 2001 CanLII 7949 (ON CA), [2001] O.J. No. 1400, 143 O.A.C. 328, 18 C.P.C. (5th) 267, 104 A.C.W.S. (3d) 601 (C.A.); Lee v. Globe and Mail (2001), 2001 CanLII 28035 (ON SC), 52 O.R. (3d) 652, [2001] O.J. No. 317, [2001] O.T.C. 63, 6 C.P.C. (5th) 354, 102 A.C.W.S. (3d) 1190 (S.C.J.)
Statutes referred to Class Proceedings Act, 1992, S.O. 1992, c. 6, ss. 9 [as am.], 13 [as am.] Courts of Justice Act, R.S.O. 1990, c. C.43, ss. 106 [as am.], 138 [as am.]
Rules and regulations referred to Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rules 6.01 [as am.], 25.11 [as am.]
Paul B. Schabas and Anne Glover, for appellants. Geoffrey B. Shaw and Eunice Machado, for respondents.
The judgment of the court was delivered by
BLAIR J.A.: -- Introduction
[1] This appeal is from the order of Justice Allen striking out large portions of the defendants' statement of defence and staying certain portions of their counterclaim. The action arises in the context of a dispute between a franchisor and its franchisees.
[2] For the reasons that follow, I would allow the appeal. Respectfully, in my view, the motion judge misapplied the test for striking out portions of a pleading and erred in applying the test for staying portions of the counterclaim.
Facts
[3] The plaintiff, Quizno's, is the franchisor and licensor of Quizno's Restaurants in Canada. Its franchisees are in the business of selling submarine-style sandwiches and related products according to Quizno's franchise system. Currently, there are over 400 Quizno's Submarine Sandwich restaurants in Canada.
[4] Five of these restaurants -- located in the Atlantic provinces -- are owned by the defendant Kileel Developments Ltd. ("KDL"). John Kileel is the president, and Jonathan Talbot-Kelly [page349] an employee, of KDL. Together I shall refer to these defendants as the "KDL Defendants".
[5] In December 2000, KDL became an Area Director for Quizno's with responsibility for the Atlantic provinces of Nova Scotia, New Brunswick and Prince Edward Island (the "Territory"). Pursuant to the Area Director Marketing Agreement (the "ADMA") giving effect to this arrangement, KDL was responsible primarily for (a) soliciting prospective Quizno's franchisees for the Territory ("sales services"), (b) performing site acquisition and development services ("site services"), and (c) rendering support and other services to restaurant franchisees in the Territory ("support services"). It was also responsible for developing a graduated number of new franchises in the Territory -- either its own or others -- over the period of the agreement.
[6] The KDL Defendants plead that the reciprocal obligations of Quizno's under the ADMA included not only the payment of commissions for the foregoing services, but also -- among other things -- the obligations to provide training to KDL and its employees and to provide operating assistance in the form of advice relating to franchise sales, support and assistance. They plead as well that the obligations and responsibilities as between them and Quizno's are governed by their franchise agreement.
[7] In 2006, Quizno's franchisees across the country became restless because they were unsatisfied with the prices being charged by Quizno's suppliers. Under their franchise agreements, they are required to purchase supplies from designated or approved suppliers. About one hundred of them joined a newly formed association called Denver Subs Canadian Franchisee Association ("Denver Subs"). Mr. Talbot-Kelly became the acting president of that association.
[8] As the temporary leader of Denver Subs, Mr. Talbot-Kelly took certain positions and made certain demands that irritated Quizno's. In the same period -- May 2006 -- two Ontario Quizno's franchisees commenced an intended class proceeding (the "Class Action") on behalf of all Quizno's Canadian franchisees seeking damages for alleged breach of contract, breach of duty of fair dealing and price fixing.
[9] All of this was too much for Quizno's, apparently. They commenced this action claiming a declaration that the ADMA had been terminated and seeking damages against KDL, Mr. Kileel and Mr. Talbot-Kelly. In essence, Quizno's alleges that Mr. Talbot- Kelly, in his capacity as acting president of Denver Subs, acted in a manner that was contrary to Quizno's interests and in breach of many of the provisions of the ADMA, and that KDL is vicariously responsible for this conduct. [page350]
[10] I observe in completing this outline of the background that neither KDL nor Mr. Kileel nor Mr. Talbot-Kelly is a party to the Class Action. It had not been certified at the time of the motion before Justice Allen and, in fact, an order was made prior to the hearing of this appeal refusing to certify the proceeding as a class action. [See Note 1 below] This is significant because much of the motion judge's reasoning -- particularly on the stay motion -- was premised on the view that there were common issues between this action and the class proceeding.
Law and Analysis
[11] The motion judge struck paras. 30(c), 33, 37, 41-46, 48-57, 62-64, 67-68 and 71-72 of the statement of defence and stayed paras. 105(b) and (c), 112(b), (c), (d), (f), (g) and (h), and 129(e) of the counterclaim. She concluded that the paragraphs in the statement of defence were relevant and were neither frivolous, vexatious nor an abuse of process, but that their prejudicial effect outweighed what she considered to be their probative value. To the extent they related to the issue of food pricing (paras. 45-46 and 48-51), they were duplicative of the allegations in the Class Action. In her view, it was "not necessary" for the KDL Defendants to plead in the detail they did and they "[could] raise a reasonable defence without the impugned paragraphs" (reasons, para. 31). She found that the allegations attacked in the counterclaim were essentially duplicative of the allegations in the Class Action and that, while the KDL Defendants had not been named in that proceeding, they would be embraced by it if it were certified.
[12] In my view, the motion judge erred with respect to both of these determinations.
The statement of defence
[13] Rule 25.11 [of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194] states:
25.11 The court may strike out or expunge all or part of a pleading or other document, with or without leave to amend, on the ground that the pleading or other document, (a) may prejudice or delay the fair trial of the action; (b) is scandalous, frivolous or vexatious; or (c) is an abuse of the process of the court. [page351]
[14] A pleading cannot be "scandalous" if it is relevant, and given her findings noted above, the motion judge must have based her decision on the ground that the impugned portions of the statement of defence "may prejudice or delay the fair trial of the action". Before analyzing the portions of the pleading by category, she stated her general conclusion as follows (para. 28):
I do not agree with Quizno's position that the impugned paragraphs . . . are irrelevant, frivolous, vexatious or an abuse of process. However, I do accept those paragraphs should be struck as being of limited probative value in relation to allegations in the Action and because the prejudice of maintaining these paragraphs outweighs their probative value.
[15] A court may strike out portions of a pleading, even where the allegations are relevant, if the applicant can establish that they are of marginal probative value and their probative value is outweighed by their prejudicial effect. Before doing so, a judge must balance the rights of the parties on the particular facts of the case and must consider carefully the extent to which the particulars attacked are necessary to enable the defendant to prove its case and their probative value in establishing that case: see Clement v. McGuinty, 2001 CanLII 7949 (ON CA), [2001] O.J. No. 1400, 18 C.P.C. (5th) 267 (C.A.), at paras. 21-24; Asper v. Lantos (2000), 2000 CanLII 29038 (ON SCDC), 51 O.R. (3d) 215, [2000] O.J. No. 3712 (Div. Ct.), at paras. 18-20; Lee v. Globe and Mail (2001), 2001 CanLII 28035 (ON SC), 52 O.R. (3d) 652, [2001] O.J. No. 317 (S.C.J.), at paras. 11 and 14. Where the allegations in question are relevant and material, however, the court should exercise this power with considerable caution, in my view.
[16] Pleadings are not the appropriate stage in an action to engage at large in what is essentially a trial judge's exercise for determining the admissibility of evidence at trial -- i.e., weighing the probative value versus prejudice of facts. That exercise is not particularly well-suited to defining issues for trial, something which is for the parties to decide. Rule 25.11 provides that the pleading may be struck if it "may prejudice the fair trial of the action". A fair trial requires that the defendant be able to put forward a "full" defence, not -- as the motion judge erroneously concluded -- a "reasonable" defence defined in advance by the plaintiff and the court.
[17] These parameters are consistent with the view expressed by MacFarland J. (as she then was) in Asper, at para. 20:
Pizza Pizza was concerned with whether a defendant could plead alternative defamatory meanings by way of justification, not the sufficiency of such a plea. In our view, Pizza Pizza does not stand for the proposition that it is open to a court to strike a pleading or particulars in a libel action where they are relevant, necessary and of reasonable probative value to the defendant on the ground that such a plea is "oppressive". On the other hand, where a plea [page352] is strictly speaking relevant, but of marginal probative value, and would be onerous for a plaintiff, it may well be found to offend the rules. (Emphasis added)
[18] For purposes of analysis, the motion judge grouped the paragraphs she struck by general category, namely: -- Allegations regarding the existence and terms of the franchise agreements (paras. 30(c), 33, 37, 41-44, 52-57, 62-64, 67-68 and 71-72) -- Allegations regarding food pricing and the cost of supplies (paras. 45-46 and 48-51) -- Allegations regarding Denver Subs (paras. 52-57)
[19] An examination of the pleading demonstrates that the motion judge struck portions of the pleading that were considerably more than "of marginal probative value" to the defendants and of little prejudice to the plaintiff. Indeed, in some instances at least, they went to the very heart of the defence.
[20] The thrust of Quizno's claim is that after Mr. Talbot- Kelly assumed his leadership position with Denver Subs he "acted in a manner that [was] contrary to Quizno's interests and [was] in breach of many terms of the [ADMA]", and that KDL is vicariously liable for those acts (statement of claim, paras. 17-18). The thrust of the defence is that the rights and obligations as between Quizno's and the KDL Defendants are defined in both the ADMA and their franchise agreements, that the two are inter-related, and that they (the KDL Defendants) were only acting in accordance with those rights and obligations but that Quizno's was not, and accordingly that Quizno's was neither entitled to terminate the ADMA nor to recover damages.
[21] The allegations concerning the franchise agreements, and their effect on the legal relationship between the parties under the ADMA, are designed to establish that Quizno's was not entitled to terminate the ADMA, as I read them. For example, para. 34 of the statement of defence pleads:
The defendants further state and the fact is that the duties owed by KDL to [Quizno's] under the ADMA, and in particular any "duty of loyalty" proffered by the plaintiff, must be interpreted narrowly in light of and subject to the fact that [Quizno's] recruited KDL as Area Director with the explicit understanding that KDL would be exercising rights it had acquired under the ADMA to become a franchisee in its own right. (Emphasis added)
[22] The motion judge neither considers nor explains how that allegation -- which was neither attacked nor struck -- can be [page353] permitted to stand but the defendants be precluded from pleading the facts relating to the franchise agreements that underpin such an allegation. Even though the plaintiff pleads that the KDL Defendants breached their obligations to Quizno's and to Quizno's franchisees in its role as Area Director, the motion judge concluded that it was "not necessary for the KDL Defendants to plead in such detail the terms of the franchisee agreements" (emphasis added) as they did in the portions of the pleading under attack (para. 30). They could raise "a reasonable defence" without them.
[23] This approach constituted an error in principle. The impugned paragraphs contain pleadings of material facts. They are not prolix, nor are they pleadings of evidence. A defendant is entitled to plead whatever material facts it chooses to in response to a plaintiff's allegations, provided the allegations are relevant and of at least marginal probative value and their probative value is not outweighed by their prejudicial effect. While the court will look at "[the extent to which] the particulars attacked are necessary to enable the defendant to prove its case", [See Note 2 below] it is not for the court to prune the case at this stage and limit the allegations to what it considers a "reasonable defence". Moreover, even if the motion judge were applying the test that weighs relevance and probative value of the allegations, on the one hand, against prejudice, on the other, she made a palpable and overriding error in concluding that the impugned allegations were of only limited or marginal probative value.
[24] For example, para. 37 of the statement of defence pleads that KDL is entitled to hire any persons it sees fit in the operation of its franchise. This allegation is in direct response to the plaintiff's plea in para. 11(f) of the statement of claim that the ADMA gives Quizno's "sole discretion" to determine who is fit or unfit to represent them in marketing its restaurants or furnishing services to its franchisees.
[25] Similarly, paras. 41-44, which relate to art. 13.4 of the franchise agreements, raise a direct defence to the plaintiff's claim that the KDL Defendants were acting in breach of their obligations by asserting a position contrary to that of Quizno's regarding supplier pricing. The paragraphs allege that the franchise agreements permit the KDL Defendants to engage in direct discussions with suppliers and to request a change in suppliers, and that Quizno's is obliged to consider and evaluate such a request in good faith. The thrust of paras. 48-51 is that Quizno's [page354] declined to respond to the KDL Defendants' attempt -- in their dual capacity as area manager and franchisee -- to deal with these problems.
[26] Paragraphs 41-51 relate to the food pricing issue. The motion judge struck those allegations as well on the ground that they were duplicative of the issues in the Class Action. This, too, was an error in principle in my view. The KDL Defendants were not parties to the Class Action. The Class Action had not been certified (and, in fact, was not). In any event, the KDL Defendants were not bound to participate in the class proceeding but would have been at liberty to opt out and pursue the claim asserted in the counterclaim. Moreover, even if the Class Action had been certified, the KDL Defendants should not have been deprived of their right to assert these allegations by way of defence to the claim put forward by Quizno's in this action.
[27] In para. 17 of the statement of claim, Quizno's pleads that Mr. Talbot-Kelly assumed leadership of Denver Subs, an association "formed by Quizno's franchisees to lobby Quizno's regarding desired changes to the franchise system". Paragraph 18 sets out particulars of how Mr. Talbot-Kelly is alleged to have acted "contrary to Quizno's interests" and to have been "in breach of many terms of the [ADMA]" in his capacity as "vocal spokesperson for the Association". In addition to their allegations in paras. 41-51 of the statement of defence -- dealt with above -- the KDL Defendants plead the facts underlying the establishment of Denver Subs, the steps undertaken by Denver Subs to deal with the food pricing issue and Quizno's negative response to those efforts, in paras. 52-57. The motion judge struck those paragraphs as well. But, as I appreciate their thrust, they are a direct response to issues put in play by the plaintiff in paras. 17 and 18 of the statement of claim and are in furtherance of the KDL Defendants' basic position that it is Quizno's, and not they, which is in breach of the ADMA and which is therefore "disentitle[d] . . . to require strict compliance with the ADMA from the defendants" (statement of defence, para. 40).
[28] The same analysis applies to paras. 62-64, 67-68 and 71-72 -- also struck by the motion judge. Paragraphs 62-64 relate to a memorandum dated May 11, 2006, circulated by Mr. Talbot-Kelly, and pleaded in para. 18(a) of the statement of claim to be an example of the KDL Defendants' breach of the ADMA. Paragraphs 67-68 respond to the allegations in para. 18(b) of the statement of claim respecting a memorandum dated May 15, 2006. In addition, para. 69 of the statement of defence -- which was not attacked -- is meaningless without the lead-up explanation contained in paras. 67-68. Paragraphs 71-72 respond [page355] directly to similar allegations in para. 18(c) of the statement of claim regarding another memorandum dated May 18, 2006.
[29] Whether the various allegations that are attacked prevail at trial is not the point. Respectfully, it is simply a palpable and overriding error to find that the allegations in the impugned paragraphs in the statement of defence were of little probative value, much less of marginal probative value, and prejudicial. A plaintiff cannot claim to be prejudiced when the defendant's allegations are directly responsive to allegations made in its statement of claim.
[30] Although the motion judge purported to apply the prejudice vs. probative value test articulated in Asper she misconstrued that test -- and the limited circumstances in which it should be applied -- in my view, and instead applied a test that calls upon the court to decide whether material and relevant allegations pleaded may nonetheless be struck because it is "not necessary" to plead them in order to "raise a reasonable defence". This constituted an error in principle.
The counterclaim
[31] The motion judge struck paras. 105(b) and (c), 112(b), (c), (d), (f), (g) and (h) and 129(e) of the counterclaim. These claims relate to allegations of breach of the ADMA by Quizno's in connection with the supplier/pricing dispute between KDL, other franchisees and Quizno's. They were struck primarily on the basis of the court's desire to avoid the multiplicity of proceedings and to stay proceedings where common issues are being litigated in more than one proceeding: Courts of Justice Act, R.S.O. 1990, c. C.43, ss. 106 and 138; Class Proceedings Act, 1992, S.O. 1992, c. 6, s. 13; rule 6.01 of the Rules of Civil Procedure. The motion judge was of the view that the same issues were being litigated in the Class Action commenced by the two Ontario Quizno's franchisees.
[32] The KDL Defendants were not parties to the Class Action. Those proceedings had not yet been certified and, as noted above -- subsequent to the argument before the motion judge but prior to argument of this appeal -- the Superior Court refused to certify them. It could not be said with any confidence that the KDL Defendants would or would not opt out of the Class Action pursuant to s. 9 of the Class Proceedings Act, 1992, and therefore whether they would or would not be bound by the findings in that proceeding. The motion judge's decision was premature and an error in principle at the then existing stages of the two proceedings, in my opinion. [page356]
Disposition
[33] For all of the foregoing reasons, I would allow the appeal and set aside the order of the motion judge striking out paras. 30(c), 33, 37, 41-46, 48-57, 62-64, 67-68 and 71-72 of the statement of defence and staying paras. 105(b) and (c), 112(b), (c), (d), (f), (g), (h) and 129(e) of the counterclaim.
[34] The appellants are entitled to their costs of the appeal, fixed in the amount of $15,000, inclusive of fees, GST and disbursements. The appellants are also entitled to costs below, fixed in the same amount set by the motion judge, namely, $7,500 all inclusive.
Appeal allowed.
Notes
Note 1: 2038724 Ontario Ltd. v. Quizno's Canada Restaurant Corp. (2008), 2008 CanLII 8421 (ON SC), 89 O.R. (3d) 252, [2008] O.J. No. 833 (S.C.J.), dated March 4, 2008. Notices of Appeal to the Divisional Court filed April 3, 2008.
Note 2: Clement v. McGuinty, at para. 24.