Court of Appeal for Ontario
Citation: Salah v. Timothy's Coffees of the World Inc., 2010 ONCA 673
Date: 2010-10-14
Docket: C51317
Before: Winkler C.J.O., Rosenberg J.A. and Pitt J. (ad hoc)
Between:
Abdulhamid Salah and 1470256 Ontario Inc.
Plaintiffs (Respondents)
and
Timothy’s Coffees of the World Inc.
Defendant (Appellant)
Counsel:
Alan J. Lenczner, Q.C., and Jaan E. Lilles, for the appellant
Stephen S. Appotive, for the respondents
Heard: September 16, 2010
On appeal from the judgment of Justice Monique Métivier[^1] of the Superior Court of Justice dated October 26, 2009, with amended reasons dated January 21, 2010, and reported at (2010), 65 B.L.R. (4th) 235.
Winkler C.J.O.:
[1] Timothy’s Coffees of the World Inc. (“Timothy’s”) appeals a decision of the Superior Court of Justice finding that it breached a franchise agreement with the respondents. The trial judge found that the franchise agreement provided the respondents with a conditional right of renewal and that the appellant denied them this right. She awarded damages for breach of contract, breach of the duty of good faith and mental distress. I agree with the trial judge’s reasons and find no error in her decision. I would dismiss the appeal. My reasons follow.
BACKGROUND
[2] In the fall of 2001, the respondent Abdulhamid Salah (“Mr. Salah”) entered into a franchise agreement with Timothy’s to operate a franchise store in the Bayshore Shopping Centre in Ottawa. Timothy’s was a lessee under a head lease for a location on the third floor in the shopping centre. When Mr. Salah entered into the franchise agreement, he became a sublessee under the head lease. There were only four years remaining on the head lease, which was set to expire on September 30, 2005. The term of the franchise agreement was tied to the length of the head lease.
[3] Mr. Salah was concerned about the short term of the lease and the franchise agreement, given the amount of his investment in purchasing the franchise and setting up operations. In response to Mr. Salah’s concerns about the term, Timothy’s proposed the inclusion of Schedule “A” in the franchise agreement. Schedule “A” provided that in the event that Timothy’s entered into a new head lease with the Bayshore Shopping Centre, Mr. Salah’s franchise agreement would be renewed with a new sublease. In the event that the new head lease was to be for a period of less than five years, there would be no additional franchise fee payable by Mr. Salah. If the new head lease was for a period of more than five years, Mr. Salah would be required to pay an amount equal to 50% of the then current franchise fee.
[4] Concurrent with the execution of the franchise agreement, Mr. Salah assigned the agreement, the sublease, and the general security agreement to his newly incorporated company 1470256 Ontario Inc. (“147”) by way of an Assignment and Guarantee. This was permitted by Timothy’s, but with the condition expressed in the Assignment and Guarantee that Mr. Salah remained personally liable for all franchisee obligations under the franchise agreement.
[5] Prior to September 30, 2005, the expiry date of the head lease on the third floor, Timothy’s entered into a new lease on the second floor and signed an agreement with a new franchisee for that location. The appellant then advised Mr. Salah that his franchise agreement would come to an end on September 30, 2005. Mr. Salah and 147 commenced proceedings against Timothy’s alleging breach of the franchise agreement and seeking damages arising both from the breach and from the appellant’s conduct.
[6] At trial, Timothy’s argued that the respondents had no right of renewal and that the parties had intended the franchise agreement to end with the expiry of the head lease on September 30, 2005. It submitted that any right of renewal provided by Schedule “A” only concerned the original location on the third floor of the shopping centre. Since the appellant could not renew its head lease on the third floor, the provisions of Schedule “A” were inoperative. Timothy’s also argued that because Mr. Salah had assigned his franchisee rights to 147, only that corporation could bring a claim against the franchisor.
DECISION OF THE TRIAL JUDGE
[7] The trial judge, in a clear and carefully reasoned decision, held as follows:
that both Mr. Salah and 147 were franchisees of Timothy’s and could be treated as one entity for the purpose of enforcing rights or seeking remedies;
the proper interpretation of Schedule “A” is that it related to the Bayshore Shopping Centre in general and was not limited to the existing third floor location;
Timothy’s breached the franchise agreement by failing to observe the terms of Schedule “A” with respect to the new head lease on the second floor of the Bayshore Shopping Centre;
Timothy’s breached a duty of good faith, contrary to s. 3 of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (“Wishart Act”); and
the breach of the duty of good faith was an independent actionable wrong.
[8] The trial judge awarded Mr. Salah damages in the amount of $230,358 for future loss of income flowing from the appellant’s breach of contract, and an additional $50,000 for breach of the duty of good faith and mental distress.
ISSUES ON APPEAL
[9] Timothy’s submits that the trial judge erred in:
i. failing to distinguish between Mr. Salah and 147;
ii. interpreting Schedule “A” as providing an option to amend the franchise agreement;
iii. finding that Timothy’s owed a duty of good faith and that Timothy’s breached it;
iv. assessing damages for breach of contract at $230,358 and awarding $50,000 for breach of the duty of good faith and mental distress;
v. awarding damages to Mr. Salah for breach of contract when these damages were pleaded only by 147.
ANALYSIS
i. Treating Mr. Salah and 147 as one entity
[10] The appellant argues that the trial judge erred in failing to distinguish Mr. Salah from his corporation, 147. Since a corporation is a distinct entity from its owner, and since Mr. Salah assigned the franchise agreement to 147, the appellant submits that only the corporate franchisee could assert contractual rights against the franchisor.
[11] I cannot accede to that submission. There was ample evidence to support the trial judge’s finding that the appellant “maintained a relationship with both the individual franchisee and its assignee corporation. It never intended to accept the corporation in the place of Mr. Salah for all purposes.” While the franchisor allowed Mr. Salah to assign the franchise agreement to 147, one of the main purposes of the Assignment and Guarantee was to ensure that all obligations under the franchise agreement continued to be those of Mr. Salah personally. In addition, as noted by the trial judge, the concluding words of s. 4 of the Assignment and Guarantee state as follows:
Furthermore and without restricting the generality of the foregoing, the assignor shall continue to be personally bound by any and all provisions of the franchise agreement related to confidentiality and non-competition.
[12] Indeed, the business model of Timothy’s, as reflected in its franchise agreement, was to treat a corporate franchisee and its personal owner as one and the same. To this effect, clause 19.19 of the agreement provides:
In the event that there is more than one Franchisee, or if the Franchisee should consist of more than one legal entity, the Franchisee’s liability hereunder shall be both joint and several. A breach hereof by one such entity or Franchisee shall be deemed to be a breach by both or all.
[13] Moreover, it is revealing and significant that Timothy’s June 8, 2005 letter—in which Timothy’s informed the franchisee that the franchise agreement would not be renewed—was addressed to Mr. Salah personally, and not to the corporate respondent. The de facto relationship under the franchise agreement was between Timothy’s and Mr. Salah.
[14] The trial judge concluded that Mr. Salah and his corporation were one entity for the purposes of the franchise agreement. Accordingly, she held that to deny Mr. Salah a remedy on the basis of separateness would yield a result “too flagrantly opposed to justice”: see Kosmopoulos v. Constitution Insurance Co., 1987 CanLII 75 (SCC), [1987] 1 S.C.R. 2, at p. 10. I agree with her conclusion. In the context of this dispute between franchisor and franchisee, it would be incongruous, not to mention unfair to Mr. Salah, if he and his corporation were treated as one entity for the purposes of franchise liabilities, but were treated as separate entities when the question of enforcing franchisee rights under the franchise agreement is at issue.
ii. Interpretation of the franchise agreement
[15] Timothy’s submission that the trial judge improperly construed Schedule “A” as providing an “option to amend” the franchise agreement is an attempt to ground an appeal on a statement taken out of context in the reasons for the decision. Read as a whole, it is clear that the trial judge was engaged in an analysis of the contract between the parties, and the rights and obligations conferred by its terms. The argument fails on this basis alone. Moreover, there was no error in the approach adopted by the trial judge in construing the agreement before her.
[16] The basic principles of commercial contractual interpretation may be summarized as follows. When interpreting a contract, the court aims to determine the intentions of the parties in accordance with the language used in the written document and presumes that the parties have intended what they have said. The court construes the contract as a whole, in a manner that gives meaning to all of its terms, and avoids an interpretation that would render one or more of its terms ineffective. In interpreting the contract, the court must have regard to the objective evidence of the “factual matrix” or context underlying the negotiation of the contract, but not the subjective evidence of the intention of the parties. The court should interpret the contract so as to accord with sound commercial principles and good business sense, and avoid commercial absurdity. If the court finds that the contract is ambiguous, it may then resort to extrinsic evidence to clear up the ambiguity. Where a transaction involves the execution of several documents that form parts of a larger composite whole—like a complex commercial transaction—and each agreement is entered into on the faith of the others being executed, then assistance in the interpretation of one agreement may be drawn from the related agreements. See 3869130 Canada Inc. v. I.C.B. Distributing Inc. (2008), 2008 ONCA 396, 66 C.C.E.L. (3d) 89 (Ont. C.A.), at paras. 30-34; Drumbrell v. The Regional Group of Companies Inc. (2007), 2007 ONCA 59, 85 O.R. (3d) 616 (C.A.), at paras. 47-56; SimEx Inc. v. IMAX Corp. (2005), 2005 CanLII 46629 (ON CA), 11 B.L.R. (4th) 214 (Ont. C.A.), at paras. 19-23; Kentucky Fried Chicken Canada v. Scott’s Food Service Inc. (1998), 1998 CanLII 4427 (ON CA), 41 B.L.R. (2d) 42 (Ont. C.A.), at paras. 24-27; and Professor John D. McCamus, The Law of Contracts (Toronto: Irwin Law Inc., 2005), at pp. 705-722.
[17] I see no error in the manner in which the trial judge applied the principles of construction of commercial agreements. The trial judge considered all of the relevant documents and found that the seminal document, the franchise agreement, was not ambiguous. All of the documents executed by the parties referred to the premises under the franchise agreement as “Bayshore Shopping Centre, 100 Bayshore Drive, Nepean, Ontario”, and not to a specific store on the third floor.
[18] Indeed, the only agreement that specifically referred to the third floor was the head lease between the Bayshore Shopping Centre and Timothy’s. The appellant contends that the trial judge failed to take the head lease into account in her analysis. I do not agree. A review of her reasons demonstrates otherwise. Moreoever, to the extent that any discrepancy exists between the head lease and the franchise agreement, I agree with the trial judge that the franchise agreement should be interpreted contra proferentem. The head lease had been negotiated by Timothy’s with the landlord, and its terms were obviously known to Timothy’s at the time it drafted Schedule “A”. Timothy’s had the opportunity to limit the scope of Schedule “A” to the third floor premises and either chose not to do so or was aware that Mr. Salah would not have accepted such a limitation. In either event, there is no basis to find that the trial judge committed a reviewable error. Her conclusions that the franchise agreement and Schedule “A” applied to the whole shopping centre and that Timothy’s conduct—which effectively amounted to a refusal to allow Mr. Salah the option of renewing the franchise agreement—constituted a breach of contract are unassailable.
iii. Breach of duty of good faith
[19] Section 3 of the Wishart Act provides:
Fair dealing
3.(1) Every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement.
Right of action
(2) A party to a franchise agreement has a right of action for damages against another party to the franchise agreement who breaches the duty of fair dealing in the performance or enforcement of the franchise agreement.
Interpretation
(3) For the purpose of this section, the duty of fair dealing includes the duty to act in good faith and in accordance with reasonable commercial standards.
[20] Timothy’s argues that its conduct leading up to the expiration of the franchise agreement could not constitute a breach of the duty of good faith because s. 3(1) of the Wishart Act only imposes the duty of good faith and fair dealing in the “performance or enforcement” of the existing franchise agreement. In other words, the appellant would have it that a terminated agreement is not caught by the section. In my view, it is unnecessary in this case to consider the full scope of the words “performance or enforcement” as used in the Wishart Act. The premise underlying the appellant’s submission has been negated by the trial judge’s interpretation of the agreement between the parties and the effect of Schedule “A”. On the facts as found by the trial judge, there can be no doubt that the conduct at issue arises squarely within the “performance or enforcement” of the franchise agreement.
[21] Since I find no error in the trial judge’s conclusion that Schedule “A” applies to the whole shopping centre and that the right of renewal was triggered, the appellant’s submission on the effect of s. 3(2) of the Wishart Act cannot succeed.
[22] I turn then to the conduct of the appellant. When Timothy’s could no longer renew the head lease of the third floor location and was negotiating a new lease on the second floor, the evidence showed that the franchisor deliberately kept Mr. Salah in the dark about its intentions. The trial judge found that “Mr. Black [the senior vice-president of development at Timothy’s] e-mailed Bayshore Shopping Centre representatives asking them to refrain from passing on any information about the second floor location to Mr. Salah”. The trial judge made further factual findings that Timothy’s “actively sought to keep the franchisee from finding out what was going on with the lease” and that Timothy’s deliberately withheld “critical information and did not return calls”. These findings of fact more than support the conclusion that there was a breach of the duty of good faith that franchisors owe franchisees under s. 3(1) of the Wishart Act.
iv. Damages
[23] The trial judge awarded damages under two heads: (1) damages flowing from the breach of contract, and (2) damages for the breach of the duty of good faith and for mental distress.
[24] For past and future losses flowing from the breach of contract, the trial judge had before her both the opinion of the appellant’s expert, who calculated the loss of profits only to 147, and the opinion of the respondents’ expert, who assessed the losses to Mr. Salah and 147 collectively. As the trial judge decided to treat Mr. Salah and his corporation as one and the same, it was open to her to prefer the evidence of the respondents’ expert, which took into account the loss of income to Mr. Salah as a result of the breach. I would not interfere with this decision.
[25] The appellant submits that it is not open to the trial judge to award damages under the Wishart Act for anything other than compensatory damages relating to pecuniary losses. In other words, it is not open to a trial judge to award damages under the head of compensatory damages relating to non-pecuniary losses, or under exemplary or punitive damages. It argues that any damages flowing from the breach of the duty of good faith is limited to lost profits, and in particular the lost profits, if any, of 147. The latter point is addressed above. The trial judge treated Mr. Salah and 147 as a single entity for the purpose of determining losses flowing from the breach of contract and, on the evidence, she was entitled to do so.
[26] In like fashion, the argument advanced by the appellant with respect to the limitations applicable to damage awards under s. 3(2) of the Wishart Act is misconceived. The Wishart Act is sui generis remedial legislation. It deserves a broad and generous interpretation. The purpose of the statute is clear: it is intended to redress the imbalance of power as between franchisor and franchisee; it is also intended to provide a remedy for abuses stemming from this imbalance. An interpretation of the statute which restricts damages to compensatory damages related solely to proven pecuniary losses would fly in the face of this policy initiative.
[27] The right of action provided under s. 3(2) of the Wishart Act against a party that has breached the duty of good faith and fair dealing is meant to ensure that franchisors observe their obligations in dealing with franchisees. In that regard, the conduct that the trial judge found egregious in the present case is precisely the mischief that this legislation was enacted to remedy.
[28] Our courts have given limited recognition to the duty of good faith between contracting parties in general. However, by enacting legislation that addresses the particular relationship between franchisors and franchisees, the legislature has clearly indicated that such relationships give rise to special considerations, both in terms of the duties owed and the remedies that flow from a breach of those duties. This is evident in the wording of s. 3(2), which focuses on the conduct of the breaching party and not injury to the other side. The trial judge’s award of damages was informed by these considerations.
[29] In summary, I am in agreement with the trial judge that s. 3(2) of the Wishart Act permits an award of damages for the breach of the duty of good faith, separate and in addition to any award in compensation of pecuniary losses. I would go further to say that any such award must be commensurate with the degree of the breach or offending conduct in the particular circumstances. Taking the conduct of the appellant as found by the trial judge into account, I see no error in her decision to award damages on a merged basis for the breach of duty of good faith and mental distress, either in principle or in respect of quantum. In my view, her findings as to the breach of duty of good faith alone would support the amount of the award.
[30] Accordingly, I would not interfere with her decision as to damages.
v. The Pleadings Argument
[31] I will deal summarily with the pleadings argument advanced by the appellant. The trial judge found that Mr. Salah and 147 should be treated as one entity with regard to the franchise agreement. As noted above, there was ample evidence to support this finding. Having done so, she was entitled thereafter to treat the pleadings of one as the pleadings of the other. This is a complete answer to the appellant’s argument. Accordingly, I would not give effect to this ground of appeal.
CONCLUSION
[32] I would dismiss the appeal.
[33] The respondents shall have their costs in the amount of $32,500, all inclusive.
RELEASED: October 14, 2010 “Winkler C.J.O.”
“I agree M. Rosenberg J.A.”
“I agree Pitt J.”
[^1]: The case was tried over a period of 12 days by Justice A. de Lotbinière Panet. However, due to illness, he was unable to deliver judgment. The Chief Justice of the Superior Court of Justice made an order under ss. 123(4) and (7) of the Courts of Justice Act, R.S.O. 1990, c. C.43, appointing Métivier J. to rehear the matter. On consent, the rehearing was based on a review of all of the transcripts, exhibits, and oral and written submissions from counsel.