COURT OF APPEAL FOR ONTARIO

ONCA 39

DATE: 20130124

DOCKET: C54761

LaForme and Watt JJ.A. and Lederman J. (Ad Hoc)

BETWEEN

3574423 Canada Inc.

Plaintiff (Appellant)

and

Baton Rouge Restaurants Inc./Les Restaurants Baton Rouge Inc., Baton Rouge Restaurants Company/Compagnie Les Restaurants Baton Rouge (now known as Sara-Mammas Corporation Inc.), John Mavromichalis, Kostas Mavromichalis, Vasilios Varvaris (also known as Billy Varvaris), Anthony Varvaris (also known as Tony Varvaris), 4077822 Canada Inc., 4089537 Canada Inc. and Mikes Restaurants Inc. (now known as Imvescor Restaurants Inc.)

Defendants (Respondents)

Paul J. Pape and Nicolas M. Rouleau, for the appellant

Timothy J. Hill and Atoosa Mahdavian, for the respondents Baton Rouge Restaurants Company/Compagnie Les Restaurants Baton Rouge (now known as Sara-Mammas Corporation Inc.) and Mikes Restaurants Inc. (now known as Imvescor Restaurants Inc.)

Bryan B. Skolnik and Rob L. Winterstein, for the respondents John Mavromichalis and Kostas Mavromichalis, 4077822 Canada Inc., and 4089537 Canada Inc.

Heard: December 14, 2012

On appeal from the judgment of Justice David M. Brown of the Superior Court of Justice dated November 14, 2011.

Lederman J. (ad hoc):

Overview

[1] The appellant, 3574423 Canada Inc., became a franchisee of the Baton Rouge restaurant franchise in 1999, assuming ownership of a franchise in the Eaton Centre in the City of Toronto. It had a contractual right of first refusal (“ROFR”) over the next franchise in the Greater Toronto Area. Over the years, the respondent franchisor, at the time Baton Rouge Restaurants Inc (“BRRI”)[^1], offered a few franchise locations, including a site in Thornhill in 2000. The appellant turned each offer down. When it was given a second opportunity, in 2001, to acquire the Thornhill location, the appellant again passed it up.

[2] The appellant commenced an action for damages on the basis of: (1) breach of a contractual duty of good faith, and (2) breach of the statutory duty of fair dealing pursuant to the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (“AWA”). The claim in respect of the breach of a contractual duty of good faith was in relation to a franchise location in North York; that property is not at issue in this appeal.

[3] In the action, the appellant took the position that when it was given the opportunity in 2001 to acquire the franchise at the revived Thornhill location, the franchisor failed in its obligation to properly and fully notify the appellant in accordance with the AWA. The appellant claimed that the franchisor’s notification was premature and that it withheld critical information. As a result, the appellant claimed that it waived its ROFR on a franchise that, with full disclosure, it would otherwise have purchased. The trial judge dismissed the action, and the appellant now appeals from that decision.

Issues

[4] The appellant argues that the trial judge erred in applying the statutory duty of good faith and fair dealing in s. 3 of the AWA to the question whether the franchisor provided the appellant with sufficient disclosure in respect of the availability of the revived Thornhill location.

[5] The appellant does not take issue with any findings of fact made by the trial judge except for the following statement, in para. 307 of his reasons: “I therefore cannot accept their submission at trial that their June 28, 2001 election to pass on the Thornhill location was not an informed one”. The issue on appeal, therefore, is narrow: namely, whether the trial judge erred in finding no breach of s. 3 of the AWA.

[6] The appellant also argues that the respondents John and Kostas Mavromichalis, former owners of BRRI, intentionally interfered with its economic relations, due to their role in the provision of insufficient disclosure with respect to the revived Thornhill location.

[7] For the reasons that follow, I disagree with the appellant’s submissions and I would dismiss the appeal.

The Appellant’s Submissions

[8] Given the narrow ground of appeal it will not be necessary to provide a detailed factual history of this dispute, which is long and torturous. I will, however, set out those facts necessary to describe the appellant’s position on appeal; facts which it says go directly to the trial judge’s error. The appellant’s core argument is that two types of material facts were withheld in the 2001 offer: (1) the final lease for the Thornhill property, and (2) the size of the territory for that location. As a result, the appellant’s decision not to exercise its ROFR with respect to the revived Thornhill location was not an informed one. Withholding these material facts, it asserts, constituted a breach of s. 3 of the AWA.

(i) The differences in the lease

[9] The appellant submits that the franchisor notified it of the revived Thornhill opportunity in June 2001 through an amended offer to lease the property. This offer largely tracked an earlier December 6, 1999 offer to lease. The appellant submits that it was not advised that the terms of the underlying lease were still being negotiated.

[10] The appellant submits that the terms of the final lease, which reflected changes from the amended offer to lease, would have been material to the appellant’s decision whether or not to exercise its ROFR. Therefore, it argues, the amended offer to lease was put to it prematurely, and it did not constitute sufficient information upon which to make a considered decision. It argues that the situation was fluid and the Thornhill location should not have been offered until the terms of the lease were finalized.

[11] The appellant contends that the amended offer was less detailed and less favourable to the appellant than the final lease as signed in August 2001. The lease is said to contain the following material differences:

(a) The possession date changed from October 30, 2001 to February 21, 2002, giving more time for the appellant to move in and make payments;

(b) The building pictured in the offer to lease was different from the building that was developed;

(c) Detailed provisions on the landlord’s liability for damages were included; and,

(d) Provisions were made for use of common areas on the premises.

[12] On the basis of these differences, the appellant suggests that it may have been in the financial position to pursue a second restaurant location, and it would have gained more confidence in the ability of the landlord to complete construction on time (lack of confidence in the landlord being one reason it gave for turning down the revived Thornhill offer).

(ii) The size of the territory

[13] The trial judge observed that the appellant had the same quality of information about the territory size for the Thornhill location in June 2001, when it received the second offer, as it had in January 2000, when it turned down the first offer. The trial judge, in para. 305 of his reasons, referred to evidence that the issue of territory size was not discussed as a precursor to the exercise of the ROFR:

Regarding the failure to disclose how large the Thornhill territory would be, the evidence of the Mavromichalis brothers was that they did not discuss precise territory size with the Bozikis brothers. They regarded that as a matter for discussion once the Bozikis brothers had expressed an interest in taking the Thornhill location. Instead, in 2001 the plaintiff passed on the location.

[14] The appellant submits that this cannot be fair dealing. It argues that there was an obligation on the franchisor to fully disclose the scope and details of the territory, beyond the generality that it was a “big” territory, as the size of the Thornhill exclusive territory was a material fact.

[15] The appellant submits that it was entitled to specific information, including the fact that the Thornhill location’s territory would be the largest of all Baton Rouge territories (approximately 320 square kilometres in size), and that it would encompass the proposed future site of a North York location, a site in which the appellant says it had been interested since 1999. Without this information, the appellant argues that it did not know it was foregoing rights to the eventual North York location by waiving its ROFR on the Thornhill location.

[16] Although the appellant does not argue that s. 5 of the AWA applies, it points out that the contents of a s. 5 disclosure document include “a description of any exclusive territory granted to the franchisee”: O. Reg. 581/00, s.6(12). It submits that this should inform the standard of fair dealing required by s. 3 of the AWA.

Analysis

[17] Section 3 of the AWA provides as follows:

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.

[18] Accordingly, the provision calls for a balancing of the rights of both franchisees and franchisors: 4287975 Canada Inc. v. Imvescor Restaurants Inc. 2009 ONCA 308, 98 O.R. (3d) 187, at para. 40.

[19] As explained by MacFarland J.A., in Personal Service Coffee Corp. v. Beer (c.o.b. Elite Coffee Newcastle), 2005 25180 (ON CA), 256 D.L.R. (4th) 466 (Ont. C.A.), at para. 29:

[W]hile the Act imposes fairly onerous disclosure requirements on franchisors, it is not entirely one-sided. In particular, s. 3 of the Act imposes a duty of fair dealing on “each party" to a franchise agreement with respect to performance and enforcement and gives the parties a right to damages for breaches of this duty of fair dealing. In this way, the Act obliges both the franchisor and the franchisee to deal fairly with one another.

[20] The extensive prior dealings between the parties in this case inform the standard of fair dealing between them. I will address each of the appellant’s two assertions of unfair dealing in turn.

(i) Differences in the lease

[21] The appellant was provided with a copy of the amended offer to lease under cover of a letter from BRRI’s lawyer, Mr. Analytis, dated May 28, 2001. The trial judge rejected the appellant’s contention, at trial, that they never received this letter. From that letter, it would have been readily apparent to the appellant’s principals that a final lease document had not yet been negotiated and finalized. If they had any interest in the Thornhill location as of June 2001, they could have exercised their right of first refusal, subject to final review and negotiation of all terms, or requested any further information required. Instead, they decided to turn down the opportunity without seeking any further information.

[22] The appellant’s principals were, as the trial judge repeatedly observed, sophisticated and practical businessmen. They had considerable experience in the restaurant business and in managing an existing Baton Rouge franchise, and had sufficient information upon which to make their decision about Thornhill. They were not interested in the Thornhill opportunity for other reasons.

[23] Further, as it turns out, the terms of the final lease document relating to Thornhill were not materially different from those contained in the offer and amended offer to lease. The final lease had all of the same basic provisions, namely term, rent, square footage, renewal terms, minimum rent-free period and tenant allowances. Having regard to commercial sense, the changes were minor and would not have made any difference to the appellant.

[24] As the trial judge found, the appellant’s principals made their own determination to pass on the Thornhill location in 2001 because they were not in a financial position to pursue the franchise at that time and, in any event, they had no confidence in the landlord’s ability to meet construction deadlines. Accordingly, the fact that the final lease pushed back the possession date by a further period of three months would not have enhanced the appellant’s confidence in this landlord.

[25] I see no error in the trial judge’s findings in respect of this issue. Therefore, I would reject this submission.

(ii) The size of the territory

[26] The trial judge implicitly found that the appellant knew at the time of the second offer that Thornhill would have a much larger territory than the appellant’s existing franchise in the Eaton Centre. As experienced franchise operators, the appellant’s principals knew that franchises located in dense, urban areas would likely enjoy smaller territories than those in less-densely populated suburban areas; this makes commercial sense.

[27] Moreover, although the Thornhill territory was the largest of the Baton Rouge territories, its size was not unusual and was not inconsistent with the size of other suburban Baton Rouge locations, including the adjacent Vaughan territory. The appellant had previously rejected both the Vaughan and Square One opportunities without inquiring into or ascertaining the size of the exclusive territory for those locations, and without considering it necessary to receive extensive documentation in order to make an informed decision in respect of the ROFR. They rejected Square One because there was no external access to the restaurant location.

[28] What is clear is that the actual size of the exclusive Thornhill territory was not a significant factor, despite what the appellant now contends. If it were otherwise, the appellant’s principals would have followed up regarding the size of the territory and obtained further information. Seeking further information in this particular relationship would have made commercial sense. In addition, the question whether the franchisor acted in good faith and engaged in fair dealing must be informed by the fact that the duty is not one-sided. This argument has no merit.

Conclusion

[29] In the end, the appellant’s principals are essentially asking this court to ignore the numerous credibility findings made against them by the trial judge and ask that we now accept that, if only they had known the precise size of the Thornhill territory and the terms that were ultimately incorporated into the final lease document, they would have elected to take the Thornhill location in June 2001. Such an inference would defy logic and cannot be drawn in the face of the knowledge of the parties and the history of dealings between them.

[30] The trial judge considered all of the evidence, including the history of the parties’ dealings, and found that the appellant’s principals were unreliable witnesses who had changed their evidence to try to support their case. The findings of fact made by the trial judge are amply supported by the evidence in the record and are entitled to deference. I see no basis to interfere with his conclusion that the franchisor did not breach its duty of fair dealing in respect of notifying the appellant of the revived Thornhill opportunity under the ROFR, and that the franchisor acted in good faith and in a commercially reasonable manner towards the appellant consistent with s. 3 of the AWA.

[31] Absent any finding of a breach of the appellant’s rights, it is unnecessary to consider whether the personal respondents may be responsible for intentional interference with economic relations due to their role in the provision of insufficient disclosure and their interest in obtaining the Thornhill and North York locations for themselves.

Disposition

[32] For these reasons I would dismiss the appeal. Counsel for the appellant takes no issue with the respondents’ costs. Therefore, the respondents, now known as Sara-Mammas Corporation Inc. and Imvescor Restaurants Inc., will have their costs of the appeal fixed at $52,102.19, inclusive of disbursements and all applicable taxes, and the respondents, John Mavromichalis, Kosta Mavromichalis, 4077822 Canada Inc. and 4089537 Canada Inc., will have their costs of the appeal fixed at $23,817.68, also inclusive of disbursements and all applicable taxes.

Released: January 24, 2013 “HL”

“S.N. Lederman J. (ad hoc)”

“I agree H.S. LaForme J.A.”

“I agree David Watt J.A.”

[^1]: BRRI has now succeeded to the respondent Imvescor Restaurants Inc.