COURT FILE NO.: 567/07
DATE: 20081218
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
B E T W E E N:
coffee time donuts incorporated, jolin groups inc., john tay and ling-yao chang
Appellant/Defendant
- and -
toshi enterprises ltd
Respondent/Plaintiff
Peter T. Henderson, for the Defendant/Appellant
Linda Wilson, for the Plaintiff/Respondent
HEARD at Toronto: November 20, 2008
BELLAMY J.:
Overview
[1] The defendant Coffee Time Donuts Incorporated (“Coffee Time”) appeals from the Order of Deputy Judge Michael Mungovan of the Toronto Small Claims Court dated October 25, 2007, in which he granted judgment against Coffee Time in the amount of $4,378.00 plus costs and interest.
[2] Mungovan D.J. concluded that Coffee Time was vicariously liable for the negligence of one of its franchisees, Jolin Groups Inc. (“Jolin”), in relation to a fire that occurred at its Coffee Time franchise location. The main findings on which this conclusion was based, namely, that Jolin was an employee of Coffee Time, and that negligence could be inferred from Jolin’s failure to appear at trial, are now challenged by Coffee Time on this appeal.
[3] Coffee Time asks that the Order of Mungovan D.J. be set aside and that the action be dismissed.
Background
[4] This action arises out of a fire that occurred in the Coffee Time franchise owned by Jolin located on Kingston Road in Toronto on December 12, 2004. Smoke from the fire entered the neighbouring premises in which the plaintiff, Toshi Enterprises Ltd. (“Toshi”) operated a restaurant, Saini’s Sports Bar & Chicken Place. As a result of the fire, the restaurant was required to close for three days to repair smoke damage. The cost of the repairs, amounting to $5,964.18, was covered by Toshi’s insurance less a $2,500.00 deductible. Toshi also claimed damages for lost business during its closure in the amount of $1,877.00.
Standard of Review
[5] The applicable standard of review of an appeal from a judge’s decision, as set out by the Supreme Court of Canada in Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, is determined by the nature of the question being addressed on appeal.
[6] The first question to be considered in this appeal is whether the trial judge erred in finding that Jolin was an employee of Coffee Time. Coffee Time submits that Mungovan D.J. committed a factual error in misinterpreting the relationship between this franchisor and this franchisee as one of principal and agent. I disagree that this is simply a factual error. This first question to be considered is one of mixed fact and law.
[7] The second question to be addressed in this appeal is whether the trial judge erred in law in inferring Jolin’s negligence, and finding a causal connection between its negligence and the fire from Jolin’s failure to appear at trial. Coffee Time submits that in doing so, the trial judge made a legal finding that was entirely unsupported by the evidence. Coffee Time submits, and I agree, that this second question addresses an alleged error of law on the part of the trial judge.
[8] In Housen, supra, the Court found that on a pure question of law, the basic rule with respect to the review of a trial judge's findings is that an appellate court is free to replace the opinion of the trial judge with its own. Thus the standard of review on a question of law is that of correctness (at para. 8).
[9] Where, however, the trier of fact has considered all the evidence that the law requires him or her to consider and still comes to the wrong conclusion, this amounts to an error of mixed law and fact and is subject to a more stringent standard of review than for findings of fact (at para. 28). The Supreme Court of Canada offered guidance on distinguishing questions of fact from questions of mixed fact and law in Canada (Director of Investigation and Research) v. Southam Inc. (1997), 1997 385 (SCC), 144 D.L.R. (4th) 1 at para. 12 where the Court stated that “... questions of mixed law and fact are questions about whether the facts satisfy the legal tests.”
[10] As a result of the Supreme Court’s reasoning in Housen, therefore, to be overturned by a reviewing court, a judge’s decision with respect to a question of mixed fact and law need not be “clearly wrong” in the sense of the reasons being “not reasonably supported by the evidence” (see H.L. v. Canada (Attorney General), 2005 SCC 25, [2005] 1 S.C.R. 401 at para. 110). Where a judge has considered all of the appropriate factual circumstances yet incorrectly applies the law to the facts, or arrives at the wrong conclusion about whether the facts satisfy the relevant legal tests, the judge’s decision cannot stand.
[11] In this instance, the trial judge considered all of the relevant evidence as to the nature of the relationship between Coffee Time and Jolin. In my view, though, he made an error in law when he found that the facts supported the legal conclusion that Jolin was an employee of Coffee Time. He made a further error in law when he concluded that the doctrine of vicarious liability applied to their relationship and a further error in law when he drew a negative inference when the defendant, Jolin, did not attend the trial.
Analysis
Question #1: Was Jolin an employee of Coffee Time?
[12] The trial judge examined the relationship between the franchisee and the franchisor as evidenced by the franchise agreement, and concluded that the franchise agreement was “riddled with controls over the activities” of the franchisee and that these controls “point unmistakably in the direction of a relationship…which can only be characterized as one of employer and employee.”
[13] The trial judge identified the correct legal test for distinguishing between employees and independent contractors as set out by the Supreme Court of Canada in 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., 2001 SCC 59, [2001] 2 S.C.R. 983. However, he misapplied the reasoning in that case, and arrived at the wrong conclusion as to whether Jolin could be characterized as an independent contractor.
[14] In Sagaz, the Court found that there was no universal test by which to distinguish employees from independent contractors, but that:
. . . The central question is whether the person who has been engaged to perform the services is performing them as a person in business on his own account. In making this determination, the level of control the employer has over the worker's activities will always be a factor. However, other factors to consider include whether the worker provides his or her own equipment, whether the worker hires his or her own helpers, the degree of financial risk taken by the worker, the degree of responsibility for investment and management held by the worker, and the worker's opportunity for profit in the performance of his or her tasks.
. . . the above factors constitute a non-exhaustive list, and there is no set formula as to their application. The relative weight of each will depend on the particular facts and circumstances of the case.
[15] In finding that Jolin was an employee of Coffee Time, the trial judge engaged in the correct legal analysis, but arrived at the wrong conclusion as to whether the particular facts of the case established that the franchisee satisfied the legal criteria of an independent contractor. Inevitably, there are some provisions of the franchise agreement according to which Coffee Time exercises control over the franchisee. Such provisions are regular and expected inclusions in a franchise agreement. Franchise agreements by nature “entail some degree of control by the franchisor, even though the franchisee is generally an independent business person operating the franchise”: Youngblut v. Jim Jaklen Holdings Ltd., 2002 SKQB 463 at para. 15.
[16] The franchise agreement in this case is clear: there is no agency relationship between the franchisor and the franchisee; the franchisee is an independent contractor completely separate from the franchisor; the franchisee hires and fires its own employees, handles its own finances, maintains its own accounting and business records, financial statements and tax returns; maintains its own insurance on the premises and the property; exercises its own business judgment in the operation of the business; and is the owner of the assets. Jolin was clearly a franchisee and not an employee.
Question #2: Was Coffee Time vicariously liable for Jolin’s actions?
[17] The agency relationship between employer and employee is the basis for an employer’s vicarious liability for an employee’s actions. The Supreme Court referred to the rationale behind imposing vicarious liability in these circumstances, but not in circumstances where a person or business operates as an independent contractor, in Sagaz, supra. Again, the element of control is pivotal:
34 What is the difference between an employee and an independent contractor and why should vicarious liability more likely be imposed in the former case than in the latter? This question has been the subject of much debate. The answer lies with the element of control that the employer has over the direct tortfeasor (the worker).
[18] The Supreme Court found in Sagaz, that there are very important policy considerations underlying vicarious liability in employment relationships. These considerations include, most importantly, providing a “just and practical remedy for the plaintiff's harm” and deterring future harm. Moreover:
the hazards of the business should be borne by the business itself; thus, it does not make sense to anchor liability on an employer for acts of an independent contractor, someone who was in business on his or her own account. In addition, the employer does not have the same control over an independent contractor as over an employee to reduce accidents and intentional wrongs by efficient organization and supervision. (para. 35)
Thus, if the employer does not exercise control over the actions of the person or business, “the policy justifications underlying vicarious liability will not be satisfied.” (para. 34)
[19] The nature of the control exercised in the relationship of a franchisor with its franchisees, if any, was addressed by Fedak J. in Murray v. TDL Group Ltd., [2002] O.T.C. 1024 (Sup.Ct.). In that case, Fedak J. found that a husband and wife operating a Tim Horton’s restaurant were, pursuant to their operating agreement with the franchisor, independent contractors as opposed to employees. The business owners in that case had many of the same responsibilities as did Jolin, and were found not to be under the direct control or direction of the franchisor.
[20] Jolin was an independent contractor at the time the fire occurred. Coffee Time, like the TDL Group Ltd., did not exercise the requisite control over its franchisees to establish an employer-employee relationship. There was no evidence that Coffee Time exercised substantial control over the day-to-day operations, and at none of the material times was Coffee Time in physical control of the premises in which the franchise was located.
[21] This conclusion, however, does not entirely dispose of whether or not Coffee Time could be held vicariously liable for the actions of Jolin. It has been held that a franchisor may be vicariously liable for the negligent acts of its franchisees where a third party believed that he or she was dealing with the franchisor, or relied on a representation by the franchisee to this effect, in adopting a certain course of conduct, which ultimately led to loss or injury (see for example Fraser v. U-Need-a-Cab Ltd. (1983), 1983 1659 (ON SC), 43 O.R. (2d) 389 (C.A.).
[22] The circumstances of this case are clearly not those in which vicariously liability could be imposed on the basis of reliance by a third party on the identity of Jolin as an agent of Coffee Time, such that either party could be estopped from denying the existence of an agency relationship. The principle of agency by estoppel has no application in this appeal.
[23] Moreover, there was no reliance by any third party on the identity of Jolin as an agent of Coffee Tim. There can be no vicarious liability on the part of Coffee Time for any negligent acts of Jolin, were such acts to be proven. The lack of control exercised by Coffee Time over Jolin vitiates the policy rationale for imposing vicarious liability in the circumstances.
[24] Even if I am wrong, and Jolin could be categorized as an employee in the circumstances, the trial judge was still wrong to conclude that Coffee Time should be held vicariously liable because the cause of the fire was unknown and there was absolutely no evidence that Jolin had committed any negligent acts.
Question #3: Can Jolin’s negligence be inferred from its failure to attend?
[25] The trial judge found that the owners of the franchise never defended the action and had “simply vanished.” He inferred, on a balance of probabilities, that the franchisee “must have caused the fire and in doing so, must have been negligent.” In the absence of evidence to the contrary, he then drew an adverse inference against Coffee Time, and found that the fire had been caused by someone’s negligence, and that such negligence was attributable to Jolin’s carelessness.
[26] It is common for a trial judge to draw inferences from the facts before him or her, but such inferences must be ones that can be reasonably and logically drawn from the evidence: R. v. Morrissey (1995), 1995 3498 (ON CA), 97 C.C.C. (3d) 193 (Ont..C.A.) at page 290. To make an unreasonable finding of fact is an error of law: Blanchard v. Control Data Canada Ltd., 1984 27 (SCC), [1984] 2 S.C.R. 476.
[27] In this instance, there was no evidence to support either a finding of conduct falling below the standard of care applicable to the franchisee or of a causal connection between this conduct and the fire. The only evidence adduced at trial as to the cause of, or responsibility for, the fire was that the cause of the fire was unknown. Further, no evidence as to any negligence on the part of Jolin was presented.
[28] In this case, the trial judge indulged in pure conjecture or speculation in making a legal finding that could not reasonably or logically be supported by the evidentiary record. The trial judge was not entitled to infer legal culpability towards Coffee Time simply due to a procedural occurrence entirely unrelated to the issue of negligence, that is, Jolin’s failure to attend at trial. In doing so, he committed a legal error.
Disposition
[29] For the reasons outlined above, the Order of Mungovan D.J. is set aside, and the action is dismissed.
Costs
[30] Coffee Time has graciously not sought costs in this appeal and, under the circumstances of this case, I commend it for taking this position.
Bellamy J.
Released: December 18, 2008
COURT FILE NO.: 567/07
DATE: 20081218
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
B E T W E E N:
coffee time donuts incorporated, jolin groups inc., john tay and ling-yao chang
Appellant
- and -
toshi enterprises ltd
Respondent
REASONS FOR DECISION
Bellamy J.
Released: December 18, 2008