ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NO.: 08-CL-7458
DATE: 20120206

B E T W E E N:

1159607 ONTARIO INC. JOSEPH SIRIANNI AND EUGENE SIRIANNI

Ben Hanuka, for the Plaintiffs

Plaintiffs

• and -

COUNTRY STYLE FOOD SERVICES INC., COUNTRY STYLE REALTY LIMITED, AND MELODY FARMS SPECIALTY FOODS AND EQUIPMENT LIMITED

Arnold Zweig, for the Defendants

Defendants

AND BETWEEN: COUNTRY STYLE FOOD SERVICES Plaintiff by counterclaim -and- EUGENE SIRIANNI AND JOSEPH SIRIANNI Defendants by counterclaim

HEARD: November 14, 15, 17 and 18 2011

MESBUR J

REASONS FOR DECISION

Introduction:

[ 1 ] In 1995 the plaintiffs, Joseph Sirianni and his brother Eugene, entered into a franchise agreement with Country Style Food Services Inc. (Country Style) to operate a Country Style store. Their numbered company, the plaintiff 1159607 Ontario Inc. (1159607) was the actual franchisee, with the Siriannis guaranteeing 1159607’s obligations. The franchise agreement provided for a ten-year term, running from February 8, 1996 to February 28, 2006, with two five-year renewal options.

[ 2 ] As part of the franchise arrangement the plaintiffs also entered into a sublease for the premises for the store. The store was well located on Davenport Road in Toronto, adjacent to the George Brown College campus. The college provided a large and hungry customer base of 15,000 students for the operation.

[ 3 ] The Siriannis operated the franchise for ten years without incident. The issues in this case arise as a result of events surrounding attempts to renew the franchise agreement and the status of the lease and sublease of the Davenport store. Central to these issues is the question of the extent to which the provisions of the Arthur Wishart Act [1] apply to the events that occurred.

[ 4 ] The plaintiffs take the position they renewed the franchise agreement for a five-year term effective April 1, 2006. They say that as a result, the defendants were under an obligation to provide all the disclosure mandated by section 5 of the Act. They say what the defendants provided was woefully inadequate, making the disclosure tantamount to no disclosure at all. As a result, they argue they had the right to rescind the franchise agreement for a period of two years following the renewal agreement’s effective date. They say they have done so properly and are thus entitled to a refund of all money paid to the franchisor or franchisor’s associate under the provisions of section 6(6) of the Act.

[ 5 ] The plaintiffs also rely on the duty of good faith the Arthur Wishart Act imposes on franchisors and franchisees in their dealings with one another. [2] The plaintiffs say Country Style’s conduct flagrantly breached that duty of good faith. Therefore, the plaintiffs take the position they are also entitled to punitive damages.

[ 6 ] The defendants say that after the initial ten-year term ended at best the plaintiffs had a month to month arrangement with the defendants, since the plaintiffs did not execute a new franchise agreement or sublease. As a result, the defendants take the position they had no disclosure obligations. Even if they did, they suggest what they provided met the requirements of the Act. If it did not, they say the disclosure was no more than the equivalent of late disclosure. As a result, they take the position that if the plaintiffs wished to rescind, they had to do so within a period of 60 days from the date of the agreement. Even if a two-year rescission period applies, the defendants say the plaintiffs failed to rescind within two years and are therefore not entitled to the return of anything they paid under the franchise agreement.

[ 7 ] The defendants deny any breach of good faith, and say they have no obligation to pay punitive damages. The defendants go further, and assert a counter claim against the Siriannis on their guarantee. The counterclaim is for just over $47,000 in unpaid fees and expenses, plus interest.

The facts as I find them:

[ 8 ] Country Style is a franchisor. Its Country Style restaurants sell coffee, baked goods, deli products and sandwiches. Its main competitor is the Tim Hortons franchise. Country Style finds and leases locations for its stores through its franchise associate, the defendant Country Style Realty Limited. (Country Style Realty). Country Style supplies food and beverage products and equipment to franchisees through the defendant Melody Farms Specialty Foods and Equipment Limited.

[ 9 ] Country Style Realty enters into leases of premises for its locations, and then subleases the premises to the franchisee for that location. In this case, the landlord was 114953 Ontario Limited/Robpetmar Limited.

The Davenport Road lease

[ 10 ] In April of 1995 Country Style Realty entered into an offer to lease with Robpetmar to lease premises on Davenport Road in Toronto. On December 19, 1995 they executed the actual lease to use the property as a Country Style restaurant. The lease was for a term of ten years, with two five-year renewal options. Renewals were to be on the same terms and conditions as the original lease, except that the rent was to be adjusted at the time of renewal. Article 9 of the lease deals with renewals. For both renewal terms, the lease says the “new rental figure will be mutually agreed upon by both parties, based on the then current rents for similar space in the nearby area.” If the landlord and tenant cannot agree, then “it shall be decided by arbitration in accordance with the Arbitration Act of Ontario.”

The initial franchise agreement

[ 11 ] On December 5, 1995 the Siriannis and their company, 1159607 entered into a franchise agreement with Country Style and a sublease of the premises on Davenport with Country Style Realty. 1159607 was the franchisor and sublessor, with the Siriannis acting as guarantors under both agreements. Both the franchise agreement and the sublease had a term of ten years, running from February 8, 1996 to February 27, 2006. Both the franchise agreement and sublease had two five-year renewal options.

[ 12 ] Joseph Sirianni testified that the first seven or eight years of the franchise operation were good. Being close to George Brown College was good for business – students formed part of the prime target market for the store’s products, and there were 15,000 of them. In years nine and ten he said the store mostly broke even, but began to lose some money. Joseph Sirianni attributed this in large part to Tim Hortons locations opening up in two nearby gas stations, as well as in the George Brown campus building itself.

[ 13 ] By the time the first ten years of the franchise was nearly up, Joseph Sirianni testified that he was no longer working the same number of hours in the store as he had before. In 2005 he had been offered a part time position at George Brown College and accepted it. He and his brother started to think about selling the franchise. The franchise agreement permitted a sale under certain conditions.

[ 14 ] In the meantime, the franchise agreement and the sublease were coming to the end of their first term. Country Style would have to take steps under the head lease to seek a renewal.

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MESBUR J.

Released: 20120206