2130679 Ontario Inc. v. The Cora Franchise Group Inc., 2013 ONSC 3099

CITATION: 2130679 Ontario Inc. v. The Cora Franchise Group Inc., 2013 ONSC 3099

COURT FILE NO.: CV-12-465607-0000

DATE: 20130528

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: 2130679 ONTARIO INC., WILLIAM B. WATTERS, LINDA J. WATTERS, SARAH E. BARBER, MATTHEW B. WATTERS, DAVID W. B. WATTERS, and MICHAEL B. WATTERS, Plaintiffs

AND:

THE CORA FRANCHISE GROUP INC., CORA TSOUFLIDOU, NICHOLAS TSOUFLIDOU, YVAN COUPAL and DAVID POLNY, Defendants

BEFORE: R. F. Goldstein J.

COUNSEL: Derek Ronde and Jonathan Wansbrough, for the Plaintiffs

Jeffrey Landmann and Robert Kalanda, for the Defendants

HEARD: March 22, 2013

ENDORSEMENT

BACKGROUND

[1] Cora’s Breakfast & Lunch is a well-known chain of restaurant franchises. The Plaintiff 2130679 Ontario Inc. (“213”) is one such franchisee. The other Plaintiffs are individuals who are officers, directors, and/or guarantors of the franchise agreement. The Defendant, The Cora Franchise Group (“Cora”), is the franchisor. The individual Defendants are officers and directors of Cora. The Plaintiffs plead that they are also franchisors associates as defined by the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3. The status of the individual Defendants is important, as franchise associates have special responsibilities and potential personal liability under the Wishart Act.

[2] On April 2, 2007, 213 entered into a franchise agreement with Cora. As required by the Wishart Act, Cora earlier provided a disclosure document to 213 in October, 2006. 213 began operating a Cora Breakfast & Lunch restaurant in Ancaster, Ontario.

[3] In 2008 another company operated by some of the same individual Plaintiffs entered into an agreement with Cora to operate a franchise in Niagara Falls, Ontario. There is a separate action for damages arising out of alleged misrepresentations and breaches of the Niagara Falls franchise agreement.

[4] The crux of the dispute in this case revolves around the opening of another Cora franchise in Hamilton, Ontario. The Hamilton franchise is in close proximity to the Ancaster franchise operated by 213. The Amended Statement of Claim pleads that the Plaintiffs were misled by the individual Defendants. They say that they were led to believe that they had an exclusive territory and a right of first refusal on opening the Hamilton franchise. Instead, they plead, the Hamilton franchise was granted to unrelated persons in the face of an “implied right of first refusal” that amounted to a misrepresentation. The Plaintiffs seek an injunction, damages, and recission of the franchise agreement. They suggest that there were implied terms that the Defendants have breached.

[5] The Defendants move under Rule 21 of the Rules of Civil Procedure to strike various portions of the Amended Claim. They also move under Rule 25 to strike references to the Niagara Falls franchise action as scandalous, frivolous, and vexatious. The Defendants say that the franchise agreement and the disclosure document are very clear that there are no exclusive territories granted to franchisees. They also say that the franchise agreement has an “entire agreement” clause and, therefore, that implied terms that contradict the franchise agreement do not disclose a reasonable cause of action.

[6] The parties agreed that certain paragraphs of the Amended Claim attacked in the Notice of Motion should be amended. I will not deal with those paragraphs. I will deal with each of the remaining groups of paragraphs in sequence. The Defendants have helpfully provided a chart setting out the reasons for moving to strike each group of paragraphs.

ANALYSIS

[7] The Plaintiffs move under Rule 21.01(a) for determination of a question of law where that determination may dispose of part of the action; the Plaintiffs also move under Rule 21.01(b) to strike part of the Amended Claim on the grounds that it discloses no reasonable cause of action; and Rule 25.11 on the grounds that: the Amended Claim may prejudice the fair trial of the action; is scandalous, frivolous, or vexatious; or is an abuse of process.

[8] The general rule is that a pleading will be struck if it is plain and obvious that the action cannot succeed: Hunt v. Carey Canada Inc., 1990 CanLII 90 (SCC), [1990] 2 S.C.R. 959. The facts pleaded are to be taken as true: R. v. Imperial Tobacco Canada Ltd., 2011 SCC 42, [2011] 3 S.C.R. 45. If there is even a faint chance of success the claim must be permitted to proceed to trial. Where documents are incorporated by reference into the pleadings, the Court may refer to them: Webb Offset Publications Ltd. v. Vickery (1999), 1999 CanLII 4462 (ON CA), 43 O.R. (3d) 802 (C.A.). The Amended Claim makes reference to the franchise agreement and the disclosure document.

Should the claim for misrepresentation against the individual Defendants (paragraphs 1(k), 21-24, 26, 32-34) be struck?

[9] A pleading containing claims of misrepresentation must be pleaded with full particulars, and more particularity than other pleadings: See Rule 25.06(8); Murray v. Sherman, 2010 CarswellOnt 3667 (Sup.Ct.).

[10] The Amended Claim sets out a very general claim regarding “numerous misrepresentations” about the Cora franchise system, including the specific service area, that induced the Plaintiffs to enter into the franchise agreement. The particulars are light. The time, place, and source of the misrepresentations are not pleaded, although a motive (pressuring the Plaintiffs to enter into the franchise agreements) is set out. The Plaintiffs have not particularized their losses as a result of the misrepresentations, despite the claim for damages, although the Plaintiffs also plead that the Ancaster franchise was profitable prior to the opening of the Hamilton franchise.

[11] More importantly, there are no facts pleaded which suggest which individual Defendant (other than Polny) was responsible for each misrepresentation, and there are no facts pleaded to suggest that the individual Defendants acted in their personal capacities: Normart Management Ltd. v. West Hill Redevelopment Co. (1998), 1998 CanLII 2447 (ON CA), 37 O.R. (3d) 97 (C.A.).

[12] In my view, these paragraphs offend Rule 25.06(8). The paragraphs also fail to plead the basis upon which individual liability should be founded, although I recognize that each individual Defendant is alleged to be a franchisor’s associate. As well, proper pleadings may well make out a reasonable cause of action for misrepresentation. In light of those facts, paragraphs 21-24, 26, and 32-34 are struck with leave to amend. I would not strike Paragraph 1(k) in relation to misrepresentation as it is a generalized paragraph and there are other paragraphs relating to misrepresentation which I decline to strike (see below).

Should the claim for breach of contract (paragraphs 1(k), 35-36, 69-77, 92-94, 97) be struck?

[13] The Defendants say that the terms of the franchise agreement and disclosure document are very clear: there is no exclusive territorial right granted to a franchisee. Furthermore, the Defendants argue that entire agreement clause means that no other terms can be implied.

[14] The Plaintiffs rest their argument on the duty of fair dealing that binds all franchisors. They plead that they relied on what amounted to a right of first refusal to open the Hamilton franchise as a result of representations made to them by the individual Defendants. The duty of good faith is implied into a franchise agreement. The Plaintiffs say that by granting the Hamilton franchise to another franchisee the Defendants breached this duty of good faith.

[15] There is no doubt that parties to a franchise agreement have a duty to deal fairly with each other: Wishart Act, s. 3(1). The imbalance in power between franchisees and franchisors is certainly something that must be taken into account when considering the interpretation and enforcement of the contract: Shelanu Inc. v. Print Three Franchising Corp (2003), 2003 CanLII 52151 (ON CA), 64 O.R. (3d) 533 (C.A.). That said, the duty to act fairly is not intended to replace the franchise agreement or amend the franchise agreement by altering its express terms: Fairview Donut Inc. v. TDL Group Inc., 2012 ONSC 1252, 2012 CarswellOnt 2233 (Sup.Ct.) at para. 500. Strathy J. (as he then was) summarized the content of the duty in that case as follows:

502 The content of the duty of good faith and fair dealing has been expressed to include the following:

• to require the franchisor to exercise its powers under the franchise agreement in good faith and with due regard to the interests of the franchisee: Shelanu Inc. v. Print Three Franchising Corp, supra, at paras. 66 and 69;

• to require the franchisor to observe standards of honesty, fairness and reasonableness and to give consideration to the interests of the franchisees: Landsbridge Auto Corp. v. Midas Canada Inc. (2009), 2009 CarswellOnt 1655, 73 C.P.C. (6th) 10 (Sup.Ct.) at para. 15; Shelanu at paras. 5, 68-71;

• to ensure that the parties do not act in such a way that "eviscerates or defeats the objectives of the agreement that they have entered into": Transamerica Life Canada Inc. v. ING Canada Inc. (2003), 2003 CanLII 9923 (ON CA), 68 O.R. (3d) 457 (Ont. C.A.) at para. 53; or "destroy the rights of the franchisees to enjoy the fruits of the contract.": Landsbridge, at para. 17;

• to ensure that neither party substantially nullifies the bargained objective or benefit contracted for by the other, or causes significant harm to the other, contrary to the original purpose and expectation of the parties: Katotikidis v. Mr. Submarine Ltd., 2002 CanLII 49646 (ON SC), [2002] O.J. No. 1959 (Ont. S.C.J.)at para. 72; TDL Group Ltd. v. Zabco Holdings Inc., [2008] M.J. No. 316 (Man. Q.B.) at para. 272; and

• where the franchisor is given a discretion under the franchise agreement, the discretion must be exercised "reasonably and with proper motive, and may not do so arbitrarily, capriciously, or in a manner inconsistent with the reasonable expectations of the parties.": Landsbridge, at para. 17, citing Carvel Corp. v. Baker, 79 F.Supp.2d 53 (U.S. D. Conn. 1997) at para. 69; CivicLife.com Inc. v. Canada (Attorney General), 2006 CanLII 20837 (ON CA), [2006] O.J. No. 2474, 215 O.A.C. 43 (Ont. C.A.), at para. 50; Shelanu at para. 96.

[16] Section 14 of the disclosure document states:

In the Franchise Agreement, the parties acknowledge and agree that the grant to the franchisee is site specific, non-exclusive, solely for use by the franchisee at the Premises, and that no territory or other protected geographic area is provided to the franchisee…

[17] Section 3 of the franchise agreement includes the exact same language as s. 14 of the disclosure document.

[18] Section 24.7 of the franchise agreement states:

This Agreement, the documents referred to in it or attached to this Agreement constitute the entire agreement between the parties with respect to the subject matter and supersede all prior discussions, negotiations, and agreements. No amendment of, change to or variance from this Agreement will be binding on either party unless in writing and signed by the parties.

[19] In Cantini Developments Ltd. v. Hi-Rise Group (Toronto) Inc., 2013 CarswellOnt 205 (Sup.Ct.) Quinlan J. stated:

38 In Gutierrez v. Tropic International Ltd., 2002 CanLII 45017 (ON CA), 2002 CarswellOnt 2599, 63 O.R. (3d) 63 the Ontario Court of Appeal considered the effect of entire agreement clauses, adopting the following passage from the Supreme Court of Canada:

The question is whether the intention of the parties in the case at bar was that the written contract... would constitute the whole of the contract. That intention, as in all matters relating to contractual construction, must be determined objectively. Here the parties expressly agreed that the contract documents constituted the whole of their agreement. While in most cases such an agreement is only a presumption based on the parol evidence rule, in this case it has been made an express term of the contract. A presumption can be rebutted; an express term of the contract, barring mistake or fraud, cannot.

[20] The Plaintiffs rely on Katotikidis v. Mr. Submarine Limited, 2002 CanLII 49646 (ON SC), [2002] O.J. No. 1959, 2002 CarswellOnt 1655, 26 B.L.R. (3d) 140 (Sup.Ct.) where damages were awarded to a franchisee when the franchisor permitted another franchise to encroach on its territory. There was no specific territorial clause in the franchise agreement. In my view, that case is distinguishable. The defendants in that case admitted to a breach of contract, and the passages relied on by the Plaintiffs were concerned with a discussion of whether punitive damages were appropriate.

[21] In my respectful view, the claim for breach of contract cannot succeed. I simply do not see how a reasonable cause of action is disclosed in the face of the clear and unambiguous terms of the disclosure document and the franchise agreement. To imply a term that is at odds with an express term is to stretch the duty of fair dealing well beyond any reasonable boundary. Accordingly, paragraphs 35-36, 70-77, 92, 94, 97 are struck without leave to amend. The words “and breach of contract” are struck from paragraphs 1(k) and 97 without leave to amend.

[22] Paragraph 69 is not struck. That paragraph relates to a claim that the Plaintiffs had “an implied right of first refusal” in relation to a grant of a franchise to operate a Cora Breakfast & Lunch franchise in Hamilton. I am dubious that a claim to an “implied right of first refusal” can ground an action in breach of contract. If, however, the facts are made out at trial an “implied right of first refusal” may ground an action in misrepresentation. I also decline to strike paragraph 93 for the same reason.

Should the claim for negligence (paragraphs 1(k), 95-96) be struck?

[23] It logically follows that if the Plaintiffs are unable to make out a claim for breach of contract in relation to implied terms of the contract, they are also unable to make out a claim for negligence. Obviously no duty of care arises under those circumstances. Accordingly, paragraphs 95 and 96 are struck without leave to amend. The word “negligence” is struck from paragraph 1(k) without leave to amend.

Should the claim for breach of sections 3 and 4 of the Wishart Act (paragraphs 1(a), 1(b), 36, 37, 85-91, 106-107) be struck?

[24] These paragraphs of the Amended Claim rest on an allegation that the Defendants failed to consider the legitimate interests of the Plaintiffs in permitting the opening of the Hamilton franchise. The Plaintiffs generally plead that the Defendants should have consulted them or at least taken their interests into account. In doing so, the Plaintiffs say, the Defendants breached sections 3 and 4 of the Wishart Act.

[25] Paragarph 36 is a “motherhood” pleading and is unobjectionable. Paragraph 37 is also unobjectionable. Subparagraph 37(d) pleads that the Plaintiffs had an implied right of first refusal to open the Hamilton franchise. A right of first refusal, unlike the territorial limitations clause, does not obviously fly in the face of the express terms of the franchise agreement or the disclosure document. I am unable to say that there is no reasonable cause of action. There is at least a germ of a possibility that the Plaintiffs can succeed on this ground. Paragraphs 1(a), 1(b), 36, 37, 85-91, 106-107 are not struck.

[26] The Defendants argue in the alternative that the claims under the Arthur Wishart Act should be struck as being statute barred. They argue that since a Burlington franchise was opened up in 2008 and raised substantially the same issues, the claim crystallized in 2010. I disagree. It is clear that the granting of the Hamilton franchise is the proximate cause of the Amended Claim. The Hamilton franchise was opened in May 2012. The original Statement of Claim was filed well within the limitation period.

Should the claim for negligent misrepresentation (paragraphs 1(k), 21-23, 97) be struck?

[27] These paragraphs rest on pre-contractual allegations of negligent misrepresentation. For the reasons I mention in my discussion of paragraphs 1(k), 21-24, 26, 32-34 it is apparent to me that proper pleadings may make out a case of negligent misrepresentation. Accordingly, paragraphs 21-23 are struck with leave to amend. The word “misrepresentation” in paragraphs 1(k) and 97 is not struck.

Should the paragraphs related to the Niagara Falls franchise (paragraphs 18-20, 39-51, 61-69, 87(c), 93) be struck?

[28] The Defendants argue that these paragraphs, which mention the Niagara Falls franchise, are irrelevant to this action. The Plaintiffs launched a similar action against the Defendants in relation to the Niagara Falls franchise and extensively mentioned the Ancaster franchise (the subject of this action) in that Statement of Claim. The offending paragraphs in the Niagara franchise action were considered on a rule 21 motion by Hainey J. I excerpt part of Hainey J.’s judgment:

31 … I agree that the allegations relating to the Ancaster franchise are relevant to the Plaintiff’s claim. I am of the view that as currently pleaded they do offend Rule 25.11. Accordingly, on the understanding that the parties involved in the negotiations should be made clearly specified, I strike paragraphs 14-25, 49, 51(b) and (c) pursuant to Rule 25.11 of the Rules of Civil Procedure and I grant leave to the Plaintiffs to amend these pleadings within 45 days of the date of this order.

[29] Hainey J.’s ruling was subsequently upheld by the Ontario Court of Appeal. In my view, the impugned paragraphs dealing with the Niagara franchise set out facts that are relevant to this case, or have a connection to this case.

[30] I see no difficulty with paragraphs 18 to 20 and 87(c). They are simply narrative and set out the fact that some of the same principals of the Niagara franchise are also principals of the Ancaster franchise.

[31] Paragraphs 39-51, 61-68, and 93 plead that the Defendants (or some of them) met with the Plaintiffs (or some of them) and pressured the Plaintiffs (or some of them) into opening the Niagara Falls franchise when it was known that they preferred to open a franchise in Hamilton. According to the Amended Claim 213 has loaned money to the Niagara franchise. The Plaintiffs claim damages as a result. These paragraphs are obviously relevant to the Plaintiff’s claim of misrepresentation. That said, the paragraphs lack particularity with regard to time, place, and the identity of the parties to the discussions as well as who made the alleged misrepresentations. The paragraphs are struck with leave to amend in order to particularize. For the reasons give above, I would not strike paragraph 69.

Should paragraphs 130-131 be struck as argument?

[32] These paragraphs state that the Defendants showed contempt for the formation of a franchisee association. They attribute argument and improper motives to the Defendants. The Defendants argue that these paragraphs should be struck as they are argumentative: Robinson v. Medtronic Inc., 2010 CarswellOnt 1957 (Sup.Ct.).

[33] I respectfully disagree. Although the paragraphs are colourful, I find that they are part of the factual narrative. I decline to strike them.

Should the claims for injunctions (paragraphs 1(e), 1(f), 1(g)) be struck?

[34] These paragraphs of the Amended Claim request an interim, interlocutory, and permanent injunction prohibiting Cora from establishing or operating another franchise in the City of Hamilton, the City of Brantford, and the Halton Region. Alternatively, the Amended Claim requests an interim, interlocutory, and permanent injunction prohibiting Cora from establishing or operating another franchise within 30 kilometers of the Ancaster franchise. Paragraph 1(g) requests an injunction to prohibit Cora from discriminating against and differentiating the Plaintiffs from others in the promotion or marketing of other Cora franchises.

[35] Although it is clear that since the Amended Claim does not disclose a reasonable cause of action for breach of contract or negligence in relation to the territorial rights of the Plaintiffs, it is not clear that an injunction could not succeed on another ground. As discussed above, I declined to strike paragraphs in relation to misrepresentation, the so-called “right of first refusal”, and the duty of fair dealing. Accordingly, it is not plain and obvious that an injunction cannot succeed even though the Plaintiffs may have a very high hurdle to overcome on an application. I decline to strike these paragraphs.

DISPOSITION

[36] In view of my findings that there are some valid causes of action made out in the Amended Claim, I decline to strike it in its entirety.

[37] The following paragraphs are struck without leave to amend:

• Paragraphs 35-36, 70-77, 92, 94, 95-96.

• The words “breach of contract” and “negligence” from paragraphs 1(k) and 97.

[38] The following paragraphs are struck with leave to amend:

• Paragraphs 21-24, 26, 32-34, 39-51, 61-68 and 93.

[39] The Plaintiffs will have 60 days to amend.

[40] The parties have had mixed success on this motion. I would encourage them to agree on costs. If they are unable to do so, they may each submit a brief (no more than two pages) costs submission and a costs outline.

R. F. Goldstein J.

Date: May 28, 2013