CITATION: 241 Pizza (2006) Ltd. v. Loza, 2016 ONSC 6623
COURT FILE NO.: CV-13-477423
DATE: 20161024
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
241 PIZZA (2006) LTD. and 6438067 CANADA LTD.
Plaintiffs
(Defendants by Counterclaim)
– and –
RITA LOZA and 1587923 ONTARIO INC.
Defendants
(Plaintiffs by Counterclaim)
A.D.J. Dick, for the Plaintiffs
D. Samadmoten, for the Defendants
HEARD: August 17, 2016
R.F. GOLDSTEIN J.
REASONS FOR JUDGMENT ON SUMMARY JUDGMENT MOTION
[1] The Plaintiffs are two numbered companies. They operate the 241 Pizza franchise system. 241 Pizza (2006) Ltd. (which I will refer to as 241) is the franchisor. 6438067 Canada Ltd. (which I will refer to as 643) enters into head leases with landlords. 643 then sub-lets to franchisees.
[2] The Defendant numbered company operates a 241 Pizza franchise in Timmins. Ms. Loza, the other defendant, is a party to the franchise agreement. She is also a guarantor. The Defendants entered into a franchise agreement with 241 in December 2003. That franchise agreement gave the Defendants the right to operate a 241 franchise for ten years. Under the franchise agreement the Defendants were required to make payments to 241. Those payments consisted of advertising fees of $75/week and royalty fees of $390/week.
[3] From September 2010 to November 2012 the Defendants only paid a portion of the royalties. After November 2012 the Defendants cease to pay any royalty fees. From mid-2010, the Defendants did not pay any advertising fees. The total amount of royalties and miscellaneous fees due but not paid, according to 241, was $135,060.03 as of August 17, 2016. The total amount of advertising fees due but not paid, also according to 241, was $27,123.09 as of August 17, 2016.
[4] At the same time that the Defendants entered into the franchise agreement, they also entered into a sublease for 425 Algonquin Blvd. E. in Timmins, Ontario. That sublease ran for five years. It was eventually renewed. The Plaintiff 241 entered into the head lease through its affiliated numbered companies, including the Plaintiff 643. The sublease obliged the Defendants to pay the rent under the head lease. In April 2012 the Defendants failed to do so. 643 was obliged to pay the rent and other service charges totalling $9027.12
[5] The franchise agreement expired in 2013. Counsel informed me during oral argument that the Defendants have remained a member of the 241 system. The Plaintiffs have taken no steps to shut them down. They simply want to be paid the amounts that they say are owed. Accordingly, they sued the Defendants for the amounts outstanding. They move for summary judgment on these amounts.
[6] The Defendants replied by arguing that 241 breached the terms of the franchise agreement. The Defendants say that they suffered damages and filed a counter-claim, seeking damages for these breaches. They argue that the summary judgment motion should be dismissed. They say that the competing claims should be dealt with at a trial, as the summary judgment process is not proportionate.
[7] For the reasons that follow, I agree with the Plaintiffs. They are entitled to summary judgment. The Defendants are not entitled to set-off on an equitable basis. Even if they were, they have failed to present cogent evidence of actual damage – the tortious behaviour they complain of is remote and relatively minor. Summary judgment on the amounts sought by the Plaintiff is granted.
ANALYSIS
[8] In my view there are three issues to be determined:
(a) Is this a suitable case for summary judgment?
(b) Are the plaintiffs entitled to the amounts they claim?
(c) Is set-off available?
(d) Should judgment be stayed pending determination of the counter-claim?
[9] I will deal with each in turn.
(a) Is this a suitable case for summary judgment?
[10] The Defendants argue that this is not a suitable case for summary judgment simply because the counterclaim and defence of equitable set-off must proceed to trial. There is no summary judgment motion in respect of those matters. Summary judgment on the Plaintiff’s claim risks duplicating the proceedings and may lead to inconsistent findings of fact.
[11] I do not accept that argument. As set out in the foundation case of Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87, there will be no genuine issue for trial where a judge can make a fair and just determination on the merits of the matter. The case is suitable where a judge can make the necessary findings of fact, apply the law to the facts, and is amore proportionate, more expeditious, and less expensive way to achieve a just result: see para. 49.
[12] In Sweda Egg Farms v. Egg Farmers of Ontario, 2014 ONSC 1200, Corbett J. set out what he considered to be the appropriate analytical framework on a motion for summary judgment at para. 33:
The court will assume that the parties have placed before it, in some form, all of the evidence that will be available for trial;
On the basis of this record, the court decides whether it can make the necessary findings of fact, apply the law to the facts, and thereby achieve a fair and just adjudication of the case on the merits;
If the court cannot grant judgment on the motion, the court should:
a. Decide those issues that can be decided in accordance with the principles described in 2), above;
b. Identify the additional steps that will be required to complete the record to enable the court to decide any remaining issues;
c. In the absence of compelling reasons to the contrary, the court should seize itself of the further steps required to bring the matter to a conclusion.
[13] On appeal, the Court of Appeal approved of this approach: Sweda Egg Farms v. Egg Farmers of Ontario, 2014 ONCA 878.
[14] In assuming that the parties have put forward their “best foot”, I assume that their evidence will not improve at trial.
[15] In this case, I am satisfied that I can decide the issues based on the record. The amounts claimed by the Plaintiffs are not in dispute. Although there are some factual disputes involving the key underlying facts of the counter-claim and the equitable set-off, they can be resolved for the purposes of this motion on the record. I note that the franchise agreement does not permit set-off, although I am aware that would not necessarily prevent equitable set-off in the case of a fundamental breach. The only real question is whether equitable set-off is available to the Defendants, and, if it is, whether I should stay judgment pending determination of the counter-claim.
[16] It would not be proportionate – to either party, frankly – to require the Plaintiffs to go to trial. That is because they would inevitably be able to establish the amounts claimed. They are liquidated amounts and not bound up with the Defendants’ claims. Since (as I determine later in these reasons) equitable set-off is not available to the Defendants it would make no sense to have a trial on these points. The least expensive and most expeditious procedure is to have the Defendants proceed with their counter-claim on a stand-alone basis.
(b) Are the plaintiffs entitled to the amounts they claim?
[17] The amounts are not in dispute. The Defendants in their factum did not dispute the amounts sought by the Plaintiff or even suggest that they do not owe these amounts. The Defendants limited their submissions to the question of equitable set-off.
(c) Is equitable set-off available?
[18] The Defendants argue that the Plaintiffs breached the terms of the franchise agreement. That is the foundation of the counter-claim. They say that this breach of the agreement amounted to a breach of the duty of fair dealing under the Arthur Wishart Act. This, they argue, takes it out of the realm of a contractual dispute and engages equitable issues.
[19] I respectfully disagree. The breaches complained of do not amount to a fundamental breach of the franchise agreement. I see no basis for granting equitable relief. I also do not see a breach of the duty of fair dealing. I say that while still being mindful of some of the principles of franchise disputes: namely, bearing in mind the differential in power between the franchisee and the franchisor; and the duty of fair dealing especially: Fairview Donut Inc. and Brule Foods Ltd. v. The TDL Group Corp. and Tim Hortons Inc., 2012 ONSC 1252.
[20] In Canaccord Genuity Corp. v. Pilot, 2015 ONCA 716, the Court of Appeal recently re-iterated the principles of equitable set-off at paras 56-57:
• The party claiming set-off must show some equitable ground for being protected from his adversary's demands;
• That ground must go to the very root of the plaintiff's claim;
• The counterclaim must be so clearly connected with the plaintiff's demand that it would be manifestly unjust to allow the plaintiff to enforce payment without taking into consideration the counterclaim;
• The claim and counterclaim need not arise out of the same contract; and,
• Un-liquidated claims are on the same footing as liquidated claims.
[21] Franchise agreements are not excluded from summary judgment where the claim of equitable set-off is alleged to be a a breach of the Arthur Wishart Act: Hino Truck Centre (Toronto) Ltd. v. Hino Motors Canada Ltd., [2009] O.J. No. 4512 (Sup.Ct.).
[22] The Defendants point to five specific alleged breaches of the franchise agreement: failure to deal with unauthorized competition; failure to permit turkey pepperoni for a school board “pizza day”; use of inferior products; errors in marketing materials; and failure to negotiate better terms of the lease. I note that the Defendants have made no attempt to quantify damages from the alleged breaches. I deal with these in turn:
[23] Alleged failure to deal with unauthorized competition: In 2007 a competitor opened up down the street and allegedly used the 241 Pizza trademark. The Defendants say that the competitor adversely affected their business. For example, on at least one occasion the competitor failed to deliver a pizza and the customer blamed the Defendants. The Defendant Ms. Lozia swore evidence that she complained to head office on numerous occasions over the course of seven years as the unauthorized competitor used the trademark to steal business. She says that head office did nothing.
[24] In fact, the franchise agreement did not require 241 to protect the trademark on behalf of a franchisee. As well, the competitor did not name the business “241 Pizza”. The competitor only infringed the trademark on some materials, such as pizza boxes.
[25] Furthermore, there is evidence that 241 head office did act to protect the interests of the Defendants. On May 23 2007 241’s general counsel wrote a “cease and desist” letter to the competitor. The activity, according to the evidence of Dan Lepidas, 241’s executive vice president, ceased and there were no further complaints from the Defendants until 2011. The evidence of the Defendants discloses that there were no complaints between 2009 and 2011. In 2011, 241 again took action and sent another “cease and desist” letter to the competitor. This was followed up in 2011 and 2012. Ultimately 241 launched an action against the competitor in November 2012. A statement of claim was filed in this court. The competitor almost immediately offered to settle. Mr. Lepidas notes in his affidavit that the competitor eventually shut down the business.
[26] I simply cannot find that this alleged complaint can meet the test for equitable set-off. There is simply no close connection to the demands of the Plaintiffs. I see no injustice arising out of the behaviour of the Plaintiffs. Factually, the Plaintiffs acted in response to the Defendants’ requests, albeit perhaps slowly. In any event, there was no contractual obligation to do so.
[27] Failure to permit turkey pepperoni: The Defendants had a contract to supply schools in the Timmins area with pizza on school “Pizza Days”. The “ministry of education in Timmins” (it is not clear what entity that refers to) changed the requirement that the pepperoni be changed from pork to turkey. The Defendants asked if they could change pepperoni. They say that the Plaintiff 241 apparently refused. This refusal, according to the Defendants, caused them to lose their “Pizza Day” business at three schools.
[28] There is some conflicting evidence on the point. Mr. Lepidas, in his affidavit, states that no formal request was made to change products under the franchise agreement. The Defendants, he submits, did not submit particulars, as also required under the franchise agreement. Ms. Lozia submitted emails. Those emails were contained in her affidavit of documents. The affidavit of documents was filed at the hearing and it is questionable as to whether it is admissible.
[29] Nonetheless, taking the allegation at its highest and assuming that the emails are admissible, this alleged breach still cannot ground a claim in equitable set-off. There is no connection with the Plaintiff’s claims. Furthermore, there is no equitable reason to relieve the Defendant on this ground. The Defendant franchise was bound to use the products that are selected by 241, the franchisor, under the terms of the franchise agreement. The Plaintiff had sole discretion in that regard. There was no obligation on the part of the Plaintiff to change the ingredients. Furthermore, at law a franchisor has a right to ensure uniformity of products. Strathy J. (as he then was) made this point at para. 181 of Fairview Donut Inc.:
One of the greatest disadvantages of operating a franchise is loss of control. The franchisee loses the freedom of choice that is the hallmark of the independent business person. This loss of control is a necessary aspect of a franchised operation. Products, prices, menu offerings, store set-up, hours and methods of operation are strictly controlled to create the uniformity that is so vital to the success of the franchise as a whole.
[30] Use of inferior products: The Defendants claim that 241 supplied inferior products to them. The inferior products included bacon, pepperoni, and cheese. The Defendants complained to 241, which acknowledged that some other franchisees had complaints, although the Plaintiffs note that the vast majority of the franchisees had made no complaints.
[31] This allegation fails for the same reason as the “Pizza Day” allegation. The franchise agreement contains a mechanism for franchisees to recommend new products and to request changes in products. The Defendants did not make a formal request in accordance with the terms of the franchise agreement. It is difficult to see how they can assert an equitable claim when they did not avail themselves of available contractual procedures. Furthermore, there is simply no connection to the Plaintiff’s claims.
[32] Errors in marketing materials: The Defendants argue that 241 made mistakes in some of its marketing materials, such as flyers. This caused the Defendants to spend money to print new marketing materials. The short answer to this complaint is that 241 acknowledged the errors. These were errors made with a number of franchisees. 241 reimbursed the franchisees – including the Defendants – with credits for supplies ordered through 241. There is no evidence that this credit was insufficient.
[33] Failure to negotiate better lease terms: In 2009 and 2010 the Defendants negotiated directly with the landlord to achieve better terms, such as a reduction in rent per square foot. The affidavit of Ms. Lozia lacks particularity. It is difficult, therefore, to know how the negotiations progressed. There are a series of emails in her affidavit of documents that on their face seem to validate her argument that she negotiated with the landlord, achieved better terms, and then waited for 643 to approve the new terms. Again, I will assume without deciding that the affidavit of documents forms part of the record. The emails show that this complaint has more substance on the face of it than the others. There were certainly efforts to negotiate with the landlord.
[34] There is also a conflict in the evidence on this point. Mr. Lepidas notes that no specific agreement was reached between the Defendants and the landlord. The landlord’s position was that 643 was the lessee, not the Defendants.
[35] At the end of the day, however, the conflict is more apparent than real. No doubt the Defendants were negotiating with the landlord – or at least with a representative of the landlord. No doubt there were proposals made. There was, however, no agreement between the Defendants and the landlord as far as I can see. Ultimately an agreement was reached between 643 and the landlord. The Defendants real complaint is simply that it took 643 too long to negotiate.
[36] Even taking the version of events of the Defendants at their highest, and assuming the admissibility of the emails, I still find that this allegation does not justify equitable set-off. The claim is not intimately bound up with the claims of the Plaintiffs. Furthermore, the franchise agreement itself gives the responsibility to the franchisor, the Plaintiffs, to negotiate with the landlords. The Defendants benefitted from that. The Plaintiffs, as lessees, are obligated to guarantee the lease obligations of a franchisee, the sub-lessee. Again, the Defendants bargained away the ability to have their own lease when they joined a franchise system. I do not accept that this is a valid complaint worthy of equitable set-off.
[37] Conclusion with respect to the alleged breaches and duty of fair dealing: As must be obvious, I find that none of the complaints can result in equitable set off. The Defendants argue that the alleged breaches when taken together amount to a breach of the duty of fair dealing. They especially point to the failure to deal with the unauthorized competitor and the lease negotiations.
[38] I must respectfully disagree with that submission as well. The allegations complain of relatively minor failures by 241. They do not amount to a breach of the duty of fair dealing, even cumulatively. As well, I find this argument odd. The Plaintiffs chose not to put the Defendants out of business when the franchise agreement expired. The Plaintiffs have allowed the Defendants to continue be part of the 241 system. The Defendants are essentially saying that the Plaintiffs should have put them out of business and sued them for trademark infringement. It is hard for me to see how the Defendants would be better off if the Plaintiffs had decided to play hardball.
[39] The Defendants have put forward no evidence about what they say the damages should be. They simply say that the amounts sought for advertising and royalties (plus interest) is inappropriate. They do not say what would be appropriate. They simply say the matter should go to trial. If the Defendants had a better foot they did not put it forward.
(d) Should judgment be stayed pending determination of the counter-claim?
[40] The Defendants submit that if the Court grants summary judgment, the judgment should be stayed since there is a counterclaim that must go to trial. The Defendants have submitted no authority for that proposition.
[41] The Defendants also say that if a stay is not ordered, the Plaintiffs may be able to render the Defendants insolvent by enforcing their judgment, which would preclude them from pursuing the counterclaim. They have also submitted no evidence that payment of the amounts sought would put them into bankruptcy.
[42] The proper test for a stay of execution of a judgment is found in R.J.R.-Macdonald v. Attorney General of Canada, 1994 117 (SCC), [1994] 1 S.C.R. 311. An applicant for a stay must show that:
(i) there is a serious question to be tried;
(ii) irreparable harm will result if the relief is not granted; and
(iii) the balance of convenience favours the applicant.
[43] I doubt, based on the evidence here, that there is a serious case to be tried. Furthermore, the evidence does not support a finding of irreparable harm to the Defendants. The Defendants are not un-sympathetic – they are clearly hard-working people trying to make a living in a tough business. That said, there is simply a lack of evidence on the point. Accordingly, I will not grant a stay.
DISPOSITION:
Summary judgment is granted to the Plaintiffs. The Plaintiffs may submit an updated schedule of damages. The parties may each submit a costs outline and costs submissions of no more than two pages within 30 days of the release of these reasons.
R.F. Goldstein J.
Released: October 24, 2016
CITATION: 241 Pizza (2006) Ltd. v. Loza, 2016 ONSC 6623
COURT FILE NO.: CV-13-477423
DATE: 20161024
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
241 PIZZA (2006) LTD. and 6438067 CANADA LTD.
Plaintiffs
(Defendants by Counterclaim)
– and –
RITA LOZA and 1587923 ONTARIO INC.
Defendants
(Plaintiffs by Counterclaim)
REASONS FOR JUDGMENT ON SUMMARY JUDGMENT MOTION
R.F. Goldstein J.