COURT FILE NO.: 18-75462
DATE: 2018-04-11
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
10313033 Canada Inc.
Applicant/Moving Party
– and –
2418973 Ontario Inc., 8188106 Canada Inc,. 2318328 Ontario Ltd., 7108036 Canada Inc., 9132-9755 Quebec Inc., 6986200 Canada Inc., 8480605 Canada Inc., and H & H Limited, Mohammed Hashmatullah Siddiqui, Juwaria Fatima, Christopher Lane, Steven Poplove, Hala Jarada, Ihab Siouti, Helen Nguyen, Ali Abbas, Sara Zahiri, Zahir Charania and Nadim Ibrahim
Respondents/Responding Parties
Georges Nassrallah for the Applicant/Moving Party
Keith MacLaren and Bryce Dillon for the Respondents/Responding Parties
HEARD: March 27, 2018
REASONS FOR JUDGMENT
JUSTICE SALLY GOMERY
[1] In December 2017, seven Laurier Optical franchisees in Ontario stopped paying monthly royalty and advertising fees to their franchisor 10313033 Canada Inc. (“103 Canada”). 103 Canada seeks an interlocutory injunction ordering these franchisees to pay the amounts owing. The franchisees have served a notice to arbitrate. They ask the court to appoint an arbitrator and stay this action.
Background
[2] On August 31, 2017, the Quebec Superior Court issued an order authorizing 103 Canada’s purchase of the assets of the previous Laurier Optical franchisor pursuant to the Companies’ Creditors Arrangement Act, RSC 1985 c C-36 (the “CCAA”). Through this order, 103 Canada acquired all of the rights, title and interest in the franchisor’s assets, free and clear of any claims or liabilities. It was also assigned all rights and obligations under a series of contracts, including leases for 21 store locations and franchise agreements for 12 locations. Although given notice that 103 Canada had applied for the vesting order, none of the respondent franchisees contested it.
[3] Four weeks later, the lawyer acting for the eight respondent franchisees sent a letter to 103 Canada raising questions about the continued enforceability of the franchise agreements and leases assigned pursuant to the vesting order. He accused both 103 Canada and its predecessor franchisor of failing to respect their obligations under these agreements. He said that the eight franchisees would continue to pay marketing and franchise fees on a without prejudice basis, but that they reserved the right to discontinue payments if their demands with respect to marketing and a renegotiation of the franchise agreements were not met within the next 90 days.
[4] At the end of the letter, the franchisees’ counsel invoked his clients’ right to arbitration under an arbitration clause in their agreements.
[5] 103 Canada did not respond to the franchisees’ demand for arbitration. Over the next two months, it gave them information about a new Laurier Optical marketing campaign and management team. 103 Canada’s shareholders, Dr. Sameh Mansour and Madeleine Bonhomme, also met with franchisees to discuss their concerns.
[6] These efforts did not satisfy the franchisees, who were now referring to themselves as the Laurier Optical Franchisee Association. On December 13, 2017, they notified 103 Canada that they were withholding their November royalty and marketing fees due on December 15. Since that time, seven of the eight franchisees have not paid any further fees to 103 Canada. According to Dr. Mansour’s affidavit, they owed total fees of just over $200,000 as of the end of February 2018. This figure is now higher since the franchisees have since defaulted in making payments due on March 15. Dr. Mansour says that some franchisees are also violating their franchise agreements in other ways, for example by ordering supplies through unauthorized vendors.
[7] For their part, the franchisees say that Laurier Optical is in disarray and that they have not received any value for fees paid to the franchisor. They say that the parties could have resolved their issues by now had 103 Canada responded to the September 28, 2017 arbitration notice.
[8] On January 22, 2018, the respondent franchisees applied to the court for appointment of an arbitrator. On February 8, 2018, 103 Canada began this action seeking enforcement of the franchise agreements, and sought an urgent hearing on its motion for an interlocutory injunction. The individual respondents are officers and directors of the franchisees who signed agreements as guarantors.
Is 103 Canada entitled to an interlocutory injunction?
[9] To obtain an injunction, 103 Canada must satisfy the three-part test set out in RJR-Macdonald v. Canada, [1994] 1 S.C.R. 334 by persuading the court that:
a. There is a serious issue to be tried;
b. 103 Canada would suffer irreparable harm if the injunction were refused; and
c. The balance of convenience favours 103 Canada.
Is there a serious matter to be tried?
[10] The respondent franchisees acknowledge that they have not paid fees to 103 Canada since early December 2017. They have offered various excuses. In an email to the franchisor in December 2017, they refused to pay until they received invoices and releases for earlier payments. Before this court, they said that they did not know exactly what amounts were owed or the breakdown of fees claimed by 103 Canada.
[11] These excuses are implausible. As acknowledged by the franchisees’ affiant Ali Abbas, the franchise agreements have been in place for years. The franchisees were paying fees to the previous franchisor, and then to 103 Canada, up until December 2017. Prior to December, the franchisees never raised questions about the amount of the monthly fees or said that they needed paperwork in order to comply with their contractual obligations. They knew they owed monthly fees to 103 Canada. They simply chose to stop paying them.
[12] I conclude that the actual motivation for non-payment is set out in an e-mail from the franchisees’ lawyer prior to the vesting order and in his September 28, 2017 letter. In the wake of the bankruptcy and the transfer of Laurier Optical to 103 Canada, the franchisees wanted to re-negotiate their franchise agreements. Even before the vesting order was issued, the franchisees announced that they were not prepared to continue with their franchises unless changes were made. Having failed to engage the franchisor in contract negociations, they ceased paying their fees in December in a further attempt to bring 103 Canada to the bargaining table.
[13] This is not the first time a group of franchisees has attempted to gain leverage in contractual negotiations through collective action.
[14] In Cash Converters Canada Inc. v. 1167430 Ontario Inc., 2004 BCCA 468, [2001] O.J. No. 5860, 49 B.L.R. (3d) 260, a group of franchisees participated in a “royalty strike” against a franchisor. Justice O’Driscoll issued an interlocutory injunction requiring them to pay fees owed pending resolution of contractual disputes with the franchisor. In his decision, he noted that “royalty strikes can be initiated with ease, especially in the age of the internet, and bring a franchise system to the brink of disaster” (para. 22). He rejected the franchisees’ argument that the franchisor had fundamentally breached their agreements, because the franchisees had taken no steps to rescind them, yet continued to enjoy the Cash Converters’ name and system to operate their stores.
[15] In Bark & Fitz Inc. v. 2139138 Ontario Inc., [2010] O.J. No. 1428, 2010 ONSC 1793, 186 ACWS (3d) 687, pet store franchisees began withholding monthly royalty and advertising fees, and stopped carrying core products, after contractual negotiations broke down with their franchisor. Justice Karakatsanis, as she then was, issued an interlocutory injunction requiring the franchisees to comply with the franchise agreements pending a decision on the merits of the contractual dispute. She did so even though, on the evidence, the franchisor had not met all of its contractual obligations to the franchisees.
[16] With respect to the first leg of the RJR-MacDonald test, I see little to distinguish the situation in this case from the situation in Cash Converters and Bark & Fitz. Here, as in those cases, a majority of franchisees have banded together to withhold fees to a franchisor in order to gain leverage in contract negotiations. There is nothing in the franchise agreements that permits them to do this. On the contrary, under the franchise agreements, the non-payment of royalty and advertising fees is a default that may give the franchisor the right to terminate the franchise without notice.
[17] The franchisees argue that 103 Canada has not presented a strong enough case to satisfy the first leg of the RJR-MacDonald test. They contend that the franchisor is seeking a mandatory order requiring them to actively respect their contractual obligations, as opposed to a prohibition restraining them from continuing to violate the franchise agreements. As a result, goes the argument, 103 Canada must not just show that there is a serious case to be tried, but convince the court that it has a strong prima facie case.
[18] The franchisees in Bark & Fitz made the same argument. Justice Karakatsanis was of the view that the order being sought in that case might well be a mandatory injunction, because the franchisor was asking for an order requiring franchisees to comply with all of their contractual obligations. She concluded, however, that the applicant franchisor satisfied the first leg of the test.
[19] I have reached the same conclusion in this case, based both on the principles set out in RJR-MacDonald and the facts of this case.
[20] In RJR-MacDonald, the Supreme Court held that the more stringent test traditionally used in interlocutory injunction applications, which required the applicant to show a strong prima facie case, does not apply in most cases. In most cases, the applicant must only show that there was a serious issue to be tried. The more stringent standard applies only where the potential harm flowing from an interlocutory order was “of a kind for which money cannot constitute any worthwhile recompense”.
[21] Issuing a mandatory order that only requires a party to pay money does not give rise to the same concerns as a broader mandatory injunction. If a person is ordered to pay money on an interim basis, and the applicant’s case is eventually dismissed on its merits, the person subject to the order can get their money back. If, on the other hand, an interlocutory order requires a person to conduct themselves in a certain way, there is nothing that can compensate them for the loss of their freedom while the order was in force, even if it turns out they were in the right.
[22] In this case, 103 Canada is asking only that the respondent franchisees be required to pay monthly fees that they had been paying until recently. Although it claims that the franchisees are breaching the franchise agreements in other ways, they are not seeking a broader order. As a result, I need only be satisfied that it has shown there is a serious case to be tried. On the record before me, I conclude that 103 Canada has met this test. As mentioned earlier, the franchise agreements clearly require the franchise to pay monthly advertising and royalty fees, and they are not doing so.
[23] The franchisees argue that they are not required to pay the fees because 103 Canada has fundamentally breached the franchise agreements or, alternatively, some of the agreements may no longer be in force. They also contend that 103 Canada has not complied with its disclosure obligations under s. 40 of the Arthur Wishart Act.
[24] The franchisees’ conduct is at odds with these arguments. They continue to operate as Laurier Optical stores, receiving the benefit of leased premises and the franchisor’s trademark. This is inconsistent with their allegation that the agreements are no longer in force. A party cannot argue that a contract has been repudiated but continue to draw its benefits.
[25] The disclosure issue is one that appears to have been raised only after the franchisees began their royalty strike. I am not persuaded that 103 Canada has failed to comply with the Arthur Wishart Act or that, if it has, that this would justify the franchisees’ breach.
[26] I find that 103 Canada is meeting its central obligations under the franchise agreements. It has engaged in a marketing campaign promoting the Laurier Optical brand. The Franchisee Association’s members are unhappy with what they perceive is an undue focus on the corporate stores. The agreements, however, give the franchisor considerable if not unlimited discretion about the operating support it provides.
[27] I accordingly conclude that 103 Canada has satisfied the first part of the test for an interlocutory injunction, subject to my comments below about its undertaking to compensate the franchisees for damages.
Has 103 Canada proved that it will suffer irreparable harm?
[28] 103 Canada contends that the franchisees are, through their actions, attempting to put them out of business. It argues that advertising and royalty fees make up a substantial part of its revenue and that, if the royalty strike continues, it will not be able to satisfy payments owed to the predecessor franchisor for its purchase of Laurier Optical. As a result, 103 Canada says that it will clearly suffer irreparable harm if an interlocutory order is not issued.
[29] This same line of argument was successful in Cash Converters and Bark & Fitz. As a matter of simple logic, if seven of 11 current franchisees withhold payments, this could have a severe, and possibly fatal, impact on the franchisor. On the evidence currently before me, however, 103 Canada has not proved that it will suffer irreparable harm if an order is not granted.
[30] 103 Canada’s counsel argue that the franchisor earns 70% of its revenue through franchise fees from the respondents. In his affidavit, however, Dr. Mansour does not provide evidence in support of this calculation or state what percentage of 103 Canada’s revenues are derived from royalty and marketing fees from franchisees. He simply asserts that, without the fees, 103 Canada will be unable to meet its financial obligations.
[31] There is a further problem with 103 Canada’s evidence. In cross-examination, Dr. Mansour refused to produce the company’s financial statements. Following the cross-examination, 103 Canada’s counsel sent the respondents an estimate of the impact of the respondents’ continued non-payment of fees on the company’s balance sheet. This production was not responsive to the questions actually asked during the cross-examination, and it would be unfair to permit 103 Canada to rely on the estimate without any underlying financial statements.
[32] In these circumstances, I cannot determine whether the continued withholding of fees will cause 103 Canada irreparable harm. If the franchisor were to re-apply with a more complete record, it might well be able to satisfy this part of the test for an interlocutory injunction. On the current record, it has not done so.
Does the balance of convenience favour 103 Canada?
[33] Since the evidence on irreparable harm is incomplete, I cannot assess the balance of convenience if the order were or were not granted.
Conclusions on the interlocutory injunction application
[34] In addition to the shortcomings in evidence regarding irreparable harm, 103 Canada has failed to meet the undertaking requirement in Rule 40.03 of the Rules of Civil Procedure.
[35] In his affidavit in support of the motion, 103 Canada’s representative Dr. Mansour did not undertake to compensate the franchisees for any reasonable damages incurred as a result of the requested interlocutory order. At the hearing, I allowed Dr. Mansour to take the witness stand. He testified that 103 Canada had the means to pay any damages to the franchisees. In cross-examination, however, he refused to provide detailed information about 103 Canada’s financial situation. This puts into question the value of any undertaking given on behalf of 103 Canada.
[36] Given my conclusions on irreparable harm, and the issues with respect to 103 Canada’s undertaking under Rule 40.03, the application for an interlocutory injunction is denied.
Should an arbitrator be appointed?
[37] The agreements between the parties contain the following arbitration clause or some variation of it:
All irreconcilable differences or disputes which arise between Laurier Optical and the [Franchisee] and the Guarantor during the term of this Agreement in relation to any matter whatsoever relating to the terms of this Agreement may, at the option of Laurier Optical or the [Franchisee] or the Guarantor by written notice to that effect … be referred to a single arbitrator agreed upon by the parties to the dispute and in the absence of agreement as to the Arbitrator … to any arbitrator appointed by the Court under the provisions of the Arbitrations Act, 1990 R.S.O. c. A-24. Any award or determination which shall be made by such arbitrator shall be final and binding upon the parties hereto and there shall be no appeal from such award or determination… .
[38] Further to this arbitration clause, any party to the franchise agreements may require arbitration by written notice. The notice does not have to follow any particular format. If the party receiving the notice does not respond, the court may appoint an arbitrator.
[39] In his September 28, 2017 letter, the franchisees’ lawyer provided notice to 103 Canada that the respondents required arbitration of the issues raised in the letter. He suggested who the parties to the arbitration would be and proposed setting timelines and exchanging statements of issues once they had selected an arbitrator. In later correspondence in December 2017 and January 2018, he put forward names of potential arbitrators.
[40] The franchisees have invoked their right to arbitration under the agreement. 103 Canada concedes that some of the issues in dispute fall within the scope of the arbitration clause. The franchisees’ application for the appointment of an arbitrator is therefore granted. Rick Weiler is hereby appointed as arbitrator as the parties agree that he would be an appropriate choice.
Should the scope of arbitration be limited in any way?
[41] The franchisees seek a stay of this action under section 7 of the Arbitration Act, 1991, SO 1991, c 17 (the “Act”). 103 Canada contends that some of the issues that the franchisees want to submit to arbitration, such as the continued enforceability of the leases and its liability for contractual breaches by the old franchisor, have been resolved through the order. 103 Canada says that these issues cannot be submitted to arbitration and asks that any stay of the action be limited accordingly.
[42] As noted by the Ontario Court of Appeal in Haas v. Gunasekaram, 2016 ONCA 744, section 7 of the Act is framed in mandatory language:
7(1) If a party to an arbitration agreement commences a proceeding in respect of a matter to be submitted to arbitration under the agreement, the court in which the proceeding is commenced shall, on the motion of another party to the arbitration agreement, stay the proceeding.
[43] Further to section 2, the provisions of the Act apply here even though the arbitration clause in the franchise agreements refers to the old Arbitrations Act.
[44] The mandatory language in section 7 of the Act reflects the principle that courts will enforce arbitration agreements. Section 17 of the Act reinforces this by establishing that an arbitral tribunal may rule on its own jurisdiction. Absent exceptional circumstances, courts will not pre-emptively limit the scope of an arbitration. In Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34, [2007] 2 S.C.R. 801 at paragraph 84, the Supreme Court held that “in any case involving an arbitration clause, a challenge to the arbitrator’s jurisdiction must be resolved first by the arbitrator”.
[45] The arbitration clause in the franchise agreements has a wide ambit. It covers all disputes between the parties “in relation to any matter whatsoever” in their agreements. The issues raised by the franchisees in their September 28, 2017 letter and otherwise in correspondence with 103 Canada fall within this broad scope. I do not find that any of the exceptions set out at section 7(2) of the Act arise here, or that it is appropriate to sever the issues as permitted at section 7(5).
[46] In its preliminary submissions to the arbitrator, 103 Canada may argue that the scope of the arbitration should be limited so as to avoid any ruling at odds with the vesting order. It would however be inappropriate for this court to pre-empt the arbitrator’s ruling on the limits of its own jurisdiction as a result of the order.
[47] For these reasons, 103 Canada’s action is stayed.
Conclusion
[48] Canada's motion for an interlocutory injunction is dismissed. The respondents' application for the appointment of an arbitrator and their motion to stay this action are allowed.
[49] If the parties are unable to agree on costs, they may provide me with submissions in writing within 10 days. The submissions may be no longer than three pages long in addition to any cost outline.
Justice Sally Gomery
Released: 2018-04-11
COURT FILE NO.: 18-75462
DATE: 2018-04-11
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
10313033 Canada Inc.
Applicant/Moving Party
– and –
2418973 Ontario Inc., 8188106 Canada Inc,. 2318328 Ontario Ltd., 7108036 Canada Inc., 9132-9755 Quebec Inc., 6986200 Canada Inc., 8480605 Canada Inc., and H & H Limited, Mohammed Hashmatullah Siddiqui, Juwaria Fatima, Christopher Lane, Steven Poplove, Hala Jarada, Ihab Siouti, Helen Nguyen, Ali Abbas, Sara Zahiri, Zahir Charania and Nadim Ibrahim
Respondents/Responding Parties
REASONS FOR JUDGMENT
Justice Sally Gomery
Released: 2018-04-11