Court File and Parties

COURT FILE NO.: CV-17- 569542

DATE: 20180515

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: AZMOON TRADING INC., Plaintiff/Moving Party

AND:

CAFFE DEMETRE FRANCHISING CORP., CAFFE DEMETRE (MISSISSAUGA) INC., CAFFE DEMETRE ENTERPRISES INC. and GARY STEVEN THEODORE, Defendants/Responding Parties

BEFORE: P. J. Monahan J.

COUNSEL: David S. Altshuller and Lara Di Genova, for the Plaintiff/Moving Party

John H. McNair, for the Defendants/Responding Parties

HEARD: April 17, 2018

ENDORSEMENT

[1] The Plaintiff, Azmoon Trading Inc. (the “Plaintiff” or "Franchisee”) seeks injunctive relief prohibiting Caffe Demetre Franchising Corp. and the other Defendants (collectively, the “Franchisor”) from acting on a January 23, 2017 notice terminating the Plaintiff’s franchise. The Plaintiff argues that it should be permitted to continue to operate the franchise until the validity of the January 23, 2017 termination notice can be determined. The Franchisor argues that the Plaintiff does not meet the test for the granting of an interlocutory injunction and the motion should accordingly be denied.

[2] For the reasons that follow, I find that the Franchisee has established that there is a serious issue to be tried. However I am also of the view that it has failed to establish that it would suffer irreparable harm if the injunction were not granted, nor does the balance of convenience favour the granting of the injunction. Accordingly, I would dismiss the Plaintiff’s motion with costs.

Background Facts

[3] The parties entered into a franchise agreement for an initial 10 year term in April 2000. That first agreement granted the Franchisee two options to renew for additional terms of five years each. The first renewal was exercised effective May 22, 2011 for the period ending on May 21, 2016. The second and final renewal was for the period May 22, 2016 until May 21, 2021.

[4] The Franchisee’s right to renew was subject to a number of conditions, including that the Franchisee not be in default of any provisions of the franchise agreement. In addition, the Franchisee was required to undertake, at its own expense, renovations necessary to comply with the Franchisor’s “then-current standards and image.” At the same time, the Franchisor agreed that it would not require remodelling or upgrading of the business to standards “that exceed those applied to its other franchised businesses nearest to the Location.” The Franchisee was not required to undertake any renovations upon the renewal of the franchise agreement that was effective in May 2011.

[5] In July and August 2015, respectively, the Franchisee entered into conditional agreements to sell the franchise to two separate prospective purchasers. Under the terms of the franchise agreement, any such sale required the approval of the Franchisor. The Franchisor reviewed the qualifications of the prospective purchasers and determined that neither was suitable to operate the franchised business. Thus these sale agreements did not proceed.

[6] In November 2015, the Franchisee served notice of its election to renew the franchise agreement for the final five year term. Later that month, the Franchisor indicated that the Franchisee was in default of a number of provisions of the franchise agreement, including an obligation to spend a minimum of 1% of gross sales on local or regional advertising. The Franchisor also indicated that any renewal was conditional on the completion of substantial renovations required to bring the business in line with the Franchisor’s current image and standards. The estimated cost for the required renovations was between $350,000 and $450,000.

[7] Over the next six months, the parties engaged in extensive discussions over the renovations that were being required by the Franchisor as a condition of renewal. Various proposals and counterproposals were made by the parties. In general terms, the Franchisee sought to substantially reduce the scope of the required renovations or, if the full renovations were to be undertaken, to obtain a ten-year renewal. The Franchisor engaged a designer to work with the Franchisee and eventually agreed to reduce the scope of the renovations. The Franchisor also argued that the renovation requirement was not unreasonable, given the fact that the Franchisee had not been required to undertake any renovations at the time of the 2011 renewal of the franchise. By May 2016, with the franchise agreement about to expire, the parties agreed to extend the agreement on a month-to-month basis as they continued to attempt to find a resolution to the renovation issue.

[8] By early January 2017, the Franchisee had obtained estimates showing total costs for the renovations then under discussion ranged from approximately $270,000-$280,000. However, the Franchisee continued to regard these renovations as unreasonable, given the limited amount of time remaining on the franchise agreement after the final renewal. The Franchisee also claimed that the scope of the proposed renovations exceeded the standards applied to other Caffe Demetre franchises in the immediate area, contrary to the relevant provision in the franchise agreement. The Franchisee indicated that it was willing to agree to a “reasonable scope of renovations” at a cost of approximately $75,000-$85,000. Alternatively, the Franchisee was prepared to undertake the full scope of renovations requested, provided that the franchise was renewed for a ten-year term.

[9] In previous correspondence, the Franchisor had indicated that, in the absence of confirmation that the Franchisee was prepared to undertake the required renovations, a notice of nonrenewal would be issued terminating the Franchisee’s rights to operate the franchise. The Franchisor was unwilling to agree to the January 2017 proposals put forward by the Franchisee. Accordingly, on January 23, 2017, the Franchisor provided 30 days notice of termination of the franchise agreement, effective February 23, 2017. The notice of termination cited the Franchisee’s failure to undertake required renovations, as well as the failure to satisfy the local advertising requirement, as the basis for the termination.

[10] On February 13, 2017, the Franchisee issued a statement of claim seeking damages of $2.5 million for breach of contract and for breach of the Arthur Wishard Act (Franchise Disclosure), 2000.[^1] The allegation of breach of contract relates, amongst other matters, to the Franchisor’s failure to approve either of the two proposed purchasers of the franchise in the summer of 2015. The claims for breach of the Arthur Wishard Act involve allegations of bad faith against the Franchisor, arising from the Franchisee’s involvement in an organization of Caffe Demetre franchisees in 2012 and 2013. The Franchisee also sought an interim and permanent injunction restraining the Franchisor from acting on the notice of termination until the issues in the action could be adjudicated, as well as a mandatory order compelling the Franchisor to renew the franchise agreement for the final five year term. On March 17, 2017, the Franchisor delivered its Statement of Defence and Counterclaim, denying the Franchisee’s claims and seeking a declaration that the franchise agreement had been validly terminated effective February 23, 2017.

[11] The Franchisee’s motion for interlocutory relief was initially returnable August 3, 2017.[^2] However, in June 2017 the Franchisee entered into a conditional agreement of purchase and sale with a prospective purchaser, Asif Siddiqui (“Siddiqui”). In July 2017, the Franchisor approved Siddiqui as a franchisee. Accordingly, the parties agreed to adjourn the Franchisee’s August 3, 2017 motion for interlocutory relief until February 1, 2018, in order to provide an opportunity to complete the potential sale of the franchise. The Franchisee subsequently undertook negotiations with Siddiqui over the next six months but was unable to settle all of the issues that arose during these discussions, particularly the length of the franchise term.

[12] The Franchisee’s application for interim relief came before me on February 1, 2018. On that date, the parties disclosed that on January 30, 2018 the Franchisee had successfully concluded the negotiations for the sale of the franchise to Siddiqui. The agreement remained subject to a number of conditions. However, since Siddiqui had already been approved by the Franchisor, there appeared to be a reasonable possibility that the transaction would in fact close on the date scheduled, namely, March 24, 2018.

[13] Following discussions with counsel during the hearing on February 1, 2018, it was agreed that the motion for interim relief would be adjourned until April 16, 2018 in order to permit the sale of the franchise to Siddiqui to close. It was also agreed that I would issue an Endorsement requiring that the Franchisor not take any steps to act upon the January 23, 2017 notice of nonrenewal prior to April 16, 2018.

[14] Although the Franchisee and Siddiqui continued their discussions following the February 1, 2018 adjournment and Endorsement, ultimately Siddiqui was unwilling to proceed with the transaction. In the meantime, in anticipation of the transaction proceeding, the Franchisee retained a contractor to undertake the renovations required by the Franchisor. These renovations were commenced on April 3, 2018 and, as of the date of the hearing on April 17, 2018, were anticipated to be completed sometime in May 2018. Documents tabled at the hearing on April 17, 2018 indicated that the total cost of these renovations is in the range of $140,000.

[15] Finally, it should be noted that in early March 2018 the Franchisee entered into yet another agreement of purchase and sale with a different purchaser. I am advised that as of April 17, 2018 there was no agreement between the parties as to whether this transaction would proceed. On this basis, the parties proceeded to argue the Franchisee’s motion for interlocutory relief.

Issues

[16] The issue before me is whether an injunction should be granted in favour of the Franchisee in order to prevent the Franchisor from terminating the franchise agreement until the issues in the Franchisee’s claim can be adjudicated.

[17] In order to obtain an interlocutory injunction, the Franchisee must satisfy the well-known three-part test set out in RJR McDonald Inc. v. Canada (Attorney General),[^3] by showing that:

a. there is a serious issue to be tried;

b. the Franchisee will suffer irreparable harm if the injunction is not granted; and

c. the balance of convenience favours the granting of the injunction.

[18] I proceed to consider each of these issues in turn.

Serious Issue to Be Tried

[19] The parties are agreed that the Franchisee is seeking a prohibitory as opposed to a mandatory injunction and that, under the first prong of the RJR McDonald test, the Franchisee is merely required to demonstrate that there is a “serious issue to be tried”. This is a low threshold and negates the need for any in-depth review of the merits at this preliminary stage.

[20] It is clear that the Franchisee has identified a number of serious issues to be tried, including whether the scope of renovations required by the Franchisor was in accordance with the requirements of the franchise agreement. In oral argument, the Franchisor conceded that the Franchisee had satisfied the first prong of the RJR McDonald test.

Irreparable Harm

[21] Irreparable harm refers to the nature of the harm to be suffered, rather than its magnitude, and is characterized as harm that either cannot be quantified in monetary terms or which cannot be cured.[^4] Here, the Franchisee relies on various decisions of this Court holding that the termination of a franchise, involving loss of business, profits, and reputation/goodwill, can constitute “irreparable harm”.

[22] For example, in 1318214 Ontario Ltd. v. Sobey’s Capital Inc.,[^5] Conway J. noted that if an injunction were not granted to the franchisees in that case, they would “lose the business that they had purchased, that they were operating, that their families worked in and that they expected to develop over the term of the franchise.” Conway J. was of the view that this lost opportunity could not be restored with a payment of monetary damages. Similarly, in Erinwood Ford Sales Ltd. v. Ford Motor Co. of Canada,[^6] Spies J. found that a franchisee who had made a significant investment in the franchise, both financially and personally, would suffer irreparable harm if he was forced to abandon the business prior to the adjudication of his claim on the merits. In 1323257 Ontario Ltd. (c.o.b. Hyundai of Thornhill) v. Hyundai Auto Canada Corp.,[^7] Brown J. (as he then was) found that permanent market loss or irrevocable damage to business reputation, which would be the inevitable result of the franchisee being forced to close its doors, satisfied the requirement for irreparable harm.[^8]

[23] The Franchisee argues that the facts here are on “all fours” with those cases in which interlocutory injunctions have been granted. The operator of the franchise, Mike Kashani (“Kashani”), is approaching the age of retirement and the franchise is the means by which he has earned his livelihood for the past eighteen years. It would be extremely difficult for Kashani to find an equivalent position in another establishment. Moreover, the franchise agreement contains both a non-solicitation and non-competition clause prohibiting Kashani from participating in any competing business for a period of two years following termination. The Franchisee also argues that its long-standing reputation in the community will suffer irreparable harm since there is no one set up to run the franchise if the Franchisor proceeds with a notice of termination.

[24] In my view, however, there are a number of circumstances which distinguish the present case from those relied on by the Franchisee. These considerations include the following:

a. there is no further right to renew the franchise after May 21, 2021, which is the expiry of the final renewal period. Thus, at most, the Franchisee has the right to operate the franchise for an additional three years;

b. the Franchisee has been actively attempting to sell the franchise since the summer of 2015. Indeed, he has provided evidence of a conditional offer to purchase the business that was entered into in March 2018. Kashani is aware of the non-solicitation and non-competition clause in the agreement and must have made suitable arrangements to enable him to meet his obligations in this regard. As such, Kashani’s situation is very different from that of the franchisees in the cases relied on by the Franchisee;

c. the Franchisor has indicated that it is in a position to take over the operation of the franchise upon termination, thereby ensuring continuity in the operation of the business, and addressing the Franchisee’s concerns over the potential loss of reputation arising from an abrupt termination of the franchise;

d. the Plaintiff has maintained accurate financial records of the operation of the franchised business for the past 18 years. Actual operating results following any termination will also be available, given the Franchisor’s intention to continue the operation of the business. Thus if the Franchisor is ultimately held to have wrongfully withheld renewal of the franchise agreement, the assessment of damages will primarily involve a relatively conventional loss of income calculation;

e. given the fact that the franchise agreement will expire in at most three years, any loss of goodwill is limited, and will in any event revert to the Franchisor by May 2021, regardless of the outcome of these proceedings.

[25] Given these particular circumstances, in my view the Franchisee has failed to establish that it will suffer irreparable harm if the Franchisor proceeds to enforce the January 23, 2017 notice of termination. In my view, the Franchisee could be adequately compensated in damages if its claim is ultimately upheld.

Balance of Convenience

[26] In light of my determination on the issue of irreparable harm, it is not strictly speaking necessary for me to consider the third stage of the RJR McDonald test, namely, the balance of convenience. For completeness, however, I would also find that the Franchisee has failed to establish that the balance of convenience favours the granting of the injunction.

[27] In that regard, I would note the following:

a. the Franchisee has failed to provide an undertaking as to damages, as required by Rule 40.03. Nor has the Franchisee provided any assurance of its capacity to satisfy any eventual damage award. As Brown J noted in Hyundai of Thornhill, the absence of an undertaking as to damages is normally in and of itself fatal to a claim for interlocutory relief. In contrast, the Franchisor has provided evidence of its capacity to satisfy any damages that it might eventually be ordered to pay. In addition, the Franchisor has undertaken to compensate the Franchisee for the cost of the current renovations to the franchised business;

b. the notice of termination was delivered in January 2017, approximately 16 months ago. The Franchisor voluntarily agreed not to act on the notice of termination for the past 16 months in order to give the Franchisee every opportunity to sell the franchise business to a third party. However, the Franchisee has failed to take advantage of this opportunity and, in the process, has obtained a de facto two-year extension to the franchise agreement without being required to meet the conditions for renewal;

c. the Franchisee has already had the benefit of my interlocutory order prohibiting the Franchisor from acting on the notice of termination, for the period February 1, 2018 until April 16, 2018;

d. the duration of any interlocutory relief awarded to the Franchisee would be uncertain and open-ended. During oral argument, the parties indicated that it might be possible to schedule the trial on the merits of the Franchisee’s claim, as well as the Franchisor’s counterclaim, before the end of 2018. However, given the numerous claims advanced by the Franchisee, which are factually complicated and include allegations of bad faith on the part of the Franchisor, it is entirely possible that the trial on the merits could not be completed until sometime in 2019. In that event, more than half of the five-year term of the final extension would already have expired. I contrast this with the interlocutory relief granted by Brown J. in Hyundai of Thornhill, which was limited to approximately 100 days;

e. it is difficult to assess the relative strength of the parties’ positions with respect to the renovation requirement, since any such assessment will require factual findings, including findings of credibility, that can only be made at trial. Nevertheless, while the dispute over the renewal of the franchise agreement has primarily centred over the requirement to undertake necessary renovations, the Franchisor is also alleging that the Franchisee is in breach of its obligations regarding expenditures for local advertising. The Franchisee has not provided any evidence indicating that this alleged breach has been satisfactorily addressed and it appears to remain outstanding.

[28] Taking into account these considerations as a whole, in my view the balance of convenience is against the granting of the interlocutory injunction.

Conclusion

[29] Although the Franchisee has established that there is a serious issue to be tried, it has failed to demonstrate that it will suffer irreparable harm if the injunction is not granted. Moreover the balance of convenience is against the granting of the injunction. The Franchisee’s motion is therefore denied.

[30] The Franchisor is also entitled to its costs. I leave it to the parties to settle between them the quantum of costs. In the event that they are unable to so agree, they may make written cost submissions of up to 3 pages (excluding Bills of Costs and Offers to Settle), with the Franchisor’s submissions due 21 days from today and the Franchisee’s submissions due 21 days following the date for the Franchisor’s submissions.

P.J. Monahan J.

Date: May 15, 2018

[^1]: S.O. 2000, c. 3. [^2]: The Franchisor had initially sought summary judgment on their counterclaim, with this motion also returnable on August 3, 2017. However, to date this motion has not proceeded and is not before me. [^3]: 1994 CanLII 117 (SCC), [1994] 1 S.C.R. 311 ("RJR McDonald"). [^4]: RJR McDonald at paragraph 59. [^5]: 2010 ONSC 4141. [^6]: (2005) 2005 CanLII 16616 (ON SC), 6 B.L.R. (4th) 182 (Ont. S.C.). [^7]: (2009) 2009 CanLII 494 (ON SC), 55 B.L.R. (4th) 265 (Ont. S.C.) ("Hyundai of Thornhill"). [^8]: I note, however, that in Hyundai of Thornhill, Brown J put in place a time-limited interlocutory injunction and required the parties to conduct an expedited trial within four months of the date of his order.