COURT FILE NOs.: CV-21-659121 and CV-22-00665778
DATE: 20210927
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: UNICITY HOLDINGS LTD., 27736666 ONTARIO INC., and JORAWAR SINGH SANDHAR, Applicants/Respondents by Counter-Application
– and –
GREAT BRITISH VAPE CO., 2755883 ONTARIO INC. O/A SIGNATURE VAPE PLUS, and JOE SORMAZ, Respondents/Applicants by Counter-Application
BEFORE: E.M. Morgan J.
COUNSEL: Roman Botiuk and Sharanjit Singh Padda, for the Applicants
Xavier Navarrete, for the Respondents
HEARD: September 21, 2021
REASONS FOR JUDGMENT
[1] Unicity Holdings Ltd., 27736666 Ontario Inc., and Jorawar Singh Sandhar (collectively, the “Applicants”), are a former franchisee and its principal of a Signature Vape store in Windsor, Ontario. Great British Vape Co., 2755883 Ontario Inc. o/a Signature Vape Plus, and Joe Sormaz (collectively, the “Respondents”), are the franchisor of the Signature Vape stores, along with its principal and its co-owner and major supplier.
[2] The Signature Vape stores are retail outlets that sell vaping equipment and cannabis accessories. The Signature Vape chain is based in Ontario and is currently composed of five stores – one in each of Hamilton, London, Mississauga, Niagara Falls, and Waterloo.
[3] Now that the Applicants have terminated their franchise relationship with the Respondents, there is no Signature Vape store in Windsor. The Applicants operate a retail outlet called London Vape, selling similar products as the Signature Vape chain, in the same Windsor location as their former Signature Vape store.
[4] The parties entered into a Franchise Agreement on September 13, 2020 under which the Applicants became a franchisee of the Signature Vape system. The Franchise Agreement was terminated on January 13, 2021 when the parties, through a mediation conducted under the terms of the Franchise Agreement, resolved their dispute and entered into Minutes of Settlement. Both sides were represented by counsel in concluding the Minutes of Settlement.
[5] That settlement is now in dispute. The Respondents in their Notice of Counter-Application state that the entire dispute should be subject to arbitration as provided in art. 42 of the Franchise Agreement. It was their initial position that the issues herein should not be heard in Court at all. However, counsel for the Respondents has not pressed that point. In fact, at the hearing before me he conceded that the facts needed to make a decision were now all before the Court, and it would be pointless and wasteful to send the matter to an arbitrator at this late date. Both sides, in other words, expressed their content that the Court resolve this Application and Counter-Application on their merits.
[6] The clauses of the Minutes of Settlement that are primarily relevant to the current dispute and Application are:
Upon execution of this agreement, Great British Vape will pay, via bank draft, the sum of $100,000 to the Franchisee, one day after the Franchisee confirming, in writing, the removal of any registered liens against the inventory and receivables from the Mississauga and Hamilton Signature Vape locations.
As the Franchisee is operating a store on its own account, the Franchisee agrees that the Windsor store, within six months, will be painted with a different colour scheme than the scheme used by Signature Vape. The Franchisee agrees that they will immediately cease using any and all designs, branding or marks used by Signature Vape.
The Franchisee will not use the chandelier lighting fixture in the Windsor store as it has become an identifying feature of the Signature Vape system.
[7] On February 25, 2021, the Applicants notified the Respondents that they were in compliance with all of their obligations under the Minutes of Settlement. There are no liens relating to the Mississauga and Hamilton stores, the Windsor store has been painted a different colour than the lavender colour used in all of the Signature Vape stores, the distinctive chandelier has been removed from the Windsor store, and the Applicants, now operating the store under the name London Vape, have removed from the Windsor store the Signature Vape signage and all logos belonging to Signature Vape.
[8] The Respondents have refused to pay the Applicants the $100,000 that they agreed to pay under the Minutes of Settlement. It is the Respondents’ position that the Applicants have not complied with their obligation in paragraph 11 of the Minutes to cease using all “designs, branding or marks used by Signature Vape”.
[9] More specifically, the Respondents argue that the Applicants continue to operate with the same basic store layout and using the same grey tiles and glossy black cabinets as the Signature Vape stores. The grey tiles and the black cabinets are not listed in the Franchise Agreement as intellectual property belonging to the Franchisor, and there is no mention of them anywhere in the Minutes of Settlement. Nevertheless, the Respondents contend that they are part and parcel of the unique Signature Vape design and retail presentation concept, and that the Applicants are thereby continuing to use a design and branding belonging to the Respondents.
[10] It is fair to say that the principals of both parties to this dispute have a tendency to overstate their case.
[11] For example, the principal of the Applicants, Jorawar Singh Sandhar, is of the view that he has some entitlement to the Respondent’s design features. His explanation is that he was an early franchisee who apparently helped the principal of the Respondent chose some of the colour and layout features of the Signature Vape stores. Mr. Singh made his position clear when cross-examined on his affidavit herein:
Q. Yesterday, your lawyer described this as a very attractive and a nice store. Why don't you copy this design?
A. Because we designed the store from the beginning, and I was there when I designed it with Joe Sormaz. The Signature Vape we had three different cabinet people come, and slowly it was designed together.
Q. That's really the crux of this matter. You've just gotten to the heart of this matter. The reason why you don't want to change the store is because you believe that you have partial ownership over the design because in your mind you assisted at some point. Isn't that the case?
A. We were partners from the beginning and we assisted. Yes, we did the stores, and I did make changes in Windsor. Windsor store cabinets are different to Hamilton, Mississauga, and other stores.
[12] In much the same way, the principal of the Respondents, Joe Sormaz, is of the view that he has some entitlement to the look of an open-layout retail store. His explanation for this is that the open layout gives the Signature Vape stores a look that is different from the classic retail store where the products are behind the counter, and that this ability to browse the shelves provides customers with a pleasing shopping experience. Mr. Sormaz made his position clear when cross-examined on his affidavit herein:
Q. But it’s a different branding, would you not agree, than the Signature Vape branding?
A. No, it’s not a different branding. It’s a concept that – the concept is exactly the same. The whole function, as I explained to you, Roman, initially when we went into this business to open the store, it was the functionality of the cabinets. It wasn’t – there’s cabinets that we could have designed that would have been more beautiful and nicer than this, but as I’ve said it needs to function.
Q. What is the function then?
A. The function is for the consumer to come into that, into the vape store that we’re talking about, the design of the cabinets, the black, the wood, that whole design which we have…
Q. There’s another thing here. This is a picture of the front of the store. This is sort of the backwards picture of the front of store, if that makes sense to you, so this is the new store and this is their new front window. This is – the London eye, the Ferris wheel thing –
A. And what we’re talking about, sir, what we’re talking about – they also have a different sign on there which is expected. But we’re talking about people who are coming into the store, walking into – the concept is, as I said there, the concept of the store isn’t the window design. The concept of the store, the functionality of the cabinets, the colour scheme, of the flooring, that’s the first thing – that is something that resonates with the customer. And also again, the concept as I said, which we have established earlier, which you’ve brought up what a customer experiences – so hold there please, at this picture. So, when a customer comes in there, there’s that concept that I’ve been talking about that developed from the get-go when we went into this business. The customer can shop around and look around. That’s the whole idea with this concept that I did not – that I expected to not continue with the independent store in Windsor.
[13] It is evident that neither side has adequate perspective on its own claims. The principle of the Applicants is incorrect when he states that the franchise chain’s designs and marks belong partly to him because he helped suggest some colours at the early staged of the Signature Vape stores. Likewise, the principle of the Respondents is incorrect when he states that an open, browsing layout of a retail store belongs to him because that format gives the customer a particularly pleasant experience.
[14] Both positions are so far reaching that they cannot be taken seriously as viable legal argument; although the principles of each party state their views with apparent sincerity, they are more akin to a kind of strategic posturing. The Applicants do not own the Respondents’ branding; and the Respondents do not own the concept of an open floor with shelving along the walls.
[15] The real question is whether the two specific concerns voiced by the Respondents – the grey floor tiles and the black, glossy display cases – are design features that make Signature Vape stores so distinctive that the London Vape store cannot be distinguished from them. Counsel for the Respondents contends that these items are a crucial aspect of its branding. He submits that these items are striking when one enters a Signature Vape store and that any customer will assume that the Applicant’s store is part of that chain if they have the same kind of flooring and cabinetry.
[16] Counsel for the Applicants retorts that Signature Vape, with its less than half a dozen stores in all of Ontario, is hardly a household name whose design is known by the Ontario consumer, and in any case the grey tile floors and black shelving are rather generic and would not confuse any customer. He also points out that nowhere in the Franchise Agreement, which contains a list of mandatory standards and specifications for every Signature Vape store, are these items ever mentioned as being unique, necessary, or in existence at all.
[17] The photographs in the record before me show that the Applicants have made some effort to change the look of their premises. The walls are painted a new colour and the distinctive chandelier is gone; those, as indicated above, are the two changes that were important enough to the Respondents to specifically include in the Minutes of Settlement.
[18] In addition, there are now Union Jack emblems and designs in keeping with the new name “London Vape” affixed to the floors and black display cases. Respondents’ counsel argues that the new emblems and designs are removable and are therefore suspect. I am not persuaded by that argument. Everything is removable, including a coat of paint which can later be painted over or cheap vinyl flooring that the Respondents seem to want to the Applicants to install on top of the ceramic tiles which can later be removed.
[19] I have before me evidence of a store that has an appearance being impugned by the Respondents, and I must judge the matter based on that evidence. If the appearance changes in the future, it will have to somehow be addressed at that time based on the evidence then available.
[20] A picture from the evidentiary record is worth many words in the judgment. The photo below is the Signature Vape store in Hamilton, Ontario, and the one below that is the London Vape store in Windsor, Ontario:
[21] Counsel for the Applicants submits that the open concept store design is, in fact, widely used in the industry and does not particularly distinguish Signature Vape from many other stores. If it looks like a familiar design to a customer, it is not because a store with an open floor and shelving around the perimeter displaying the store’s wares is a unique or rare sight; it is rather because this design itself that comes from Marketing 101 and can be seen everywhere. Applicants’ counsel further points out that the Union Jacks on the cabinets and the tri-colour stripes along the entire perimeter of the floor are unique to the Applicants’ premises. There is nothing similar in the Signature Vape stores’ trademarks, designs, or branding.
[22] In my view, even if there were something distinctive about the grey floors and black cabinets – a proposition of which I am dubious – the addition of the Union Jacks and coloured stripes distracts from those features and distinguishes the London Vape store from a Signature Vape store. The two stores depicted above resemble each other in the way that, for example, a Rexall Pharmacy’s interior resembles that of a Shoppers Drug Mart, or a Burger King resembles a McDonald’s. The overall impression is similar as the products and businesses are similar; but the branding details are different, and consumers are certainly able to distinguish the brands.
[23] My confidence in reaching this conclusion is bolstered by the testimony of the Respondents’ principle, Mr. Sormaz. When asked about the Union Jack and tri-colour additions to the premises, Mr. Sormaz opined that they had made the store’s otherwise tasteful design look “shabby”, “tacky” and “ugly”. Applicants’ counsel went through a series of photographs with him, and each time he was disparaging about the additions made by the Applicants in their Windsor location:
Q. Now, we’re going to [Exhibit] K, or kilowatt London franchise… very recent picture. I see that. So again, we can confirm we’ve got the black cabinet, none of those tacky Union Jack decals affixed to the cabinets, the lavender wall, the porcelain tile.
A. Yes, yes.
Q. Ugly decals.
A. Yes.
Q. It is tacky, it is not, not –
A. It’s unfortunate because it’s done on the German wood. Yes – so that’s –
Q. It’s ruinous… But it’s a different branding, would you not agree, than the Signature Vape branding?
A. It’s not a different branding. It’s a concept that – the concept is exactly the same. The whole function…initially when we went into this business it was the functionality of the cabinets. It wasn’t – there’s cabinets that we could have designed that would have been more beautiful than this and nicer than this, but as I’ve said, it needs to function.
[24] In other words, the Respondents see the Applicants’ additions as an unaesthetic blight on the interior of the store. But when pressed with the notion that an ugly or tacky premises is not a confusing imitation of an attractive premises lined with “German wood”, the Respondents change direction. Mr. Sormaz’ real concern is not the look of the floor or the cabinets. Rather, it is the “functionality” of the design that he wants the Applicants to change – i.e. the very fact that there are cabinets displaying goods for sale and browsing space for customers.
[25] The Respondents’ position is not sustainable. Any store will have some kind of shelving or cabinets for display of the items for sale, and it is certainly not unique to Signature Vape stores to have an open area where customers can browse the goods on the shelves. To claim such a basic attribute of a retail establishment as a franchise-specific “standard” that is part of the Respondents’ “branding” is to prohibit all competition in the same retail sector.
[26] In this respect I am mindful of the Court of Appeal’s instruction that, “In interpreting the contract, the court must have regard to the objective evidence of the ‘factual matrix’ or context underlying the negotiation of the contract, but not the subjective evidence of the intention of the parties”: Salah v. Timothy’s Coffees of the World Inc., 2010 ONCA 673. The issue that the Respondents seem to want the court to address comes from their subjective understanding alone; the issue that the Applicants want the court to address, and to which they have addressed their own changes to the premises, is contained in the objective understanding of the contract language in, and factual matrix of, the Minutes of Settlement and Franchise Agreement.
[27] I agree with the Respondents, of course, that “the most precious possession of the franchisor is its trademarks and its systems”: Kentucky Fried Chicken of Canada v. Scott’s Food Services Inc., [1977] OJ No 3773, at 15 (Gen Div), rev’d on other grounds, 1998 CanLII 4427 (ON CA), [1998] OJ No 4368 (Ont CA). But in using black cabinetry and grey flooring and covering them with unique – to the Respondents’ eyes even distracting – designs, the Applicants have not intruded on anything belonging to the Respondents. Display cabinets and open flooring in and of themselves are not protected in the Franchise Agreement or the Minutes of Settlement, and so the Applicant’s flooring and cabinetry that now appears different – “uglier” and “tackier” – from the Respondents’ flooring and cabinetry can remain.
[28] Furthermore, nothing in the Minutes of Settlement permitted the Respondents to respond to attempt to enforce their view of the branding issue by withholding the $100,000 payment they were to make to the Applicants. The Applicants have fulfilled the terms of the Minutes that they were required to fulfill in order to earn that payment. The Respondents’ act of withholding payment was and is a breach of contract regardless of the merits of the branding issues discussed above.
[29] Indeed, the withholding of funds from the Applicants was such a blatant breach and misreading of the Franchise Agreement, not to mention the specific terms of the Minutes of Settlement that flowed from the Franchise Agreement, that it also amounted to a breach of the duty of good faith in contractual relations and a violation of the duty of fair dealing owed by a franchisor to a franchisee – including a departing franchisee – under section 3(1) of the Arthur Wishart Act (Franchise Disclosure), SO 2000, c 3. The withholding of a significant payment due to the Applicants under the Minutes of Settlement was, in effect, a pressure tactic utilized by the Respondents that was not authorized in those Minutes.
[30] The Respondents shall pay the Applicants $100,000 plus pre-judgment interest from February 25, 2021 and post-judgment interest from the date hereof. Any PPSA registration or other security interest that the Respondents have against the assets of the Applicants is to be discharged.
[31] The Respondents’ Counter-Application is dismissed.
[32] The Applicants are entitled to their costs. Applicants’ counsel seeks costs on a substantial indemnity scale, but I see no grounds for invoking that elevated scale. The Respondents were not successful in the case, but they and their counsel did nothing in the conduct of the litigation to warrant departure from the usual partial indemnity scale. Substantial indemnity costs are not appropriate on the basis that one side argued strongly for its position but lost the argument.
[33] Using round numbers, Applicants’ counsel seeks $21,900 in partial indemnity costs, inclusive of HST. That is not far off of what Respondents’ counsel presents in his Bill of Costs, where he would seek $27,200 on a partial indemnity scale.
[34] Rule 57.01(1)(0.a) of the Rules of Civil Procedure provides that in fixing costs I am to take into account the principle of indemnity for the successful party, while Rule 57.01(1)(0.b) mandates that I take into account “the amount of costs that an unsuccessful party could reasonably expect to pay in relation to the step in the proceeding for which costs are being fixed”. The Applicants’ request for indemnity should not take the Respondents by surprise since it is somewhat less than the Respondents’ own request.
[35] The Respondents shall pay the Applicants costs of this Application and Counter-Application in the all-inclusive amount of $27,200, payable within thirty (30) days of the date hereof.
Date: September 27, 2021 Morgan J.