2022 ONSC 6356
COURT FILE NO.: CV-22-00002653-0000
DATE: 2022 11 10
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
2659953 ONTARIO INC.
John Mullen, for the Plaintiff
Plaintiff
- and -
DRUXY’S FRANCHISING INC. and DRUXY’S INC.
Alexander Hora, for the Defendant
Defendants
HEARD: October 31, 2022
REASONS FOR JUDGMENT
DALEY J.
INTRODUCTION:
[1] The plaintiff moves for relief from forfeiture and injunctive relief relating to two franchise agreements and a commercial premises sublease entered into with the defendants.
[2] The plaintiff, as franchisee, entered into two distinct franchise agreements with the defendant Druxy’s Franchising Inc. (“Druxy’s”), as franchisor, in November 2018.
[3] Under the terms of one franchise agreement, the plaintiff began to operate a franchise location as Williams Fresh Café, which was located at 2454 Queen St. W., Brampton (“Queen Street”). The plaintiff also entered into a commercial sublease with the defendant Druxy’s Inc. as the sublessor of the business location at that address.
[4] The plaintiff also began operating a second franchise location of Williams Fresh Café at 150 Central Park Dr., Brampton (“Central Park”) in 2018 and the plaintiff is a tenant of the city of Brampton.
[5] As a result of alleged franchise agreement breaches Druxy’s terminated the plaintiff’s franchise agreement for Queen Street in the summer of 2022.
[6] The franchise agreement with respect to Central Park was not terminated and continues in force at the time of the plaintiff’s motion, although the plaintiff asserts that negative collateral impact on the operation at Central Park has occurred, as a result of the termination of the Queen Street franchise agreement.
[7] On this motion the plaintiff seeks a wide variety of relief including: (a) an order relieving the plaintiff from the forfeiture of its franchise agreement; (b) an order reinstating the franchise agreement with respect to the Queen Street location; (c) an order enjoining Druxy’s from interfering with the plaintiff’s franchise business pending the determination of the issues in this action; and (d) alternatively, for an order relieving the plaintiff as against re-entry and granting relief against forfeiture with respect to the Queen Street leased premises.
[8] For the reasons detailed below, the plaintiff’s motion is dismissed.
FACTUAL BACKGROUND & EVIDENTIARY RECORD:
[9] While the plaintiff asserts that the Central Park location is tied to the Queen Street location and that as the alleged breach by the defendants of the franchise agreement and sublease at that location is intertwined, relief is also sought with respect to the Central Park location, however, as discussed below, there is no evidence supporting the submission.
[10] It is only the commercial history of the Queen Street franchise location that is relevant to the plaintiff’s claims on this motion.
[11] The history of the Queen Street franchise location, as outlined in the defendant’s affidavit includes evidence of breaches of the agreement by the plaintiff including financial and operational breaches, health and safety breaches and the plaintiff’s failure to operate the franchise in accordance with the required hours of operation, as set out in the franchise agreement
[12] The defendant Druxy’s issued Notices of Default under the Queen Street franchise agreement on August 14 and December 14, 2020.
[13] In addition to the Notices of Default, the plaintiff’s operation of the Queen Street location was the subject of audits, in accordance with the terms of the franchise agreement, as to its food, health and safety performance on May 5 and 22nd of 2022, and in both audits the plaintiff failed to meet the minimum standards of 80%, with scores of 38% and 65% respectively.
[14] As a result of the plaintiff’s monetary and operational defaults and breaches, and it’s failing scores on the audits, the defendant Druxy’s advised the plaintiff that it would not renew its franchise agreement for another full term. This was concurrent with the end of the plaintiff’s sublease on the Queen Street location with the defendant Druxy’s Inc., as sub-lessor.
[15] In May 2022, the plaintiff and Druxy’s entered into a month-to-month extension agreement in respect of the Queen Street franchise location.
[16] Following the start of the month-to-month extension of that franchise agreement, the parties engaged in various discussions as to the required changes to be implemented by the plaintiff before the defendants would consider entering into another full-length term franchise agreement and commercial lease.
[17] The plaintiff did not commit to carrying out the changes requested by the defendants, however it sought to have an agreement with the defendants whereby the defendant Druxy’s would buy the location back from the plaintiff. No such agreement was ever concluded.
[18] On July 26, 2022, the defendants received an email from the employee manager of the plaintiff’s Queen Street location advising that the plaintiff had not paid the restaurant staff in one and a half months. The message further advised that the staff felt that they had no option but to close the store location.
[19] On July 27, 2022, a representative of the defendants attended at the Queen Street location and the store remained closed and no employees were on site.
[20] The plaintiff’s representative advised the defendants that the Queen Street location was encountering short-term cash flow problems and that this would be remedied by way of new financing.
[21] It is the defendants’ evidence that as a result of the various breaches by the plaintiff and the failure of the plaintiff to maintain the Queen Street location open for business, the defendants decided to terminate the franchise agreement.
[22] The defendants gave notice of the termination of the franchise agreement and re-entered the store and changed the locks.
[23] Following the termination of the franchise agreement, the plaintiff’s representative asked for permission to re-enter the store to make it ready for sale back to the defendant Druxy’s. Although the defendants acknowledged that they had considered this as an option, upon learning of the very substantial secured debt owed by the plaintiff, it was concluded that the debt far exceeded the value of the store and the defendants determined that they would not buy back the store location.
[24] Among the debts owing by the plaintiff with respect to the Queen Street location were the following: (a) WSIB insurance premium arrears – $4884.82; (b) overdue utility bills – $13,217.68; (c) unpaid HST – $235,085.93 and (d) unpaid source deductions – $30,204.82.
[25] Additionally, the plaintiff has failed to pay rent for August and September 2022, which totals $27,383.78 plus HST.
[26] Following the termination of the franchise agreement with respect to Queen Street, the plaintiff has incurred expenses totaling $17,690.30 with respect to renovations and repairs.
[27] Although there was no detailed evidence was offered by the defendants on this, a new operator for the Queen Street location had been located by the defendants , however the sale of the business of that location had not yet closed as a result of this pending motion.
LEGAL FRAMEWORK and ANALYSIS:
[28] The plaintiff seeks relief from forfeiture and interlocutory injunctive relief in respect of which the test to be met has clearly been established in the decision of RJR-MacDonald Inc. v. Canada (Attorney General), [1994] SCR 311, at paras. 77 – 80.
[29] With regard to the first branch of the test in RJR- MacDonald, it has been held that where a court is requested to compel a party to remain in a commercial agreement through to trial, such an order would constitute a mandatory injunction and the test in the first branch would require the moving party to establish a strong prima facie case rather than simply a serious issue to be tried: Hearing Clinic (Niagara Falls) Inc. v. Ellesmere hearing Centre Ltd., [2008] O.J. No. 5271
[30] On its motion, the plaintiff asserts that relief from forfeiture and injunctive relief should be granted to it in accordance with section 98 of the Courts of Justice Act, R.S.O. 1990, c. C. 43: “A court may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise as are considered just” and pursuant to section 20 (1) of the Commercial Tenancy Act, R.S.O. 1990, c. L.7.
[31] As of the date of the termination of the franchise agreement for the Queen Street location, neither the sublease nor the franchise agreement had been renewed and as of May 2022, the plaintiff was operating that location on a month-to-month basis while the defendants considered whether they would exercise their discretion under the franchise agreement and sublease as to granting a further full-term franchise agreement and sublease to the plaintiff.
[32] The evidence as to the plaintiff’s intentions, if it were allowed to regain entry to the Queen Street location, is uncontradicted. Namely, the plaintiff had no intention to continue the operation of the franchise location in accordance with the terms of the franchise agreement, but rather it was planning on refurbishing the premises in order to proceed with the sale of the franchise location either to the defendants or to a third party.
[33] It was never the intention of the plaintiff to continue the operation of the franchise location as a going concern, in compliance with the terms of the terminated franchise agreement, nor in accordance with the terms of the month-to-month arrangement that was put in place in May 2022.
[34] It was submitted on behalf of the plaintiff that as a result of the defendants’ termination of the plaintiff’s franchise agreement and sublease of the Queen Street location, the defendants had effectively put the Central Park location in financial jeopardy. It was asserted that once the Queen Street location’s franchise agreement was terminated, the Central Park location had no means of purchasing goods and foodstuffs that it was required to purchase in accordance with the terms of its franchise agreement for Central Park, as it had ordinarily received its Druxy goods and foodstuffs via purchases made by the Queen Street location.
[35] There is no evidence at all linking the two franchise locations or that required the Central Park location to purchase Druxy’s stock and foodstuffs from or through the Queen Street location. Thus, there is no relief from forfeiture or injunctive relief that can be claimed by the plaintiff with respect to the Central Park location. By its franchise agreement it was required and able to make its purchases of stock and foodstuffs from the defendant Druxy’s, without any requirement that those purchases had to be made through the Queen Street franchise location.
[36] Turning to the test to be met by the plaintiff as established in RJR-McDonald, the well-known test can be summarized as follows: (a) is there a serious issue to be tried or in specific circumstances a strong prima facie case? (b) will the moving party suffer irreparable harm if the injunction is not granted? (c) which party will suffer the greater harm from the granting or refusing the remedy pending a decision by the court on the merits? (d) as to the first branch of the test – it is to be determined on the basis of common sense and a limited review of the merits.
[37] As to the first branch of the applicable test, it is urged by the plaintiff that it only need to demonstrate that there is a serious issue to be tried.
[38] Counsel relies upon the Divisional Court decision in TDL Group Ltd. v. 1060284 Ontario Ltd. [2001] O.J. No. 3614 in support of its position that in the circumstances of this case the court should enforce the franchise agreement with respect to the Queen Street location by way of a prohibitory injunction as distinct from a mandatory injunction.
[39] In TDL Group Ltd. the court was considering an entirely different commercial arrangement in a franchise dispute, in that the franchise agreement was still alive and there was a contractual right to an renew still in existence in favour of the franchisee.
[40] In its decision in TDL Group Ltd, the court concluded that the injunction sought by the franchisee requiring the franchisor to continue the franchise relationship constituted a prohibitory injunction as distinct from a mandatory one.
[41] The court noted in its reasons the earlier decision in Parker v. Canadian Tire Corp. [1998] O.J. No. 1720 where the court faced with a franchise agreement with no renewal clause and a motion by the franchisee seeking an order that the franchisor continue the franchise contract, the court in TDL Group Ltd. stated at para 7: “In Parker v. Canadian Tire, again, there was no right to renew. In such a case, it is our view that a much higher standard than a serious issue to be tried is appropriate for the court will in effect create a right not contemplated by the parties in their contract.”
[42] The decisions in both Parker and TDL Group Ltd. are most apt to the facts in this case. In this case the plaintiff had entered into a month-to-month franchise agreement in May 2022 without any contractual right to renewal. The franchise agreement and the sub-lease had come to an end prior to the commencement of the month to month agreement.
[43] As the TDL Group Ltd. decision relied upon by the plaintiff is clearly factually distinguishable from the facts in this case, I have concluded that the plaintiff’s motion for relief from forfeiture and injunctive relief must meet the higher standard of demonstrating that the plaintiff has a strong prima facie case.
[44] It is submitted on behalf of the plaintiff that the notice of termination of the franchise at Queen Street was ineffective as the defendants did not provide the plaintiff with 10 days’ notice as is called for in section 15.1 subparagraph (f) of the franchise agreement which states:
15.1. The parties agree that the happening of any of the following events constitutes a breach of this Agreement and violates the essence of the Franchisee’s obligations. Accordingly, without prejudice to any other rights…….
f. If the Franchisee fails to observe or perform any other term or condition of this Agreement to be observed and performed by the Franchisee or any of the rules, bulletins, directives or other notices set forth in the Manual and such failure to observe or perform the same continues for a period of ten (10) days after written notice thereof has been given by the Franchise or to the Franchisee;
[45] The notice of termination delivered by the defendants stated that the plaintiff was in breach of subsection 15.1(g) of the agreement which provided that a breach occurred: “g. If the Franchisee abandons the Business, or fails to continuously and actively operate the Business.”
[46] It was submitted on behalf of the plaintiff that absent notice in accordance with subsection 15.1(f) of the franchise agreement, the termination of the agreement was ineffective.
[47] Without determining the full interpretation of the franchise agreement, and the termination requirements, I am of the view that the type of breaches as referred to in subparagraph 15.1(f) are breaches that would occur during the currency and active operation of the franchise location, whereas the breach referenced in subparagraph 15.1(g) and in the notice of termination contemplates a fundamental breach of the franchise agreement either by way of a complete abandonment of the business or by failing to operate the business continually and actively as required by the contract. As a result, I disagree with the interpretation of the agreement as urged by the plaintiff on the notice requirement.
[48] Therefore, on the first branch of RJR- McDonald, which in this case requires the plaintiff to establish a strong prima facie case, I have concluded that on weighing the evidence as a whole my assessment of this first branch favours the defendants in that the plaintiff has failed to demonstrate it has a strong prima facie case.
[49] Having regard to the second branch of the test, which requires the plaintiff to demonstrate that irreparable harm will occur if the relief sought is not granted, given the very sparse evidentiary record adduced on behalf of the plaintiff as to its financial circumstances and its ability to even carry on the business if it was restored to the franchise location, I have concluded that the plaintiff has failed to demonstrate irreparable harm will occur if the relief sought is not granted.
[50] Furthermore, the evidence is clear that quite apart from the absence of any financial information as to the plaintiff’s financial wherewithal, the plaintiff has no intention of resuming operation of the franchise location but rather simply wished to retake possession of the business and thereafter attempt to sell it. This is not in keeping with the purpose and spirit of the franchise agreement.
[51] Irreparable harm constitutes harm that cannot be quantified in monetary terms or cured by an award of damages following a trial. Irreparable harm is not established simply because it may be difficult to quantify the loss claimed: Hearing Clinic (Niagara Falls) Inc. at para 21.
[52] The plaintiff has failed to demonstrate with any evidence that it will suffer irreparable harm in the event the relief sought is not granted.
[53] As to the balance of convenience, as already noted above, the plaintiff has offered no evidence as to its current financial situation and as such the undertaking as to damages offered is highly questionable.
[54] Further, the defendants have found a new operator for the Queen Street location and were the relief sought granted, the plaintiff would in effect be restored to a franchise agreement that had ended by its expiry and thereafter turned into a month-to-month agreement, while the defendants have retaken possession and repaired and refurbished the premises with a demonstrated plan to have a new operator takeover the franchise location. In my view the balance of convenience favours the defendants.
[55] In the result, I have concluded that the plaintiff has failed to establish an entitlement to relief from forfeiture or the injunctive relief sought and as such its motion is dismissed.
[56] In the event the parties cannot resolve the issue of costs, counsel for the defendants shall serve and file submissions as to costs of no longer than two pages along with a costs outline within 20 days, followed by similar submissions by counsel on behalf of the plaintiff. The cost submissions shall be deposited in the court portal and in CaseLines, with a courtesy copy of the submissions sent to my administrative assistant. No reply submissions shall be delivered.
Justice Daley
Released: November 10, 2022
2022 ONSC 6356
COURT FILE NO.: CV-22-00002653-0000
DATE: 2022 11 10
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
2659953 ONTARIO INC.
Plaintiff
- and –
DRUXY’S FRANCHISING INC. and DRUXY’S INC.
Defendants
REASONS FOR JUDGMENT
Daley J.
Released: November 10, 2022