Reasons for Decision

Court File No.: CV-24-189
Date: January 6, 2025
Superior Court of Justice – Ontario
Re: The Ken Breau Corporation, Applicant
– and –
DQC Canada Inc., Respondent
Before: B. MacNeil
Counsel:

D. Touesnard – Lawyer for the Applicant
K. Byers – Lawyer for the Respondent
Heard: October 1, 2024 (via Zoom videoconference)

Introduction

The Applicant, The Ken Breau Corporation, a franchisee of the Respondent, DQC Canada Inc. (“DQC”), makes this application seeking a declaration that DQC has breached its statutory obligations of fair dealing and good faith as required by s. 3 of the Arthur Wishart (Franchise Disclosure) Act, 2000 (“the Wishart Act”); and injunctive relief restraining DQC from awarding a new restaurant to a different franchisee within eight (8) kilometres of the Applicant’s territory, or, in the alternative, an order directing a trial on damages.
The Respondent, DQC, is an Ontario corporation that acts as the Canadian franchisor of the Dairy Queen franchise system. It opposes the application on the basis that the Applicant is seeking to prevent DQC from exercising its rights to develop a restaurant/store location that is outside of the Applicant’s exclusive territory and where the Applicant has no contractual rights.
The parties filed supporting affidavits. Cross-examinations on some of those affidavits were held; transcripts of those cross-examinations were also filed.

Facts

The Franchise Agreement

Ken Breau (“Mr. Breau”) is the President of the Applicant.
The Applicant has a licence to and operates three DQ Treat stores in Brantford. As well, by letter dated April 28, 2021, DQC approved a fourth location for the Applicant to operate a DQ Treat store at 989 Rest Acres Road, Paris (“the Approved Rest Acres Site”). Construction has not yet commenced for the Approved Rest Acres Site. However, a Food Service Amendment Agreement, dated June 1, 2021, was entered into by the parties authorizing the Applicant to operate a store at this location.
The Applicant operates its licensed locations pursuant to a franchise agreement executed by predecessors in interest to the Applicant and DQC, dated July 21, 1954 (the “Franchise Agreement”). The Franchise Agreement was assigned to the Applicant in 2016, with DQC’s consent. The Franchise Agreement has been amended on several occasions, including to allow the sale of certain additional food items otherwise not permitted to be sold under the terms of the original agreement.
By the Franchise Agreement, the Applicant has exclusive rights to use Dairy Queen freezers and the name “Dairy Queen” for the product dispensed through those freezers within the following franchise area:

The City of Brantford, Ontario and five (5) miles in any direction from the present city limites [sic] of Brantford, Ontario.

(the “Territory”).

By s. 7 of the Franchise Agreement, the Applicant pays a flat rate of 37-and-one-half cents per Imperial gallon on all mix processed through all DQC freezers.
Section 18 of the Franchise Agreement states that the agreement does not interfere with DQC’s right to develop the area outside of the Territory. Section 18 reads:

18 – It is specifically agreed and understood between the parties hereto that Licensee may not use the DQC name, products, freezers or equipment at any place except within the area hereinabove described, and nothing herein shall be construed to prevent the Licensor or any person duly authorized by it, from engaging in the DQC business and from using the DQC name at any other location or area.

Section 20 of the Franchise Agreement provides exclusivity to the Applicant, stating:

20 – During the effective period of this contract or any renewal or extensions hereof the Licensor shall not lease, sell, or assign or transfer any freezer manufactured under said Patents Numbers 2080971 and 2506101 to any party other than Licensee for use within the franchise area hereinabove described, and shall not authorize the use of the trade name “Dairy Queen” in said area by any party other than Licensee.

Section 25 of the Franchise Agreement sets out the renewal and non-competition terms of the agreement. It reads:

25 – The term of this agreement shall automatically be extended for additional terms of five (5) years each, subject to all the undertakings and agreements herein provided unless the Licensee or his assigns shall give written notice to the Licensor of his election to cancel this agreement at least sixty (60) days prior to the termination of this agreement or of any subsequent extension thereof. The Licensee agrees that he will not either directly or indirectly (either as individual, partner or stockholder of any corporation), use any other type or make of ice cream or equipment or engage in any competitive ice cream or ice milk business within a radius of thirty miles from the center of the above described area at any time during the term of this franchise agreement or any renewal or extension hereof or at any time within five years from the date of the termination of this franchise agreement.

DQC no longer uses the form of the Franchise Agreement. New franchisees are required to enter into a contemporary standard franchise agreement (“the Standard Franchise Agreement”). The Standard Franchise Agreement requires franchisees to pay significantly more fees to DQC than the Franchise Agreement by way of royalties and an advertisement fee fund in the aggregate amount of 9% of gross sales. It also permits DQC to exert more control over its franchisees than the Franchise Agreement, for example:

the Standard Franchise Agreement has a term which can only be renewed at DQC’s discretion, whereas the Franchise Agreement’s term renews automatically;
DQC can require franchisees to modernize their stores at their own expense at DQC’s direction, whereas the DQC cannot direct the Applicant to make any changes to its stores;
the Standard Franchise Agreement operates on a store-by-store basis, whereas the Applicant has an exclusive territory;
DQC can direct the store owners to use certain software including a point-of-sale system, whereas it has no right to direct the Applicant to do so; and,
DQC can compel production of sales records and poll those records from their franchisees but cannot do so with the Applicant.

DQC’s evidence is that there are dozens of different types or forms of franchise agreements in place between DQC and its franchise operators. Many of those forms of agreements date from the 1950s or 1960s. Approximately half of the DQC locations in Canada are subject to older franchise agreements rather than the Standard Franchise Agreement. There are currently 33 stores within the Dairy Queen franchise system in Canada whose franchise agreements require them to pay a royalty that is calculated by referencing cents per litre of mix processed through DQ freezers or other “unique arrangements”.
The Applicant’s evidence is that DQC’s revenues received from the Applicant are more than $100,000.00 less for each of its full-time stores than the Applicant would pay under the terms of the Standard Franchise Agreement.

The Proposed Grand River Site

On February 16, 2023, Mr. Breau spoke with the Director of Franchise Development for DQC, A. Watters (“Mr. Watters”), about the Applicant’s intention to develop a restaurant at 307 Grand River Street North, Paris (the “Proposed Grand River Site”). The Applicant wished to proceed with that development because construction of the Approved Rest Acres Site had been delayed. Mr. Breau advised that it was his understanding that the 307 Grand River Street North, Paris location was within the Territory.
As the Proposed Grand River Site was in Paris, not Brantford, DQC referred to its internal mapping software to confirm if the site was within the Territory. The evidence of DQC is that, at the time it responded to Mr. Breau about this location, there was an error within DQC’s internal mapping system such that it used a Brantford map more recent than July 1954 that inadvertently broadened the applicable city limits. Erroneously applying those broader city limits, the Proposed Grand River Site appeared to be within the Territory; however, in actuality, it was not. Operating under the wrong information, on February 22, 2023, Mr. Watters replied to Mr. Breau and confirmed that the Proposed Grand River Site fell within the Territory and that, once the Applicant had an accepted offer on the property, Mr. Watters would request the operating agreement from DQC’s legal department to commence the formal steps to open the location.
During the period February 2023 through to February 2024, the Applicant negotiated with McDonald’s Restaurants of Canada Limited (“McDonald’s”) to acquire 307 Grand River Street North, Paris.
In response to inquiries made by Mr. Watters on September 22, 2023, November 3, 2023 and December 8, 2023, the Applicant informed DQC as to the ongoing status of the proposed purchase from McDonald’s. During this time, the Proposed Grand River Site remained in the DQC system as conditionally approved.
By text communication sent on February 21, 2024, Mr. Breau advised Mr. Watters that McDonald’s had decided to sell 307 Grand River Street North, Paris to a different purchaser, and indicated that he had started looking for another location in the same area.

The Proposed Hartley Avenue Site

Mr. Watters’ evidence was that, shortly after February 22, 2023 when he conditionally approved the Proposed Grand River Site, he became aware of an existing franchisee identifying 1 Hartley Avenue, Paris as a potential site for a Dairy Queen franchise. The other existing franchisee was rejected in July 2023, in part because conditional approval had already been given for the Proposed Grand River Site. In answer to an undertaking given at Mr. Watters’ cross-examination, it was clarified that DQC’s first discussion with this franchisee was on April 13, 2023. Other franchisees subsequently expressed interest in operating a franchise at the 1 Hartley Avenue location.
After hearing from Mr. Breau that the Proposed Grand River Site was not going to happen, Mr. Watters learned that 1 Hartley Avenue was still available. As a result, he decided to explore other opportunities for that site. By a text message sent to Mr. Breau on March 7, 2024, Mr. Watters advised the Applicant that DQC was exploring a site in Paris for a “Grill and Chill, outside of the Territory”. He further indicated that, if DQC decided to move forward, it would follow its standard procedure for approval consideration, including “issuing site clearance”.
Mr. Watters then followed up by formal correspondence, dated March 15, 2024, advising the Applicant that DQC was “currently reviewing the possibility” of developing a new DQ Grill & Chill restaurant at 1 Hartley Avenue, Paris (“the Proposed Hartley Avenue Site”). Enclosed with the March 15th letter was a copy of DQC’s “Policy on Site Clearance Market Factors” (“the Site Clearance Policy”). The opening paragraph of that policy describes DQC’s approach in approving new franchise locations. It reads:

From time to time Dairy Queen Canada Inc. (DQC) is called upon to decide whether to grant a license for a new restaurant/store in proximity to an existing restaurant/store. Except for certain rights granted in older franchise agreements, DQC does not, as a rule, grant protected territories to any franchisee. DQC grants to its franchisees the right to operate a restaurant/store at a particular location only and makes no commitment that it will not establish new restaurants/stores in proximity to existing restaurants/stores. Nevertheless, there may be circumstances under which DQC, acting within its exclusive and absolute right, may choose not to establish a new restaurant/store in proximity to an existing restaurant/store.

Pursuant to the Site Clearance Policy, the Applicant was requested to advise in writing if it had concerns about the proximity of the proposed new store to its licensed location(s) so that DQC could consider same. By correspondence sent to DQC on March 28, 2024, the Applicant expressed its concerns about the Proposed Hartley Avenue Site as a new franchise location.
In response, by correspondence sent to the Applicant’s lawyer from G. Beck, DQC’s Vice President & Assistant General Counsel, dated May 1, 2024, DQC advised of its decision to move forward with the Proposed Hartley Avenue Site. Ms. Beck clarified that the Applicant’s territory was as described in the Franchise Agreement, consisting of the city limits of Brantford as of July 1954 and five (5) miles in any direction from those city limits; a map was attached showing the area and showing the location of the Proposed Hartley Avenue Site as falling outside the Applicant’s territory. Ms. Beck further advised that the Applicant did not have the right to preclude DQC from approving and licensing a DQ Grill & Chill location outside of the Territory, and that DQC had no obligation to consult further with the Applicant prior to it being finalized.
Mr. Watters’ evidence on cross-examination was that DQC had not yet approved, conditionally or otherwise, the Proposed Hartley Avenue Site. The existing franchisee still needs to go through the approval process.

Issues

The following are the main issues to be determined on this application:

(a) Has DQC breached its statutory obligations of fair dealing and good faith to the Applicant, contrary to s. 3 of the Wishart Act?

(b) If DQC has breached its statutory obligations under s. 3 of the Wishart Act, what is the appropriate remedy?