A brief summary as to what this case means for you:

This case stands for two very important principles of which franchisors should take note. The first is that franchise agreements should be drafted as clearly and precisely as possible so as to avoid any possible ambiguities relating to renewal, specific location, and any other material terms; and, the second is that as a result of this decision, a franchisee may be more likely to successfully advance a claim under the Arthur Wishart Act (Franchise Disclosure), 2000 (the “Wishart Act”) for damages over and above actual monetary losses suffered as a result of a franchisor’s breach of the duty of good faith.

SALAH V. TIMOTHY’S COFFEES OF THE WORLD INC.

This case came to the Court of Appeal from a trial decision granting the plaintiff franchisee damages for breach of contract (in the amount of $230,358 for loss of future income), and breach of the duty of good faith and mental distress (in the amount of $50,000) as a result of the defendant franchisor’s failure to renew a franchise agreement.

The background facts are as follows: the franchisee entered into a franchise agreement that provided the franchisee with the right to operate a franchise in “the Bayshore Shopping Centre” (the agreement was silent as to a specific unit or floor of the shopping centre). There were four years remaining under the head lease at the time that the franchisee entered into the franchise agreement, and the term of the agreement was tied to the term of the lease with no option of renewal contained in the body of the franchise agreement. Prior to the expiry of the term of the agreement, the franchisor provided the franchisee with notice of the upcoming expiry of its agreement, and around the same time entered into a new lease on a different floor of the Bayshore Shopping Centre with a different franchisee. The plaintiff franchisee commenced an action against the franchisor alleging breach of the franchise agreement and seeking damages. The plaintiff franchisee was successful in its action through its reliance on a schedule to the agreement stating essentially that should the franchisor successfully renew its lease at the Bayshore Shopping Centre, the franchisee would be granted a renewal and outlined the basic terms of the renewal (remaining in good standing and paying a renewal fee). The plaintiff franchisee also relied on a schedule to the franchise agreement showing a 10% depreciation on the valuation of the equipment being purchased and the franchisee testified that he understood it to be depreciation over a 10 year period, thereby implying that the franchisor had intended to grant a 10 year term.

The trial court agreed with the franchisee and found that the franchise agreement was intended to cover the entire “Bayshore Shopping Centre” despite the franchisor’s arguments that: the term of the agreement was tied to the term of the lease; the new premises were not in existence at the time of execution of the plaintiff’s franchise agreement; any discussion relating to renewal was as related to the lease on the franchisee’s floor of the Bayshore Shopping Centre; and important issues surrounding a renewal had not been negotiated by the parties, such as the cost of construction for a renewal and the interim operation of a franchise in the period between expiry of the franchise agreement and construction of the new location. The trial court found that the experience of the franchisor in these matters was superior to the franchisee’s and the Wishart Act was “specifically enacted so as to correct the imbalance”. The court also found that the failure of the franchisor to offer the opportunity for the new location to the franchisee and the franchisor’s deliberate withholding of material information concerning the new location to the franchisee amounted to a breach of contract and breach of the duty of good faith. The court also found that the wording “Bayshore Shopping Centre” applied to the whole shopping centre and not just the franchisee’s unit.

On appeal, the Court of Appeal upheld the trial court’s decision and upheld the amount of damages the franchisee was awarded. In discussing contractual interpretation generally, the court stated that courts must give intention to the parties in accordance with the written word of the document and “presumes that the parties have intended what they have said”. The contract should be interpreted as a whole in a manner that gives meaning to all of its terms and in accordance with commercial principles and business sense. The Court of Appeal found that the trial judge applied sound principles of contractual interpretation in concluding that the franchise agreement was not ambiguous and was clear as to its intention to grant a renewal to the whole of the “Bayshore Shopping Centre” and not just to a specific unit occupied by the franchisee at the time.

In its analysis of the breach of the duty of good faith, the Court of Appeal found that given the trial judge’s finding that the agreement granted the franchisee with a right of renewal to the whole Bayshore Shopping Centre, the franchisor was therefore in a breach of the duty of good faith for failure to uphold the renewal provisions of the agreement.

In its assessment of the amount of damages awarded to the franchisee, the defendant franchisor submitted that the trial judge should have only awarded damages under the Wishart Act to compensate the franchisee for its pecuniary losses, and no damages should be awarded for non-pecuniary losses (referring to the $50,000 breach of good faith award). The Court of Appeal stated that the Wishart Act “deserves a broad and generous interpretation” and is “intended to redress the imbalance of power as between a franchisor and franchisee” and “provide a remedy for abuses stemming from this imbalance”. Any breach of the duty of good faith and fair dealing was held to be egregious conduct and “precisely the mischief that this legislation was enacted to remedy”. Therefore, the Court of Appeal found that s. 3(2) of the Wishart Act permits an award of damages for the breach of duty of good faith separate and in addition to awards for pecuniary losses. The Court of Appeal concluded by saying that any award under s. 3(2) should be “proportionate to the degree of the breach or offending conduct in the particular circumstances”.

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