1017933 Ontario Ltd. v. Robin's Foods Inc.
IN THE MATTER OF an application pursuant to Rule 14,05 of
the Rules of Civil Procedure and a counter-application
Between
1017933 Ontario Limited, applicant, and
Robin's Foods Inc., respondent
And between
Robin's Foods Inc., applicant by counter-application, and
1017933 Ontario Limited, respondent by counter-application
[1998] O.J. No. 1110
Court File No. 25182
Ontario Court of Justice (General Division)
Killeen J.
Heard: December 8-9, 1997 (at London).
Judgment: February 16, 1998.
(24 pp.)
Statutes, Regulations and Rules Cited:
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Courts of Justice Act, R.S.O. 1990, c. C-43, s. 98. Ontario Rules of Civil Procedure, Rule 14.05(3)(d). |
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Counsel:
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Elizabeth Hewitt, for the applicant, 1017933 Ontario Limited. |
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1 KILLEEN J.:— The applicant, 1017933 Ontario Limited ("1017933"), brings this application under Rule 14.05(3)(d) seeking a determination of its rights under a franchise agreement dated July 6, 1989, together with certain ancillary relief. Specifically, the court is asked to determine "whether the franchise agreement limits the person or persons to whom the applicant can sell its products": see Applicant's Factum, para. 1.
2 The respondent, Robin's Foods Inc. ("Robin's"), has replied in its counter-application with a request for a more broadly based interpretation of several provisions in the franchise agreement to determine whether the applicant is in default of the agreement and has requested a declaration of default and a consequential order terminating the agreement.
Background Facts
3 The respondent, Robin's, is a franchisor of donut stores and also operates a limited number of corporate-owned stores. It now has about 214 stores in its franchise system across Canada and another 26 or so corporate-owned stores.
4 On September 30, 1993, the applicant, 1017933, purchased the Robin's franchise store located at 120 Anne Street South in Barrie, Ontario, from the former franchisees and took an assignment of the original franchise agreement dated July 6, 1989, along with other obligations, including a sub-lease for the store premises.
5 The principal of 1017933 is one Richard MacKay. He operated the franchise under the original agreement and then entered a franchise renewal agreement with Robin's on October 31, 1994.
6 The materials on both sides show that there were ongoing disputes between Mr. MacKay and Robin's over a variety of matters related to his performance as a franchise operator but, nevertheless, the parties did renew the original agreement as aforesaid for a further five year period ending on October 1, 1999.
7 The basic initiating cause of this proceeding may be found in a unilateral decision taken by Mr. Mackay in October, 1995 to start selling wholesale donuts to other donuts shops for resale.
8 It may not be unfair to characterize these extra donut sales as a "bootleg" operation of sorts in that (1) the donuts in question were not identified in their boxing as Robin's donuts, (2) the mix for the donuts was not that specified by Robin's in its rigorous specifications, (3) the sales were made to a group of non-Robin's donut stores, (4) the dealings between Mr. Mackay and these donut stores were conducted in great secrecy and on a cash basis, with Mr. Mackay selling them outside his own store and using his mother's residence as a base of operations, usually delivering the donuts personally and late at night and, finally, (5) the sales were never rung up on the store cash register.
9 All in all, these dealings, which still continue, strongly smack of a second "back-door" business in donuts which was and is cocking a snook at Robin's and the franchise agreement.
10 Mr. Mackay has always claimed, however, that, while these sales were done outside the store and not using the store cash register, they were perfectly legal as a sort of adjunct to the ordinary sales of Robin's donuts because of the terms of the agreement and the fact that he has allegedly accounted to Robin's for the extra sales in his reports and royalty payments to Robins.
11 It is interesting to analyze the course of the relationship of the parties since Mr. Mackay started selling his "no-name" donuts in about October, 1995.
12 The franchise agreement, in Article 11, requires a franchisee to set up his sales and reporting records in a particular way. For example, Article 11.01 requires the franchisee to employ a qualified bookkeeper "to maintain a bookkeeping, accounting and record keeping system ... including without limitation, the retention of cash register tapes, invoices, cheque stubs, bank deposit receipts, sales and income tax records and returns, cash disbursements, journals and general ledgers."
13 Article 11.02 goes on to call upon the franchisee to provide by the 10th day of each month a sales report of gross and net sales, on which the various royalty fees are shown, along with "such other reports and records as the Franchisor may from time to time require." Here, Robin's had prepared a monthly reporting form and a set of such forms for the period from October, 1995, to June, 1997, are included in Mr. Mackay's second supplementary affidavit at Ex. C: see Amended Motion Record, p. 144.
14 This Robin's form is very detailed, as I have said, and contains boxes for such information as closing sales, opening sales, gross sales, GST, PST net sales, the base rent, percentage rent, royalties and advertising charges.
15 What it does not contain is any box or space for sales which have not been rung up on the franchise cash register. It is abundantly clear to me why no such information box was provided for such sales. Any fair and rational reading of Article II leads to the irresistible conclusion that Robin's wanted and expected all sales to be recorded through the cash register. Indeed, one of the upper left boxes on the forms shows specific lines for "Voids, GST and PST" and these identification terms must only refer to the use of a cash register exclusively to record sales.
16 Inevitably, Robin's objected to Mr. Mackay's uncontrolled outside sales to other donut stores and his response was to purport to report the full outside sales on plain bookkeeping paper without any back-up proof whatsoever of the accuracy of the numbers he was providing. He did, in fact, include his version of such sales figures in handwritten reports and claimed that he had received $118,496 from October, 1995, to June, 1997, and paid the prescribed royalty fees on them.
17 From the perspective of Robin's this was improper because it had no way to verify his figures at all, appearing as they did on handwritten sheets without the usual verifying material available with cash register tapes.
18 By early 1997, the relationship of the parties had badly deteriorated for a variety of reasons, not the least of which was Mackay's continuing sales of the no-name donuts and some related baked products to about 25 outside donut stores. It was only in Barrie itself that there could be said to be direct competition between Mackay as a wholesaler of such donuts and the Robin's chain because Robin's had two other stores there. The other retailers who bought from Mackay operated in towns with no Robin's store.
19 Robin's bitter complaints reached their culmination when, on February 12, 1997, it sent a formal "Default notice" to 1017933 outlining four violations of the agreement and giving 101793315 days to correct these violations, filling which the franchise would be terminated.
20 In summary form, the violations referred to in this document were these:
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There were arrears of due royalty payments totalling $7,421.17 under the agreement. |
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Monthly gross sales reports were not being submitted timeously under the agreement. |
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Non-approved shortening and flour were being used. |
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As a result of a detailed surveillance investigation in January, 1997, Robin's concluded that 1017933 was producing a large volume of donuts and related products and selling them to third-party retailers without Robin's consent. |
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21 Some considerable sparing occurred between the parties after the Notice of Default was delivered in which Robin's alleged these several serious breaches of the agreement and threatened termination unless such breaches were remedied. Rather predictably, 1017933 denied that it had done anything wrong and Robin's continued to persist in its position. Seeing that an apparent standstill had been reached in such discussions, 1017933 launched an application under Rule 14 on May 13, 1997, and the counter-application of Robin's followed inexorably on July 23.
22 Later, on October 20, Robin's issued a second Notice of Default which alleged several additional breaches, including continuing defaults under a signed lease agreement which Robin's had entered for 1017933's store.
The Legal Issues and their Resolution
1. Article 10.00
23 As already noted, Ms. Hewitt's factum for the applicant asked for the court's opinion on whether the agreement limits the persons to whom the applicant can sell its products.
24 In making her submissions, Ms. Hewitt specifically zeroed in on Article 10 which reads as follows:
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Article 10.00 - Restrictive Covenants |
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10.01 During the term of this agreement, the Franchisee shall not either individually or in partnership in conjunction with any person or persons, firms, association, syndicate, company or a corporation as a principal, agent, shareholder, employee or in any other manner whatsoever, directly or indirectly, carry on or be engaged in or concerned with or interested in or advance, lend money to, guarantee the debts or obligations of, or permit his or its name or any part thereof to be used or employed by any person or persons, firm, association, syndicate, company or corporation engaged in or concerned with the operation of any business competitive with or similar to the Franchised Business as carried on from time to time during the term of this agreement, including renewal thereof. This shall include the operation of any type of business selling any goods, wares and merchandise or part thereof similar to that sold from time to time by the Franchisee in the Franchised Business. |
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10.02 In addition to and without restricting the generality of Paragraph 10.01 hereof, during the term of this agreement the Franchisee shall not either individually or in partnership in conjunction with any person or persons, firms, association, syndicate, company or a corporation as principal, agent, shareholder, employee or in any other manner whatsoever, directly or indirectly, carry on or be engaged in or concerned with or interested in or advance, lend money to, guarantee the debts or obligations of, or permit his or its name or any part thereof to be used or employed by any person or persons, firm, association, syndicate, company or corporation engaged in or concerned with the operation of any business competitive with or similar to any Robin's Donuts outlet as carried on from time to time during the term of this Agreement, including renewal thereof. This shall include the operation of any type of business selling any goods, wares and merchandise or part thereof similar to that sold from time to time by Robin's Donuts outlets. |
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10.03 Without limiting the generality of Paragraph 10.01 hereof, during the term of this agreement the Franchisee shall not be engaged in any other Donut Shop business either directly or indirectly without the prior written consent of the Franchisor. |
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10.04 The Franchisee shall not at any time directly or indirectly furnish any ideas or any other information relating to the Franchised Business to any one except the Franchisor or the employee and advisors of the Franchisee to the extent that such disclosure may be necessary for the efficient operation of the Franchised Business. |
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10.05 All formulae, materials, products and systems supplied or revealed to the Franchisee by the Franchisor for use in the Franchised Business are to be construed as trade secrets of the Franchisor and the Franchisee covenants not to use or duplicate them for any other purpose than under the terms of this agreement. |
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10.06 All local advertising in any media proposed by the Franchisee shall first be submitted to the Franchisor for written approval or oral approval confirmed by letter. |
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25 Ms. Hewitt argued that a fair reading of this lengthy article must lead to the conclusion that it is a typical restrictive covenant which prohibits 1017933 from participating in a competing donut business but that it does not catch and prohibit what 1017933 was doing by way of its wholesale sales to the non-Robin's retailers.
26 While this argument has a surface attractiveness if one limits the field of interpretive inquiry to Article 10.00 in isolation, I must reject it in the light of a careful contextual approach to Article 10.00, considered within the framework of the entire agreement.
27 One must start the inquiry, I believe, by considering the Preamble to the agreement. Here, the recitals disclose that the purpose of the agreement is to enable 1017933 to obtain the right to operate a Robin's franchise at a particular retail location as part of a national franchise operation.
28 The nine recitals to the Preamble reflect this core purpose but three of them will suffice to demonstrate it:
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And whereas the Franchisor has successfully established a reputation under the tradename and trademark "Robin's Donuts" which tradename and trademark sees to the public the highest standard of quality, service, merchandising and management; |
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And whereas the Franchisee is desirous of accepting a franchise to operate a retail business in the Subject Field utilizing the Franchisor's know-how, experience and ideas and using in accordance with such business the trademark "Robin's Donuts" together with other trademarks and/or tradenames as the Franchisor generally makes available to its franchisees to indicate to the public that the Franchisee has been authorized to sell donuts and to operate a business in the Subject Field of the standard of quality set by the Franchisor and in accordance with the Franchisor's standard business methods, policies, know-how and ideas, all of the said know-how, experience, ideas, trademarks, tradenames, and supplier information being collectively referred to as "Features of the Franchise System"; |
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And whereas the Franchisee recognizes the value of the Features of the Franchise System and his need therefor in establishing and operating a business in the Subject Field and is desirous of accepting a franchise to operate a retail store in the Subject Field utilizing features of the Franchise System and generally availing himself of the Franchisor's goodwill, which is acknowledged by the Franchisee to have substantial value. |
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29 Article 2.00 provides an internal interpretation canon to assist in interpreting the key terms and understanding the purposes of the agreement. Article 2.01(a) and (d) define "Franchised Business" and "Authorized Location" as follows:
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"Franchised Business" means the business carried on by the Franchisee at the Authorized Location pursuant to the provisions of this agreement; ... |
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(d) |
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"Authorized Location" means the building or portion of the building, as appropriate, at the location described in Schedule "A" annexed hereto and forming part here of. |
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30 These provisoes make it clear that 1017933 was being given a franchise to sell Robin's trademarked products at a specific authorized location, namely, 120 Anne St., Barrie.
31 Article 2.01(b) defines "Gross Sales" in this way:
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"Gross Sales" means the total amount of all sales of goods and/or services of the Franchisee and all other receipts or receivables whatsoever from all business conducted upon or from the Authorized Location and shall include but not be limited to, the amounts received from the sale of goods, wares and merchandise and for services performed on or at the Authorized Location, together with the amount of all orders taken or received at the Authorized Location, whether such orders be filled from the Authorized Location or elsewhere and whether such sales be made by means of mechanical or other vending devices in the Authorized Location. No allowance shall be made for bad debts. Gross sales shall not include the amount of any tax imposed by any Federal, Provincial, Municipal or government authority directly on sales and collected from customers, provided that the amount thereof is added to the selling price and actually paid by the Franchisee to such governmental authority. |
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32 Once again, the proviso relates the franchise business to the specific location in question.
33 Article 2.02 goes on to make it clear that the agreement must be interpreted contextually and broadly and not section-by-section in isolation:
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The division of this agreement into articles, sections and the insertion of headings in this agreement are for convenience of reference only and shall not be construed so as to affect the interpretation or construction of this agreement. |
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34 Article 3.00 is the formal granting clause for the franchise itself:
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Article 3.00 - Grant of Franchise |
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3.01 Subject to all the terms, conditions and provisions of this franchise agreement and the continuing performance and good faith thereof by the Franchisee, the Franchisor grants to the Franchisee a franchise to operate a Robin's Donuts outlet at the Authorized Location, and hereby licenses to the Franchisee for the term hereof; |
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(a) |
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The exclusive privilege to use at the Authorized Location and in connection with the operation of the Franchisee's Robin's Donuts Outlet, those and only those of the Franchisor's Marks in respect of which the Franchisor and the Franchisee, or their respective agents on their behalf, execute registered user applications or agreements as required by the provisions of "The Trade Marks Act" Canada, such Franchisor's Marks to be used solely in association with the goods, wares and services as set out in such registered user applications or agreements; |
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(b) |
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The privilege to use the Franchisor's System of preparing, packing, merchandising and selling of donuts, drinks and related merchandise, including the use of secret processes and recipes owned by the Franchisor and used by it in connection with Robin's Donuts Outlets, provided however, that the Franchisor shall not be obligated to disclose to the Franchisee or to any other person, firm or company, any recipes or secret processes used by the Franchisor or manufacturers licensed by it for the manufacture of ingredients used in the preparation of the goods and wares prepared and sold in and from Robin's Donuts outlets. |
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(All the rights enumerated above are collectively herein comprised within the term "Franchise".) |
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3.02 The Franchisee hereby accepts the above Franchise from the Franchisor subject to all the terms, provisions and conditions hereof and the Franchisee shall maintain and operate a Robin's Donuts outlet at the Authorized Location upon the standards hereinafter provided. |
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35 Once again, this granting clause, in very wide language, makes it clear that Robin's is granting a franchise at the authorized outlet to sell Robin's products.
36 Article 6.00 deals with the franchisee's front-end payment obligations for what is called the Robin's "Equipment Package," totalling $185,000 and then goes on to deal with franchise improvements and ongoing fees. For example, Articles 6.02-6.04 specify a 4% royalty fee monthly, on gross sales, payable on the 10th day of each month, together with a 3% advertising fee, a minimum licence fee and a percentage licence fee.
37 Then follows a series of clauses in Article 6.00 which control in great detail how the franchise is to be operated using designated equipment along with containers, bags, napkins, spoons and all of the "food or beverage, made, sold or consumed on the Authorized Location, including donut flours, topping, filings, frosting, flavourings, coffee, tea, chocolate, dairy products and any other products or equipment necessary for the operation of the Franchised Business": see Article 6.08.
38 Article 6.16 gives some idea of the breadth of the controls given to Robin's over the day-to-day life and operations of the franchise.
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The Franchisee acknowledges that all containers, cartons, bags, napkins, spoons, and other utensils used or ordered by the Franchisee shall comply with the specifications provided by the Franchisor from time to time. The Franchisee further acknowledges that any and all of the ingredients and commodities which may form any part of the products or the whole product of any food or beverage made, sold, or consumed on the Authorized Location including donut hours, toppings, fillings, frostings, flavourings, coffee, tea, chocolate, dairy products, shall be purchased from the Franchisor or suppliers, distributors or manufacturers as designated by him from time to time and payment for same shall be made on delivery or within fifteen (15) days of delivery or as specified by the Franchisor the writing from time to time during the currency of this agreement. It is hereby acknowledged by the Franchisee that the purchasing such products or supplies from the Franchisor or suppliers, distributors or manufacturers designated by him the Franchisor will make a profit or receive a commission or rebate on the price of goods sold to the Franchisee and the Franchisee agrees that such profits, commissions or rebate shall be the property of the Franchisor and the Franchisee shall have no claim to them in law or in equity. |
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39 Article 6.19 goes on to say that 1017933 is prohibited from selling "any item or product from time to time unless approved in writing by the Franchisor ..." This full proviso reads as follows in unambiguous language:
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6.19 During the term of this agreement, the Franchisee shall not dispense or sell any item or product from time to time unless approved in writing by the Franchisor and such approval may be withdrawn at any time. Without limiting the generality of the foregoing, the Franchisee agrees that telephones, newspaper racks, juke-boxes, gum machines, games, rides or any other coin vending machines will not be installed or allowed on the Authorized Location by the Franchisee without the prior written approval of the Franchisor. |
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40 Article 6.20 provides additional teeth to the controls set out in Article 6.19 and other earlier provisoes by saying this about the ongoing obligation of the franchisee to devote its whole energies to the franchised business:
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The Franchisee shall ensure that the Franchisee Business is at all times under the direct, on-premises supervision of the Franchisee ... The Franchisee further agrees that he will devote his entire time, labour, skill, effort and attention to the Franchised Business and the Franchisee shall at all times faithfully and diligently perform or cause to be performed his obligations hereunder and will continuously exert his best efforts to promote and enhance the Franchised Business ... (Emphasis added) |
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41 As an assignee of the original agreement and a party to the renewal agreement of 1994, both 1017933 and its sole owner and driving force, Mr. Mackay, were clearly obligated to comply in good faith with this strong mandatory language. It may be that most of this language smacks of a draconian regime of control over every detail of the franchised business operation, but such is the general tenor of life within any successful franchised business regime.
42 One might not unfairly compare the relationship of the franchisor and franchisee to a modem version of a feudal estate: the franchisor is the liege lord and the franchisee is the vassal. The modern franchiser is not obliged to enter the relationship and, indeed, the recitals to the agreement warn the franchisee to seek legal counsel before signing on. However, once the franchisee signs the agreement, a strict paternalistic regime is imposed on the franchisee.
43 The case-law which has developed over recent years highlights the stringency of the regime and its purposes. May of the cases have echoed the words of Steele J. in Kentucky Fried Chicken of Canada v. Scott's Food Services Inc., [1997] O.J. No. 3773, where he said this at p. 15:
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The most precious possession of a franchisor are its trademarks and system. The practice is to protect these interests in the terms of contracts with its franchisees for the benefit of the franchisor and other franchisees. |
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44 Also, such agreements must be interpreted to give business sense to the given arrangement and achieve a commercially efficacious result. As was wisely said by Estey J. in the landmark case of Consolidated Bathurst v. Mutual Boiler, [1980] 1 S.C.R. 888, at p. 901:
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Even apart from the doctrine of contra proferentum as it may be applied in the construction of contracts, the normal rules of construction lead a court to search for an interpretation which, from the whole of the contract, would appear to promote or advance the true intent of the parties at the time of entry into the contract. Consequently, literal meaning should not be applied where to do so would bring about a unrealistic result or a result which would not be contemplated in the commercial atmosphere in which the insurance was contracted. Where words may bear two constructions, the more reasonable one, that which produces a fair result, must certainly be taken as the interpretation which would promote the intention of the parties. Similarly, an interpretation which defeats the intentions of the parties and their objective in entering into the commercial transaction in the first place should be discarded in favour of an interpretation of the policy which promotes a sensible commercial result. |
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45 In my view, then, Ms. Hewitt attempts to give a far too narrow and cramped reading to Article 10.01 in her primary argument that this proviso falls to prohibit the wholesale sales of what I have called no-name donuts to other retailers. Read contextually and sensibly, this proviso prohibits Mr. MacKay and his company not only from being a participant in a competitive similar business but, also, prohibits them "individually", as the article reads, from doing so.
46 Mr. MacKay's secretive backdoor operation, in which he deals with other retailers for cash and off premises largely through his mother's house, as so graphically described in the affidavit of Mr. Wilson (Counter-Application Record, Tab 3), clearly contravenes the restrictive covenant set out in Article 10.01 and, indeed, Article 10.02 as well.
47 It is no answer, I think, that the level of competition involved in this second business may not be high nor is it an answer that Mr. MacKay has recorded some of these clandestine sales on separately compiled statements outside the framework of the prescribed monthly reporting forms called for under the agreement.
48 On this latter issue, I add that, because Mr. MacKay had thrown up a veil of secrecy surrounding this second business activity, Robin's was forced, in January, 1997, to order a surveillance operation in order to establish beyond controversy that Mr. MacKay was in fact carrying out a bootleg operation of some considerable magnitude.
49 The surveillance report of Megaprobe, dated January 31, 1997, (Counter-Application Record, Tab 2(m)) demonstrates both the scope and secrecy of the wholesale operation.
50 Also in April, 1997, a former baker employed by 1017933, Dale Wilson, came forward to provide more details to Robin's about its clandestine operations. His affidavit (Counter-Application Record, Tab 3) provides a full history of the extra sales from their inception in October, 1995.
51 This affidavit makes the following points:
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About 25 separate retailers were being supplied with the no-name donuts. |
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The product was baked in the kitchen of the franchise store using unapproved flour, shortening and cake mixes. |
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He estimated that the daily production of such donuts was about 2,000 and that a significant amount of time was spent on this wholesale baking. |
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While the production was done in the franchise store, Mr. MacKay largely conducted the business from his mother's house, where orders were taken. |
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Mr. MacKay's practice was to deliver the donuts after 12:00 midnight to the retailers' stores. |
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The sales were done on a cash basis by Mr. MacKay and were not recorded in the franchise store cash register or, apparently, anywhere else. |
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Mr. MacKay instructed the staff not to allow Robin's inspectors into the back of the franchise store and unapproved ingredients were actually hidden on occasion to deflect the inspectors. |
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Unapproved Flannigan's coffee was sold in the store, using Robin's containers. |
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2. The Counter-Application Claims
52 In the Counter-Application, Robin's has, as I have said earlier, attempted to broaden greatly the scope of this proceeding. Not only does Robin's ask for an interpretation of several clauses in the agreement but it also asks for a "determination of its rights" under the agreement, including declarations that 1017933 is in default and that the agreement be terminated.
53 While Ms. Hewitt has protested that most of the relief claimed in the Counter-Application should be the subject of an action, or, at the very least, should lead to an order for the trial of an issue, I cannot agree. As it seems to me, the scope of subrules 14.05(3)(a)-(g) is large and, subject to my discretion, I can deal with issues raised by Robin's even if there are material facts allegedly in dispute: see McKay Estate v. Love (1991), 6 O.R. (3d) 511 (Ont. Gen. Div.), aff'd 6 O.R. (3d) 519 (Ont. C.A.).
54 First, I re-emphasize that I have ruled against 1017933's interpretive approach to Article 10.01. While Ms. Hewitt would have me interpret the language of that proviso narrowly such that 1017533 would not be in violation of it, I have concluded that its language prohibits 1017933 from selling its no-name products to other retailers.
55 It is uncontradicted fact in the record that 1017933, through Mr. MacKay, is conducting a clandestine second business which is in competition with Robin's. To say that this conduct is a serious and substantive breach of the agreement is almost an understatement. The breach has been ongoing since October, 1995, and by itself, justifies an order for termination.
56 Other articles in the agreement have also been raised for interpretation and application by Robin's counsel, Mr. Johnson. I will deal with these additional articles now.
A. Article 6.00 Issues
57 Under Article 6.00, the franchisor is required to submit payments for royalty fees, advertising fees and percentage licence fees on or before the 10th day following the end of each calendar month, based on gross sales for the preceding month.
58 The February 12, 1997 notice alleged arrears of $7,421.17, not including arrears for January. In addition, despite the express requirement of Article 6.00 that payments be made by the 10th of each month, it was alleged that 1017933 had been "persistently late" in submitting payments.
59 The record shows that the allegation of arrears was correct and that later negotiations in March led Robin's to accept $1,000 monthly in satisfaction of arrears which had crept up to $9,791.99, including January arrears.
60 This arrears problem did not, however, end with the settlement arrangement in March. Ms. Whitty's affidavit for Robin's, sworn on December 5, 1997, states that, as at December 4,1997, the arrears stood at $7,907.64. Her affidavit also includes a schedule which demonstrates that in the 23-month period from December, 1995 to October, 1997, 1017933 only paid its royalty payments on time in three months and, in many months, stayed in arrears for long periods.
61 This "10th day of the month" payment obligation is couched in crystal-clear language and has, so far as I can see, been treated with contempt for two years by 1017933.
62 The very chronicity of the lateness of payments under Article 6.00, both before and after the February 17 notice, constitutes a serious violation of a fundamental term of the agreement and should constitute a ground for termination. While Ms. Hewitt has raised the question of relief from forfeiture under s. 98 of the Courts of Justice Act, R.S.O. 1990, c. C.43, it is my view that the persistent pattern of the breaches over such a long period of time precludes any possible equitable relief of this kind: see Sebe v. TDL Group Ltd., [1997] O.J. No. 407 (Out. Gen. Div.); Leader Window Fashions Ltd. v. Home Products Inc., [1993] B.C.J. No. 1182 and LMR Holdings Ltd. v. 222 Pizza Inc. (1993), 52 C.P.R. (3d) 330 (B.S.S.C.).
B. Article 10.03
63 This provision reads as follows:
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10.03 Without limiting the generality of Paragraph 10.01 hereof, during the term of this agreement the Franchisee shall not be engaged in any other Donut Shop business either directly or indirectly without the prior written consent of the Franchisor. |
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64 Read in the context of the "Authorized Location" principle, as defined in Article 2.00 and reinforced in Article 3, this proviso must be construed as a prohibition against setting up another donut business of the type set up here. Yet this is what Mr. MacKay did, albeit surreptitiously and using the Robin's prescribed equipment to produce the no-name donuts. The evidence, of course, shows that he did not get Robin's prior written consent for this activity and, once again, there is a clear breach.
C. Article 10.05
65 Article 10.05 reads as follows:
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10.05 All formulae, materials, products and systems supplied or revealed to the Franchisee by the Franchisor for use in the Franchised Business are to be construed as trade secrets of the Franchisor and the Franchisee covenants not to use or duplicate them for any other purpose than under the terms of this agreement. |
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66 In my view, this proviso is clear and, here again, the evidence shows a breach of its requirement.
67 At the very least, 1017933 has illegally "used" the Robin's prescribed system and equipment to produce a product which is not permitted under the agreement.
D. Article 6.19
68 This proviso states that the franchisee "shall not dispense or sell any item or product from time to time unless approved in writing ..."
69 The no-name donuts constituted a "product" within this proviso and 1017833 did not obtain Robin's written approval for the dispensing or sale of this secret unauthorized product.
E. Article 6.11
70 This proviso reads as follows:
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6.11 The Franchisee shall pay for any sign rental or any other rental equipment used at the Authorized Location whether or not the same be leased directly by the Franchisee or the Franchisor. |
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71 This proviso is couched in straightforward language. The dispute between the parties relates to the sign rental obligation of 1017933.
72 The history of the dispute may be described in this fashion. In 1989, when the franchise originally opened, Robin's negotiated a five-year signage lease with Oakville Signs. This was to end in 1994 and, as a result, Robin's entered negotiations for a new five year lease and brought Mr. MacKay into the negotiations.
73 On February 7, 1994, a representative of Robin's, James Collie, wrote a memo to Mr. MacKay and others (counter-Application, Tab 2(R)) which shows that Mr. Mackay was given a full explanation of the proposed new lease. This document even goes on to indicate that the new lease provisoes would in fact lead to annual savings over the old lease of $1,807 per annum.
74 As a result, a new lease was concluded in February which became effective on August 2 and was to run for five years to October 31, 1999.
75 Mr. Mackay in fact made approximately 36 payments under this lease down to mid-1996 when he decided to stop the $400 monthly rental payments and take the position that this lease was somehow illegal or unconscionable.
76 Mr. Mackay's present position, as I understand it, is that Robin's should have bought the required signage, rather than lease it, and that the lease was not bargained for in good faith.
77 To me, the argument put forward by Mr. Mackay and his company is patently frivolous and constitutes wishful thinking after the event. The lease was clearly negotiated in an open manner and with the knowledge of Mr. Mackay. I see nothing in this lease which could possibly suggest that Robin's entered it in bad faith. The present arrears under this lease total about $7,600 or so and this persistent and deliberate series of breaches constitutes another reason why the franchise rights should be terminated.
F. Articles 6.18 and 21.01
78 These provisoes in the agreement give Robin's broad rights of entry and inspection during normal business hours and even without notice to ensure that the franchisee is complying with the other detailed terms and conditions upon which the franchise was grated. There is uncontradicted evidence from Mr. Wilson's affidavit that employees were instructed to obstruct or delay the inspections and to hide the clandestine baking of no-name donuts. There is even evidence that the employees were told to remove the unapproved ingredients for these donuts from the store when these inspection visits occurred.
79 In indulging in such obstructive tactics, 1017933 was hardly meeting its obligations under these articles and its more general obligation of "good faith" as specified in Article 3.01 of the agreement.
80 During argument, Ms. Hewitt attempted to raise a triable-issue argument on the question of her client's use of unapproved ingredients (shortening and flour) in the no-name donuts. She pointed out that several franchisees across Canada felt that they were being cheated by Robin's because Robin's was receiving rebates from its preferred suppliers but was doing little or nothing to achieve savings to the franchisees through bulk purchasing and so on.
81 The short answer to this argument may be found in Article 6.16 in which the franchiser acknowledges that it is aware of these rebates.
82 I recognize that 1017933 and other franchisees have apparently started an action or actions to claim that Robin's is in breach of a fiduciary relationship arising out of its handling of the rebate entitlements of Robin's but these other actions do not, in my opinion, diminish the plain act that 1017933 was violating the agreement in using non-approved ingredients. For the purposes this proceeding and its issues, I do not believe that Ms. Hewitt's argument on this point is of any assistance to her client.
83 In fine, I have concluded that 1017933 has committed may serious and fundamental breaches of the agreement, as I have interpreted it, and that the following orders should issue:
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(1) |
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1017933 is in multiple default under the terms of the franchise agreement, as specified above; |
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(2) |
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The franchise agreement is terminated by virtue of these multiple and fundamental defaults; |
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(3) |
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The sub-lease agreement between the parties for the premises at 120 Anne Street South, Barrie, Ontario, is terminated by virtue of the defaults under the franchise agreement; |
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(4) |
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An order for vacant possession will issue, with leave to issue a writ of possession after 30 days; |
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(5) |
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An order will issue requiring 1017933 to deliver up forthwith all of Robin's advertising materials, bulletins, manuals and other documentation pursuant Article 12.04 of the franchise agreement. |
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84 I may be spoken to on costs or any other ancillary matters at a time to be arranged by the trial co-ordinator but, in any event, not later than 30 days from the release of this judgment.
KILLEEN J.
QL Update: 980408
qp/s/mii/DRS/DRS
