Court of Appeal for Ontario
Date: 19910408
Docket: No. 434/88
ROBINS, TARNOPOLSKY AND FINLAYSON JJ.A.
BETWEEN:
BAWITKO INVESTMENTS LIMITED
Plaintiff
(Respondent)
and
KERNELS POPCORN LIMITED
Defendant
(Appellant)
Heard: February 11, 1991
R.J. Rolls, O.C. and Peter A. Downard for the appellant
Tracy C. Warne, O.C. for the respondent
ROBINS J.A.:
This is an appeal from the judgment of O'Driscoll J. dated June 13, 1988, declaring the appellant in breach of an oral contract to grant the respondent a franchise to operate a retail store at a shopping centre in Hamilton, Ontario, known as " Jackson Square ".
The appellant is an Ontario company carrying on business as a retailer of specialty popcorn products under the trademark "Kernels Gourmet Popcorn". At the time of trial, the appellant sold such products through some 35 "Kernels" stores in Canada and the United States . Approximately one-half of the stores were owned and operated by the appellant. The remaining stores were owned and operated by franchisees pursuant to franchise agreements with the appellant.
[Page 2]
In early 1984, the appellant planned to open two stores. One was to be in a shopping centre in London, Ontario called "White Oaks", and the other in Jackson Square in Hamilton. On March 23, 1984, Anthony Passander approached the appellant with a view to acquiring franchise rights for the Kernels store in Jackson Square. Passander is a real estate broker with wide business experience. For the purposes of this action, he is the sole representative of the respondent, Bawitko Investments Limited, an Ontario company owned by his wife.
On April 3, 1984, the appellant, which was represented throughout this matter by either Richard Sadowski or Scott Staiman, provided Passander with a Kernels "information package". This package contained a variety of promotional items, such as, statements projecting profit and loss for typical locations, statements regarding basic start-up costs, a discussion of questions commonly asked by prospective franchisees about the appellant's franchise, and an application for franchise. Most importantly, the material included a copy of Kernels "draft" or "standard" form of franchise agreement.
The draft agreement is approximately 50 pages in length. It sets out in minute detail the terms and conditions under which the appellant, as franchisor, agrees to grant a franchisee the right to use "the system, methods and procedures" developed by the
[Page 3]
appellant "for the operation of a retail sales outlet specializing in the sale of popcorn, popcorn related paraphernalia, and beverages under the trademark 'Kernels Gourmet Popcorn'". The extent of the detail governing the franchisor-franchisee relationship can be seen from the headings given to the various sections of the agreement, which include: Grant; Franchisee Fee and Royalty Fee; Term and Renewal; Accounting, Record, Reports, Audits; Duties and Obligations of the Franchisor; Duties and Obligations of the Franchisee; Premises; Construction and Outfitting of Premises; Trademark; Engagement in Similar Business: Non Disclosure of Information; Termination; Effect of Termination; Sale or Encumbrance; Death or Incapacitation; and Guarantor's Covenants. Where the franchisee is a corporation, the agreement provides that the franchisor may, with respect to certain provisions, require the directors, officers or shareholders of the corporation to personally guaranty, acknowledge or agree to be bound by those provisions "in such form of document as may be required by the Franchisor from time to time". Time is made of the essence of the agreement.
This is manifestly a complex document intended to govern a long-term business relationship. Prospective franchisees are advised in the informational material "to make certain to retain professional advisors (e.g. lawyers, accountants, business advisors) to advise you so that you will understand all the terms of the agreement and your obligations thereunder".
[Page 4]
Shortly after receiving these documents, Passander met with Sadowski at the appellant's offices. This meeting took place on April 18, 1984, and what transpired at that time is crucial tc the respondent's case. Reducing the facts to their essentials, teE trial judge, rejecting Sadowski's evidence, found on the basis of Passander's evidence that the appellant had orally contracted or that date to grant the respondent a franchise agreement for the Jackson Square store. The terms of the franchise agreement are not specified in the trial judge's reasons or in the formal judgment which simply adjudges that "the defendant is in breach of an enforceable contract" and directs the Master "to assess the damage: flowing from the breach of the said contract". Clearly, however, the discussions at this meeting were directed to particular item: in the draft franchise agreement and culminated, as the trial judge found, in the parties agreeing:
(a) that the $5000 renewal fee provided for in the draft agreement was to be eliminated;
(b) that the term of the draft agreement was to be extended from 5 to 10 years;
(c) that the fee payable on the resale of the franchise as provided for in the draft agreement would be payable only if the franchise were sold by the respondent within one year; and
(d) that the personal guarantees contemplated by the draft agreement would be eliminated.
[Page 5]
The meeting ended with Sadowski shaking hands with Passander and saying, "You've got a deal". The trial judge held that at that point "there was a contract - the defendant granted the franchise". Although the trial judge did not specify all of the terms upon which the franchise was granted or find that the respondent had agreed to the appellant's draft form, he inferentially concluded that the franchise agreement was to be in accordance with the appellant's draft except to the extent that document was amended at the April 18 meeting.
The respondent acknowledged, however, that the parties agreed at the April 18 meeting, and at all pertinent times thereafter, to embody their mutual obligations in a formal written document. Indeed, one would not expect otherwise. In the light of that fact, it is necessary to consider the legal effect to be given the informal oral contract found by the trial judge. The question is whether, on one hand, the oral contract can in itself constitute, as the trial judge held, a complete and legally enforceable contract or, whether, on the other hand, as the appellant contends, the oral contract was not in itself a complete and legally enforceable contract but was subject to and dependent upon a formal written franchise document being settled, approved and executed by the parties. Alternatively, the appellant contends that the respondent was in breach of the oral contract at the relevant time and, in any event, that the oral contract was
[Page 6]
unenforceable by reason of s.4 of the Statute of Frauds, R.S.O. 1980, c.481.
Before turning to these issues, .it is important to examine briefly the conduct of the parties after April 18. I should perhaps first note, although, as the appeal was presented, it did not become significant, that as of that date neither party was in a position to enter into or finalize a franchise agreement. The appellant did not yet hold a lease to any premises in Jackson Square , and the respondent had not yet been incorporated. Nevertheless, it was undoubtedly anticipated that the respondent would become the franchisee in premises to be rented by the appellant, and the parties conducted themselves accordingly. Passander made payments by way of deposit towards the initial franchise fee and construction costs pursuant to an extended payment schedule agreed to after April 18; he took steps to arrange the respondent's financing for the project; and he had discussions with the appellant about the proposed layout of the store. These and similar acts go both to the evidentiary issues that fell to be determined as to whether a contract had been agreed to, and, more particularly, to the question of whether, assuming an otherwise binding oral contract, there had been sufficient part performance to avoid the application of s.4 of the Statute of Frauds.
Because it becomes significant later, I will make reference at this juncture to the White Oaks franchise in London.
[Page 7]
As mentioned earlier, the appellant planned to franchise premises in this shopping centre at about the same time it planned to franchise premises in Jackson Square. The White Oaks franchise was eventually given to a company controlled by two persons introduced to the appellant by Passander. The respondent subsequently invested $10,000 and acquired a minority interest in that corporate
franchise. The White Oaks and Jackson Square transactions, however, were clearly unrelated to one another in any contractual
or legal sense. The White Oaks agreement was not entered in evidence, and there is no suggestion that Passander played any part in negotiating its terms. More importantly, there is no suggestion that the terms of the franchise contemplated by the oral contract were in any way referable to the terms of the White Oaks franchise. In short, the terms of the franchise to which the parties were found to have agreed on April 18 were independent of and in no way dependent on the terms that were to be arranged for the White Oaks franchise.
By late May or early June of 1984, matters had progressed to the point that the Jackson Square store was expected to open on June 29. The appellant wished to secure a duly executed written franchise agreement by that date. It accordingly advised the respondent by letter dated June 14 that "we desire to complete this transaction as quickly as possible", and set June 29, 1984, as the target date for execution of the documents. Consistent with the position the appellant has taken throughout, that is, that the
[Page 8]
franchise agreement's terms had yet to be agreed upon, Passander was given another blank copy of the proposed agreement to review. He made no comment about its form or content. As a result, on July 9, he was told, according to the appellant's evidence, that July 13 was the date by which the franchise documents were to be executed and that any comments he might have with respect to them were to be made without delay.
On July 16, 1984, still having received no response from Passander, the appellant hand-delivered a letter to him "reviewing the status of the Kernels' Franchise at Jackson Square" and advising: (1) that the anticipated opening date was then July 24;
that "all franchise documents must be in their final form and properly signed and sealed not later than Friday, July 20, 1984";
that "the store will not commence business as a franchise operation until all documents have been sufficiently executed"; and, (4) that if either the respondent or its solicitor had any comments "regarding the franchise documents submitted to you" they were to be made to the appellant's solicitor not later than 4:00 p.m. on July 18.
Passander did not reply to this letter until July 19 when he contacted the appellant's solicitor. As a result, copies of the following completed documents were delivered to him on that date: the franchise agreement.; the application for registration as a registered trademark user; the sublease; the shareholders'
[Page 9]
covenants (including personal guarantees) to be executed by Mr. and Mrs. Passander; and the non-competition covenants. In his covering letter, the solicitor stated that the franchise agreement was in the same form as that "originally submitted" to the White Oaks franchisee, which appears to be in the same form as the draft agreement originally submitted to the respondent. The other documents forwarded by the solicitor are all contemplated by the draft franchise agreement which the parties had before them on April 18. The franchise agreement itself, however, was not in compliance with the oral contract, in that the personal guarantee and renewal fee provisions were not eliminated, and the provision relating to the fee payable on resale was not amended. The term of the agreement was extended from five to ten years, a change which the appellant has always acknowledged was agreed upon by the parties.
On July 20, Passander requested Staiman to extend the date set for execution of the documents. By this time, however, the relationship between the parties had deteriorated to the point that Staiman refused the request and thereupon delivered a letter in which he returned the deposit monies (thereby abandoning a position asserted earlier) and purported to terminate the dealings between the parties on the ground that the respondent was unable "to meet our requirements within which the appropriate franchise material was to be reviewed and executed".
[Page 10]
Passander's solicitor immediately responded on his behalf by letter, also dated July 20. The position then taken by Passander was as follows:
We understand that today you gave Mr. Passander a deadline to sign the franchise agreement, the deadline being this afternoon. This is unacceptable. As Mr. Passander indicated, I am on vacation and unable to deal with the agreement today. Mr. Passander wishes to have the franchise but wishes the franchise agreement reviewed by his solicitors. As he indicated to you, he is willing to sign the same agreement as is reached with the White Oaks Group and I understand that that agreement is nearing completion. He appreciates your position that the store should not be opened without a signed agreement in place and was willing to delay opening to await the completion of the agreement.
He is prepared to abide by his end of the bargain and I have arranged for a lawyer in my office to handle the paper work immediately u pon the White Oaks agreement being completed. I would request that you re-evaluate your position and extend the deadline for the signing of the franchise agreement to the completion of the White Oaks agreement. [Emphasis added.]
Clearly, the franchise agreement the respondent was then "willing to sign" was to be in the same terms as the agreement yet to be reached with the White Oaks group, and the Jackson Square store opening was to await completion of the White Oaks transaction. The evidence does not disclose when the White Oaks documents were finally signed or what terms were finally agreed upon for that franchise.
[Page 11]
In August, 1984, the respondent instituted this action claiming specific performance. It is important to recognize precisely what it sought to have specifically performed. The statement of claim asks for:
specific performance of the franchise agreement between the parties, in accordance with the terms of the draft form of agreement annexed hereto as Schedule "A" [i.e. the appellant's draft franchise agreement], as modified by further agreement of the parties as pleaded in paragraph 5, above; [i.e. the specific items found by the trial judge to have been agreed to on April 18].
The respondent pleaded to being "at all material times ready, willing and able to complete the oral franchise agreement" whose terms allegedly were "those of the [appellant's] draft form of agreement" except "as modified by further agreement of the parties". However, shortly before trial the respondent dropped the claim for specific performance and the action proceeded on thé alternative claim for damages. It is common ground, as already indicated, that the parties intended that their franchisor‑ franchisee relationship would be governed by a formal written agreement, and, further, that the agreement would be signed and delivered before the store opened and that time was of the essence. With that factual background in mind, I turn to the principal issue in this appeal, which, to repeat what I stated earlier, is essentially this: Was the oral contract found by the trial judge a complete and binding contract or was its
[Page 12]
enforceability subject to the parties' subsequent agreement on all of the terms and conditions to be contained in the contemplated written franchise agreement? Put another way, did the learned judge err, as the appellant contends, in concluding that Passander was granted the franchise on April 18 and the franchise agreement to which he was "to put his signature" was no more than "a contract already agreed upon"?
As a matter of normal business practice, parties planning to make a formal written document the expression of their agreement, necessarily discuss and negotiate the proposed terms of the agreement before they enter into it. They frequently agree upon all of the terms to be incorporated into the intended written document before it is prepared. Their agreement may be expressed orally or by way of memorandum, by exchange of correspondence, or other informal writings. The parties may "contract to make a contract", that is to say, they may bind themselves to execute at a future date a formal written agreement containing specific terms and conditions. When they agree on all of the essential provisions to be incorporated in a formal document with the intention that their agreement shall thereupon become binding, they will have fulfilled all the requisites for the formation of a contract. The fact that a formal written document to the same effect is to be thereafter prepared and signed does not alter the binding validity of the original contract.
[Page 13]
However, when the original contract is incomplete because essential provisions intended to govern the contractual relationship have not been settled or agreed upon; or the contract is too general or uncertain to be valid in itself and is dependent on the making of a formal contract; or the understanding or intention of the parties, even if there is no uncertainty as to the terms of their agreement, is that their legal obligations are to be deferred until a formal contract has been approved and executed, the original or preliminary agreement cannot constitute an enforceable contract. In other words, in such circumstances the "contract to make a contract" is not a contract at all. The execution of the contemplated formal document is not intended only as a solemn record or memorial of an already complete and binding contract but is essential to the formation of the contract itself. See, generally, Von Hatzfeld Wildenburq v. Alexander, [1912] 1 Ch. 284; Canada Square Corp. Ltd. et al. v. Versafood Services Ltd. et al. (1980), 25 O.R. (2d) 591 (H.Ct.), aff'd., (1981), 34 O.R. (2d) 250 (C.A.); Bahamaconsult Ltd. v. Kellogg Salad Canada Ltd. (1976), 9 O.R. (2d) 630 (H.Ct.), rev'd, (1977), 15 O.R. (2d) 276 (C.A.); Chitty on Contracts, 26th ed. (1990), at pp.79-91; Corbin on Contracts, (1963), Vol. 1, § 29-30; and Treitel, Law of Contract, 7th ed. (1987), at pp.42-47.
In this case, the parties clearly contemplated the signing of a formal written contract. Given this fact, can the oral contract they were found to have reached constitute in law a
[Page 14]
completed contract which took effect immediately after it was agreed to on April 18? In determining this question, it is plainly necessary to examine what transpired at that time. In doing so, it must be borne in mind that the franchise agreement which formed the subject-matter of the negotiations was intended to govern a lengthy franchisor-franchisee relationship. The precise terms under which a business relationship of this nature is to be governed are manifestly essential to the formation of a binding contract. If no agreement in respect to essential terms has been reached or the terms have not been agreed to with reasonable certainty, it can only be concluded that such terms were to be agreed upon at a later date and until that time there would be no completed agreement.
It is to be borne in mind that to succeed in this action the respondent was required to prove that a complete agreement was entered into on April 18. The plaintiff's claim proceeded entirely on the legal basis that the parties had agreed on that date that the final written document granting the franchise was to be in accordance with the terms and conditions set out in the appellant's draft agreement as then amended. If that were established, and the parties manifested an intention to be bound thereby, it could readily be concluded that they had entered into an identifiable and legally enforceable oral contract. In so far as it is contended that the oral contract would be unenforceable by virtue of the Statute of Frauds, I may. say that I agree with the trial judge that the respondent's acts following April 18, without detailing them,
[Page 15]
constituted part performance sufficient to take the oral contract out of Statute of Frauds.
However, as I stated earlier, the trial judge did not specify all the essential terms which were to be incorporated into the intended written franchise document other than the specific items to which the parties agreed on April 18. More particularly, he did not find that it had been agreed at that meeting, or, indeed, at any later time, that the written franchise agreement was to be in the form of the appellant's draft or that this draft had been accepted by the respondent as the document to govern the Jackson Square franchise. In my opinion, such a finding could not be made on the record in this case. Accepting the respondent's testimony in its entirety, the evidence does not establish agreement on the terms to be embodied in the formal written document. Rather, it establishes that the terms, other than those specifically agreed to, were to be settled and agreed to later.
Passander made clear in his testimony that his focus at the April 18 meeting was on what he regarded as the business aspects of the deal, namely, the provisions relating to the personal guarantees, to the renewal and resale fees and to the length of the franchise. The parties were found to have reached agreement on these items. However, the remaining provisions of the draft agreement were not the subject of negotiation or discussion. It would appear that they were not even considered by Passander.
[Page 16]
He described these numerous terms as "boilerplate" which, he said, "meant nothing" to him. Significantly, his approach was that they "would be something that would be looked at later". In fact they were not; indeed, there is no indication that he ever subsequently reviewed the draft or sought legal advice with respect to the proposed franchise agreement. Passander clearly did not agree to the ancillary documents to be executed by the shareholders or officers of a corporate franchise pursuant to the provisions of the draft agreement, and there is no evidence that he was ever prepared to have these documents executed. When asked in-chief whether he knew "there would be all these other documents other than the franchise involved", he replied "I had absolutely no idea". In short, Passander did not at any point assent to the terms of the appellant's draft form.
In my view, the terms of the franchise beyond those agreed to cannot be regarded as mere formalities or routine language. This is not a conventional document that requires only the filling in of blank spaces or the completion of minor details which the parties can impliedly be taken to have agreed upon. The terms of the draft clearly include material conditions essential to this kind of specialized contract. The very nature of the franchisor-franchisee relationship mandates that there be express agreement on the detailed provisions set up to regulate the business relationship of the parties. Here, taking the respondent's evidence at its highest, there was no meeting of the
[Page 17]
minds necessary for a completed contract. Certain terms, as the trial judge found, were agreed to on April 18, but others essential to the proposed contractual arrangement, with respect to which he made no findings, remained open for negotiation. Viewing the matter in terms of mutuality of obligations, if the situation were reversed and the appellant sought specific performance of the oral contract, accepting Passander's evidence, I would not think it possible to conclude that he had at that time entered into a final and binding contract which the appellant was entitled to enforce.
The parties' conduct after the April 18 meeting supports the conclusion that no final agreement had been reached. At all relevant times the appellant plainly considered that the terms of the intended formal agreement were not yet settled. Consistent with its position that there was no binding agreement, it invited the respondent, on more than one occasion, to comment on the draft form of agreement, so that, if necessary, terms could be negotiated, presumably, an agreement reached, and the formal written documents thereafter engrossed and executed. It is to be noted that the respondent at no time asserted, as it has throughout this action, that the terms had in fact already been agreed to and the formal agreement should accordingly be prepared for signature in the form of the draft as amended. Quite to the contrary. At the stage at which the parties resorted to their perceived legal positions, the respondent was willing to sign an agreement only on such terms as might thereafter be agreed upon with respect to the White Oaks
[Page 18]
franchise. The respondent did not suggest that the Jackson Squaretransaction was to take the form of the draft agreement. The two franchises, as noted earlier, are contractually unrelated, and the terms of the one allegedly granted by the oral contract were in no way referable to the White Oaks agreement. In light of the position adopted by the respondent at that time, it is, in my opinion, apparent that essential terms to be contained in the formal written agreement granting the Jackson Square franchise had not been agreed upon. The parties were simply not ad idem on all of the terms necessary to form a completed and legally enforceable franchise contract.
It follows from this conclusion that the trial judge was in error in holding that Passander had agreed to put his signature to "a contract already agreed upon". The terms found to have been agreed upon could not by themselves constitute a full and binding contract. If, however, such were the case, the respondent was in breach of the contract in that it was not ready and willing to complete the transaction in accordance with the "contract already agreed upon" but, instead, manifested a willingness to complete only pursuant to the terms of a franchise that formed no part of its alleged agreement with the appellant. Furthermore, time admittedly being of the essence of the contract, the appellant was entitled to require that the documents be executed within a reasonable time and certainly before the store opened; it was not. nhliaated to have the closina of this transaction or the opening of
[Page 19]
the store await the completion of an unrelated transaction. I would agree with the trial judge that the time fixed for execution of the documents tendered was unreasonable. The respondent was entitled to more than a day in which to make certain that the documents conformed to the oral contract, assuming that contract to be operative. However, from the position taken in the letter of July 20 and the nature of the extension specified therein, the respondent was not prepared to close pursuant to the oral contract alleged by it even if the deadline set by the appellant were extended for the very short additional period that could reasonably be required given the appellant's prior efforts to finalize the written documentation and the anticipated date of opening.
For these reasons, I am of the opinion that the respondent has not established the contract upon which its claim is founded or, in any event, that it was ready and willing at any pertinent time to sign or have signed the various documents contemplated by that contract. The agreement reached on April 18 did not encompass essential aspects of the intended formal agreement. Accordingly, it did not satisfy the standards of certainty which the law requires as a prerequisite to incurring binding and enforceable contractual relations.
In the result, I would allow the appeal, set aside the judgment of O'Driscoll J., and dismiss the action. In the
[Page 20]
circumstances, I would make no order as to costs either here or below.
NO. 434/88
COURT OF APPEAL FOR ONTARIO
ROBINS, TARNOPOLSKY AND FINLAYSON JJ.A.
BETWEEN:
BAWITKO INVESTMENTS LIMITED
Plaintiff (Respondent)
- and -
KERNELS POPCORN LIMITED
Defendant (Appellant)
JUDGMENT
Released: April 8, 1991
