COURT FILE NO.:   A4865/97

DATE:   November 29, 2001

ONTARIO

SUPERIOR COURT OF JUSTICE

REASONS FOR JUDGMENT

Belleghem J.

[1]       The plaintiff claims a declaration that an Agreement of Purchase and Sale dated September 17, 1996, between the plaintiff and the defendant, is of no force and effect.  He asks a return of a $35,000.00 deposit plus punitive damages.

The Evidence

Jamshed M. Ali

[2]       The plaintiff, a man with little food and catering experience, answered an ad in the paper of the defendant.  The ad described the defendant “as the fastest growing franchise in Canada with over 100 locations in five years”.  In October of 1996, he met with the defendant, Zwiedrynski , who held himself out as the “franchise director” of the defendant.  He was given some general information, including a sales projection sheet setting out in general terms the investment to be made and the return expected.

[3]       At a further meeting on December 17, 1996, the plaintiff paid a $2,000.00 deposit and signed the Agreement of Purchase and Sale which is the subject matter of the action.  The purchase price of the franchise was to be $88,000.00.  $35,000.00 was to be by way of a down payment.  Closing was arranged for February 28, 1997.

[4]       When he was given the Agreement of Purchase and Sale, he said he wanted to take it to show his lawyer but was told that he had to sign it in the office, which he did.

[5]       Although the agreement provided that he was to be given a copy of “the offer to lease, sublease, Franchise Agreement, List of Equipment and any other franchise documents within two (2) days of the date of acceptance of the agreement by the parties”, he did not, in fact, get these until January of 1997.

[6]       Although the agreement stated that “the obligation of the purchaser to complete the purchase” was subject to the satisfaction of a condition permitting “the purchaser’s solicitor inspecting the original lease, sub-lease, list of chattels, Franchise Agreement and finding same to his satisfaction”, the documents referred to were not provided until January of 1997.

[7]       Although the document says, “Schedule A and B attached hereto is forming part of this Agreement of Purchase and Sale”, there was, in fact, no schedule A or B attached.

[8]       The plaintiff says that Zwiedrynski told him that he would be given the franchise after he had paid the deposit.  On January 3, he got the franchise documents.  They did not include a copy of the original lease.  After he got the documents, he took a few days to read them.  He then called Zwiedrynski and said that he did not agree with some of the things in it.  He said that some of the things in the documents given him were not mentioned at the original meeting.  He made up some notes while reading the documents in order to assist him in addressing the issues when he met with Zwiedrynski.

[9]       Among other things, he said that he had not been told that there would be a “renewal fee”.  He wanted clarification of what was meant by the “good will”.  He wanted clarification of his “territory”. He wanted to straighten out the issue of the “opening package”. 

[10]                          Zwiedrynski assured him that he would fix whatever concerns the plaintiff had and the plaintiff said he would only sign if those concerns were addressed.  On December 28, relying on these assurances, Mr. Ali paid a further $8,000.00 deposit.

[11]        On January 17, 1997, Mr. Ali attended at the defendant’s office.  Again, relying on Zwiedrynski’s assurances that all of his concerns would be met, he paid a further $25,000.00.  He had now paid a total of $35,000.00 towards the $88,000.00 purchase of the franchise.

[12]        He was told to come to the office on January 22 to sign the final documents. 

[13]        At that time, Zwiedrynski introduced him to a man called “Bill”, the “contract administrator”.  “Bill” told him to sign the agreement.  The plaintiff demurred, saying that he wanted to take it to his lawyer.  He said that he was told that he couldn’t take the document with him because “when people take it they don’t come back”.  The “Bill” referred to is the witness Chaupiz.

[14]        He said after they wouldn’t let him take it to his lawyer, that he read it and found that the changes he had requested were not in it.  He was told that they would not change the documents.  The plaintiff told the defendants that if they did not change the documents that he wanted his deposit back.  He said he refused to sign the documents and left the office with them. 

[15]        The following day, January 23, he wrote a comprehensive letter detailing the changes he wanted made before he would sign the agreement.  He also expressed an interest in finalizing it as soon as possible.  He said he had not taken the papers to a lawyer by this time because he was still interested in the business and wanted to go ahead with it.  He said that he was told that there would no changes and that he was either to sign it or call his lawyer.

[16]        Ultimately, on February 25, 1997, his lawyer wrote a comprehensive letter setting out the history of the matter from the plaintiff’s perspective and requesting a return of the deposit.

[17]        In cross-examination, he reiterated that he had been told that it was a “turn key” operation and that there would be no further charges other than as set out in the sales projection sheet and the original Agreement of Purchase and Sale.  The Franchise Agreement provided a number of extra charges which he says had not been disclosed in the discussions or in any of the material given to him before he had paid the $35,000.00.

[18]        The Franchise Agreement called for substantial increases in advertising fees.  It left over the possibility of “counter sales” commission at the option of the vendor.  It provided for a $10,000.00 “initiation fee” upon signing the agreement.  There were other onerous conditions to obtaining and operating the franchise which had not been disclosed in the original Agreement of Purchase and Sale, nor in any of the sales inducement material given him.

[19]        Much time was spent in examination-in-chief and cross-examination of the plaintiff regarding his handwritten notes and discussions between he and Mr. Chaupiz respecting the agreement of the latter to some of the changes and his refusal to other of the changes.

Andrew Zwiedrynski

[20]        Andrew Zwiedrynski, who is a named defendant and who is noted in default in these proceedings, testified on behalf of the plaintiff.  He said he was hired as franchise director to sell franchises.  He said he was told the operation had about 100 stores.  He found this to be not the case.  In fact, they had far fewer stores than they advertised.  He said that there were likely no more than 39 stores altogether. 

[21]        He said that Mr. Solhi, president of the company, instructed him to tell prospective franchise buyers that 20 to 25 per cent of their sales would be profits.  He said that the sales projection sheet was always presented to the prospective franchisee but that he was not given any backup information to support it.  He said that Mr. Solhi had ordered the business card for him which described him as the “franchise director”.

[22]        The offer was to be between “Triple 3 Holdings Inc.” while the leases were to be with “3 for 1”.  Solhi was president of both companies.  During Zwiedrynski’s career with Triple 3, he met about 50 prospective franchisee.  He made about 12 sales. 

[23]        He met the plaintiff in the first year in the business.  He gave him the sales projection sheet and told him that Triple 3 planned to open 50 more stores that year.  This is what Mr. Solhi had told him to say.  He was told that the franchisee had to sign the original contract, that he was to get the $2,000.00 and that he was to release the document and decide within five days if he was going to proceed with the purchase.  Zwiedrynski doesn’t recall if he gave him the Franchise Agreement at the time he signed the offer.  He agreed it was possible that he got it in January of 1997, as Mr. Ali testified.

[24]        He said that after the plaintiff saw the Franchise Agreement, he called about changing some paragraphs, and that he was concerned about the territory.  Zwiedrynski says that he took the plaintiff’s concerns to Mr. Solhi.  Mr. Solhi went through it and said yes or no to certain parts.  He was then sent back to the plaintiff to say what changes would be permitted.  Solhi agreed to some of the changes, according to Zwiedrynski, but not all of them.  He testified that the plaintiff came “in good will” to sign the final agreement with his cheque and said that before he would give the cheque he wanted the changes made.  Zwiedrynski said that Solhi said to him that if he brought the deposit to tell him that the changes would be made so that he could get the deposit but that, in fact, there would be no changes made.  He said after they got the deposit he refused to make the changes.

[25]        Zwiedrynski said that there were many franchisees who lost their deposit.  It usually happened, he said, when the changes were refused.  He said there were about eight persons who lost their deposits.  There were 12 to 14 franchisees that he knew of who took possession.  After, the franchisees would request things. He said that the defendant would bully them and tell them that they had to fix it themselves.  In this way, they drove people out of the business.  Then they were able to resell it.

[26]        Zwiedrynski had been examined for discovery at a time when he said he had been told by the defendant not to give this incriminating evidence.  He was not employed with the defendant at the time of trial.  He said he could see the deposits vanishing.  He did not want to be part of it.  He apparently got in a dispute with the defendant over the defendant taking his car.

[27]        In cross-examination, he said that he was paid by commission.  This was a percentage of the sale price.  He had a larger commission if the deal closed.  He agreed it was in his interest for the deal to close.  He does not recall getting a commission, in this particular case, although he did say that some cheques which were filed as Exhibit 8 could be either for the sale in this case or for other sales.

[28]        In cross-examination, when pressed about whether or not he was employed by the defendant at the time of the examination for discovery, he indicated that he worked for the defendant on and off and did “conversions” for them to convert independent pizzerias to “3 for 1” franchises.  He then said that, in fact, he had the prospect of working for the defendants again at the time of the discovery, and that that is why he did not provide the full information on discovery that he gave at the trial.  He said that even after the discovery he worked for “3 for 1” doing “conversions”.  He considered himself “part of the ‘3 for 1’ family” at the time of the discoveries.

William Chaupiz

[29]        The only witness called by the defence was William Chaupiz.  He dealt with day-to-day business operation for the defendant.  It appears from the evidence that Zwiedrynski reported to him.  He, in turn, reported to the president.  He said that he would get involved when an offer was tendered.  He would then draft the purchase and sale and provide the Franchise Agreements once the offer was signed.  He describes Zwiedrynski as a “contractor” who was paid a percentage of what “Triple 3” got. 

[30]        He said he had only met with the plaintiff on one occasion although he may have spoken to him briefly on another occasion.  His position was that the plaintiff “backed out of the contract” by not signing the Franchise Agreements.  He says that the cheques totaling $7,000.00 paid to Zwiedrynski were for the commission for this particular deal.  He also says that a lease was negotiated for the Clarkson property where the franchise was to be located and that approximately $3,000.00 was paid to cover first and last months rent, in contemplation of the plaintiff taking up the franchise.  He said that the plaintiff had five days from December 17 to back out and that his $10,000.00 paid at that time would have been returned. 

[31]        He said that he prepared the documents and gave them to Zwiedrynski the same day that the offer was accepted.  Zwiedrynski was to deal with the purchaser and to have delivered the documents.  He said that Zwiedrynski told him that he had given Ali the documents.  The original documents given were what he called “standard drafts”.  They were not the ones that were specifically for the plaintiff.  The specific ones were to be signed on January 22.  It was on that day, he says, that he was introduced to the plaintiff by Mr. Zwiedrynski at head office.  The meeting took most of the morning.  In the usual case it would only take a half hour or so.  He said he was surprised that the plaintiff wanted to amend several parts of the Franchise Agreement.  He testified to a number of the changes that were agreed to.  He said that after much discussion the plaintiff still would not sign, but wanted to reconsider it and look at it for another day before he signed it.  He conveyed his impression that all of the changes that Mr. Ali wanted, and that were agreed to, had been made, and that there was no reason for Mr. Ali to refuse to sign.  He said that he told the plaintiff that the defendant needed his commitment because the defendant had committed to the landlord. 

[32]        He said that he first learned from Zwiedrynski after the meeting of the January 23 letter that the plaintiff did not want to go ahead with the deal.  He said that the plaintiff had simply said on January 22 that he wanted to review the documents. 

[33]        The lease ultimately went into default and was terminated in July of 1997.  The defendant retained the plaintiff’s $35,000.00 deposit, and never paid any further rent. 

[34]        He conceded in cross-examination that he did not know how Mr. Zwiedrynski represented himself to the plaintiff nor could he refute Zwiedrynski or the plaintiff’s evidence with respect to the time of the turning over of the various documents. 

[35]        He agreed there was nothing in the offer to purchase about royalty on “over the counter sales”, nothing about a further $10,000.00 initiation fee on execution of the Franchise Agreement, nothing about further costs of marketing or royalties, nothing about the purchase of the flyers and advertising, opening fee, additional refurbishing fees, minimal sales requirements and other matters that were put to him by counsel. 

[36]        He said that Zwiedrynski had not discussed any of the changes that the plaintiff wanted until the January 22 signing meeting.  He agreed that a couple of changes were made on January 22, as requested, but that not all of the changes were made and that the agreement was never signed by the plaintiff.  He agreed that the defendant never agreed to some of the changes demanded by the plaintiff as a condition of signing. 

[37]        Ultimately, he agreed that they had “a difference of opinion” about whether the company could charge royalties on “counter sales” in the future by unilaterally imposing such a fee notwithstanding the plaintiff’s refusal to sign an agreement with such a clause in it.  He agreed that he had no evidence to show that the rental deposit was paid nor that the gas bills claimed were paid.

[38]        After the breakdown of negotiations and while the premises lease was going into default, the defendant prepared a statement of loss and claimed $212,565.36 from the plaintiff which included $100,000.00 for loss of “good will”.

[39]        This document speaks eloquently to the “bullying” manner in which the defendant conducted its business with existing or potential franchisees as testified to by Zwiedrynski.  It conserves to rehabilitate the value of his otherwise questionable evidence.  By suggesting to the plaintiff three months after he had just finished paying a $35,000.00 deposit on an $88,000.00 franchise purchase that he was somehow liable at that stage and time to a claim for $212,000.00 is nothing short of preposterous.  It was clearly intended, as I have indicated, as a bullying tactic to try to scare the plaintiff out of proceeding with his claim.

Analysis

(i)   Counterclaim

[40]        The defendant agrees that it cannot prove damages for the counterclaim and said that it was only brought as a matter of defence.  It is not pursuing the counterclaim.  The counterclaim is, therefore, dismissed. 

(ii)   Royalty Fees

[41]        The defendant denies each and every of the allegations of fraudulent misrepresentation. 

[42]        I accept the plaintiff’s evidence with respect to the “royalty fee” issue.  It is apparent from the wording of the agreement that if it was signed in the final form as presented, the defendant would have the unilateral option to impose “royalty fees” on counter sales.  It was never struck off the original copy retained by the plaintiff.  There was nothing in the original offer to purchase with respect to it. 

[43]        The prospective material, ie. the sales projection chart, clearly states “sales consist of telephone order sales”.  If the plaintiff had signed the Franchise Agreement, the Franchise Agreement was clearly in conflict with the information given the plaintiff to induce him to enter into the contract.  It was a misrepresentation put forward to have the plaintiff sign the contract. 

[44]        The defendant knew that the Franchise Agreement called for the defendant’s right to impose “counter sales royalty fees”.  It intentionally withheld this information from the offer to purchase.  It intentionally included misleading information respecting the items on which sales could be charged royalty fees.  It was fraudulent.  It was clearly referred to in the January 23 letter.  It was, likely, therefore discussed in the meeting held not 24 hours earlier.

(iii) Initiation Fee

[45]        The $10,000.00 “initiation fee” is a substantial cost increase from what was contemplated in the offer to purchase.  It was not disclosed in the offer to purchase.  The defendant obviously knew that if it got the plaintiff to sign the Franchise Agreement that the plaintiff would have to pay the defendant a further $10,000.00.  It was knowingly withheld when the offer to purchase was signed.  The failure to disclose was an intentional and fraudulent misrepresentation.

(iv)  Advertising Fees

[46]        The projection sheet shows a fixed advertising rate.  The offer to purchase does not mention that the Franchise Agreement calls for several items of advertising not disclosed in the offer to purchase.  This information was intentionally not disclosed in the projection sheet.  This is, once again, an instance of obvious fraudulent misrepresentation.

(v)  Sales Penalty

[47]        There was no disclosure of the $500.00 per week penalty if minimum sales of $6,000.00 per week were not made. This is again a substantial penalty not disclosed in the offer to purchase or any of the sales inducement material provided.  It amounts to a fraudulent misrepresentation.

(vi) Territory

[48]        While the Franchise Agreement did not set out in specific words the territory, the map given to Mr. Ali was probably sufficient in the event of a dispute to show his territory.  However, he was certainly entitled to have the Franchise Agreement spell out, under the signature of the defendant, the actual parameters of his territory.  I am not satisfied that this is a misrepresentation.

(vii) Refurbishing Obligation

[49]        The unilateral right to require complete refurbishing was a matter which ought to have been disclosed.  It was of some substance.  It amounts to a fraudulent misrepresentation.

[50]        The defence argued that some of the clauses of the Franchise Agreement were not discussed at the January 22 meeting.  In that regard, I accept the testimony of Mr. Ali over that of Mr. Chaupiz.  His evidence is internally consistent.  It is more consistent with the documentation filed and it is inherently more probable.  Even if the differences between the Franchise Agreement or the omissions in the Offer to Purchase or the sales projection sheet were not discussed, the representations made in the promotion material and the Offer to Purchase when compared with the Franchise Agreement satisfy me that it was the defendant’s intention to have the plaintiff act on the sales projection sheet and the Offer to Purchase.  The defendants wanted the plaintiff  blindly to enter into the Franchise Agreement without disclosing that there were many onerous terms in the Franchise Agreement that were not disclosed as consideration for taking his deposit. 

[51]        I agree with plaintiff’s counsel that there was a substantial non-disclosure of material facts.  This substantial non-disclosure of material facts amounts to fraudulent misrepresentation. 

[52]        I am not prepared to draw the adverse inference suggested by plaintiff’s counsel based on the failure of Mr. Solhi to testify.  It is not necessary. 

[53]        I accept the plaintiff’s evidence that he was told by Mr. Zwiedrynski, (and of Mr. Zwiedrynski that he in turn was told by Mr. Solhi) that Zwiedrynski’s job was to get the deposit even if it meant agreeing to changes which the company had no intent of making. 

[54]        While Zwiedrynski’s evidence, in some respect, was lacking, his description of the defendant’s business methods is substantiated by the preposterous claim made three months after taking Mr. Ali’s money in an obvious effort to bully him into backing off. 

[55]        Mr. Zwiedrynski was told to make the clear misrepresentation that he did, namely, that the changes would be made as long as he got the deposit.  This misrepresentation was to be made, knowing that it was false, intending that the defendant act upon it in making the deposit.

[56]        In short, I am satisfied that if there was any agreement formed as a result of the execution of the parties of the Offer to Purchase that it was induced by fraudulent misrepresentation.

[57]        The plaintiff is entitled to his damages of $35,000.00.  This is what it would take to put him back into the position that he was in.  He would, of course, be entitled to interest on his money from the date the funds were advanced until the date of payment at the prevailing rate of interest.  He is also entitled to his actual out of pocket legal costs in order to ensure restitutio in integrum.

[58]        However, it is not necessary to decide this case on the basis of fraudulent misrepresentation.  Accepting the evidence of Mr. Chaupiz, on the question of whether the parties ever agreed, I am satisfied that the “difference of opinion” testified to by him, as being the way matters were left after the January 22 meeting, is evidence from which I can infer that negotiations were ongoing.

[59]        I agree with counsel for the plaintiff that the franchise agreement is not incorporated into the Offer to Purchase.  It was not attached to it.  It was not disclosed in the terms of the Offer to Purchase.  The Offer to Purchase amounts to nothing more than an “agreement to agree”.  It is not a contract.

[60]        There are simply too many substantial terms under which the parties would have operated pursuant to the Franchise Agreement which were not disclosed or made part of the Offer to Purchase to find that there was a meeting of the minds between the parties at the time the offer to purchase was signed. 

[61]        I agree with Plaintiff’s counsel that the plaintiff never agreed to the terms in the Franchise Agreement.  He couldn’t possibly have agreed to them at the time he signed the Offer to Purchase because they were never disclosed to him and they were never in the Offer to Purchase.  They were not even in the promotional material.  There was no way that the plaintiff could possibly have been aware of what obligation the defendant’s were expecting to extract from him in addition to the money he was paying in exchange for which he was to get the premises including all of the benefits of the Franchise Agreement.

[62]        Although some of the essential terms of the agreement were agreed upon, there are many items in the Franchise Agreement to which I have already alluded under the heading of fraudulent misrepresentation that were never agreed to. 

Conclusion

[63]        The plaintiff refused to sign the Franchise Agreement on the defendant’s terms.  The defendant refused to sign the Franchise Agreement on the plaintiff’s terms.   There was never any meeting of the minds on what terms both parties would agree to.  There was, therefore, no agreement.

[64]        It follows, therefore, that the plaintiff must succeed in his claim for a declaration that the Offer to Purchase dated December 16 is void and of no legal force or effect.

[65]        The plaintiff is entitled to return of his deposit together with interest at the prevailing rate from the date the deposit was paid.

[66]        The conduct of the defendant was highhanded and egregious.  While this may have been a proper case for the award of punitive damages, I am satisfied that restitutio in integrum can best be achieved by awarding the plaintiff the return of his deposit together with interest at the prevailing rate from the date of the deposit to the date of payment together with payment of the (reasonable) actual out of pocket legal expenses incurred by the plaintiff.

[67]        With respect to the quantum of these costs, if the parties are unable to agree, then they make written submissions and supplement their written submissions with oral argument not to exceed 15 minutes each by way of an appointment scheduled through my secretary.

Set-Off

[68]        I reject the defendant’s argument that the claim should be reduced by the amount of prepaid rent, gas costs or commission paid to Mr. Zwiedrynski.  These were amounts paid out as a result of the conduct of the defendant.  There was never any contract.  Even if there was, the defendants breached it.  There is no conduct of the plaintiff which would attract any reduction in the plaintiff’s loss as claimed.

Mr. Zwiedrynski

[69]        With respect to Mr. Zwiedrynski, his evidence is clear.  He knew that he was misrepresenting to Mr. Ali on behalf of his principal.  He knew that his conduct was fraudulent.  While he may be entitled to reimbursement from his principle for acting on their instructions, he is jointly and severally liable to the plaintiff for the plaintiff’s losses.

________________________

Belleghem J.

Released:    November 29, 2001

COURT FILE NO.:  A4865/97

DATE:  November 29, 2001

Released:    November 29, 2001