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Andersson v. Second Cup Ltd. STATUTES, REGULATIONS AND RULES CITED: Franchise Act, R.S.A. 1971, c. 38.
REASONS FOR JUDGMENT DIXON J.:— This three-day trial concerns recontracting under renewal rights given in a Franchise Agreement where the business operations of the Franchisor and the Franchisee have been very successful and where the store location is in a major urban shopping mall and the mall is undergoing an upscale expansion programme. Under Franchise Agreement dated November 10th, 1980, the Defendant, The Second Cup Ltd. ("Second Cup") granted franchise rights to the Plaintiff for the sale of coffee, coffee beans, tea, spices and certain other food products out of a 330 square foot premises leased by the Defendant from Centre 114 Company in the food fair area of the South Centre Mall in South Calgary. On July 9th, 1980 a Second Cup Prospectus was filed as required by the Franchise Act R.S.A. 1971, c. 38. The cost of the franchise to the Plaintiff was a $12,500.00 fee and the sum of $57,000.00 was paid by the Plaintiff for the equipment, fixtures and tenant improvements supplied to the premises and/or incorporated therein by Second cup. The Second Cup lease term with Centre 114 Company was for seven years commencing April 1, 1980 with no right of renewal. Under the 1980 Prospectus and the Franchise Agreement the Franchisee is given the right to develop the store with an election to have it done by Second Cup. The Plaintiff made that election and entered into a Developed Store Agreement coincidental with the signing of the Franchise Agreement on November 10th, 1980. No formal sub-lease was entered into between Second Cup and the Plaintiff. Clause 2 of the Franchise Agreement described the grant of franchise, the renewal of franchise and manner of renewal and is the critical clause for the purpose of this litigation. The Defendant is referred to as the "Company" and Mr. Andersson as the "Franchisee" and the clause reads in its entirety: "2. GRANT AND RENEWAL OF FRANCHISE A. GRANT OF FRANCHISE
Everything went very well tor both Second Cup and the Plaintiff over the period 1980 to 1986. Second Cup had expanded its operations throughout most of the provinces in Canada to include in excess of 130 stores and the Plaintiff's sales and profits had increased significantly each year. It is clear that the Plaintiff was considered as a valued Franchisee by Second Cup and that the Plaintiff was pleased with his operations in south Centre. It is not clear when Trilea Centres Inc., the successor to Centre 114 Company, decided to embark upon a major expansion to the South Centre Mall including relocation of the food fair tenants, but on March 19th, 1987, Trilea Centres Inc. wrote to Second Cup, in care of the Plaintiff's store outlet, reminding Second Cup of the expiration of the head lease as of March 31st, 1987. The Plaintiff and his wife were instrumental in gaining a one month extension to the lease term and, effective as of May 1st, 1987, arranged for the occupation of temporary premises across from the food fair area and at a rental of $1,000 per month gross. This space had no water or sewage services and the Plaintiff made do on a "bucket brigade" basis. On April 14th, 1987, Mr. Hair, the Franchise Manager for Second Cup, wrote to Mr. Andersson as follows: "Dear Arne: As you are aware, on March 30th, 1987 your sub-lease at the South Centre expired. Upon termination of the sub-lease, the Franchise Agreement which you signed on November 10, 1980 also expired.
Yours: truly,
The Plaintiff did not sign this letter, taking the general position that the Company was not keeping him informed as to what was going on. It is somewhat difficult for me to determine what was going on. It was the evidence of the Plaintiff that Second Cup's head office personnel in Toronto were not aware, for some six weeks, that he had secured alternate premises outside the old food fair area. We do know that a letter arrived, dated June 18th, 1987, demanding royalties and sign lease cheques for the accounting periods ending May 9th, 1987 and June 6th, 1987. The Plaintiff testified as to contacting the Company Office, including the President, for the delivery of the plans for the new store, a list of equipment, the name of a Calgary contractor etc. and that none of this information was forthcoming. He testified that he was told by the President that the new store would be significantly expanded in terms of space, that it would be built in accordance with the new styling design adopted for at least two new stores in Ontario and that the plans would not be released to third parties. When questioned as to why royalty and sign payments were not being made over the May to August period, the Plaintiff stated that he had withheld same so as to force some communication from Second Cup, as he was frustrated in achieving it. By letter of July 22nd, 1987, Messrs. Goodman & Carr, solicitors for second Cup, wrote to the Plaintiff's solicitors in Calgary advising that Second Cup was in the process of negotiating for new premises in the South Centre Mall, that a November 1st, 1987, opening date was proposed and that the maximum renovation and installation costs to the Plaintiff would be $175,000.00. In addition, information was provided as to the contemplated size of the new premises at 757 square feet, as to the new lease term of eight years and no option to renew. Advice was also given as to the minimum rent for the new lease and the percentage rent was specified at 8%. It also appears that the Plaintiff had earlier sold a Second Cup franchise business in Bow Valley Square in Calgary with some accounting left to be resolved and by this letter a balance owing to the Plaintiff was stated and confirmation of this amount was sought. By letter of August 12th, 1987, Goodman & Carr wrote to the solicitors for the Plaintiff enclosing seven documents for execution by Mr. Andersson and with the opening recital:
The documents were:
The Schedule "II" figure was $166,750.00 with the following break-out:
A deposit was expressed to be payable on October 1, 1987 and the balance on November 1, 1987. The administration fee is 15% of the aggregate of the equipment, fixture and leasehold costs. The payment of a 15% administration fee is not contemplated under the 1987 prospectus (Exh. 9) except perhaps under the wording in Clause IV.C:
The 1987 Franchise Agreement as forwarded to the Plaintiff's solicitors, contains the following language in Clause 3C:
No administration fee was directly or indirectly referred to in the 1980 documents, nor was any such fee charged. It would appear that other correspondence passed between the solicitors to the parties concerning the use of existing equipment, submission of the contract for tender, payment of the 15% administration fee, official opening date Schedule "I", costs etc. On August 30th, 1987, Mr. Andersson wrote to the President of the Company alerting the latter as to the necessity for immediate fixturing, requesting a detailed listing of equipment, prices, names and addresses of contractors in Calgary, and detailed plans. On September 18th, 1987, the Plaintiff and his wife met with Sarah Strachan, Second Cup's Vice-President of Development. Ms. Strachan prepared a memorandum of their discussions which is dated September 21st, 1987, 2nd which was received as Exh. 31. In this document Ms. Strachan outlined Mr. Andersson's enquiries concerning cost, use of a Calgary based contractor and other related matters and indicated that Mr. and Mrs. Andersson understood the necessity of having the best quality store provided for the best price and within the shortest time frame possible. Understandably, Mr. Andersson was concerned about the $166,750.00 figure in the documents forwarded to him in the letter of August 12th and Ms. Strachan indicated to Mr. Andersson that she felt that the costs of the store, plus 15%, would range somewhere between $150,000 and $161,000 but related that she was careful to qualify her personal comment by stating that the cost of each store varied somewhat depending on the landlord requirement and the servicing requirements. The memo also indicates that the absence of a renewal right in the franchise agreement was discussed and appeared to have been accepted by the Plaintiff. Ms. Strachan reported on her understanding at the end of the meeting as follows:
On or about September 27th, 1987 Mr. Andersson noted that tradesmen were working on the new Second Cup premises within the South Centre Mall and having received no plans, no cost figures and no opportunity to test any prices with Calgary contractors, Mr. Andersson attended on his solicitors. This attendance resulted in the issuance of a Statement of Claim on October 5th, 1987 whereby breach of contract was alleged and damages were sought in the amount of $1,006,702.00 for loss of future income, in the amount of $300,000.00 for unilateral confiscation of franchise resulting in a loss goodwill, special damages, specific performance an injunction enjoining resale and costs.The Statement of Claim was issued some six days prior to the expiration of the sixty (60) day period called for by the initial franchise agreement and by the Goodman & Carr letter of August 12th, 1987. It is to be noted here that the 1987 Prospectus gives a Franchisee no right to receive plans, no right to construct a store through a Franchisee's own contractor, no right of renewal and indirectly contemplates an administration fee on construction and equipment costs. The Franchise Agreement forwarded with the Goodman & Carr letter of August 12th, 1987, is similarly constructed so that there are these significant differences between the documentation filed and used in 1980 and the documentation filed and proposed to be used in 1987. Plaintiff's counsel, Mr. G.D. Ball, contends that the rights and constraints as provided in the 1980 Prospectus govern the 1987 renewal of the franchise, that the Plaintiff was instrumental in maintaining the Second Cup presence in the South Centre Mall through obtaining temporary space, that the Plaintiff alerted the Defendant as to the possible loss of new space procurement through inattention, that the Plaintiff was entitled to plans, cost figures and to submit such figures to Calgary contractors and that such documentation and information was intentionally and wrongfully denied to him. It is contended that the Plaintiff was stonewalled and/or misled, that the Defendant was in breach of its contract with the Plaintiff and that damages based on the financial exhibits filed are to be awarded. The Defendant's counsel, Ms. G.K. Randall, asserts that Clause 2C of the original Franchise Agreement makes it clear that on any renewal, the Franchisee must execute "the Company's then current form of Standard Franchise Agreement and all other agreements and legal instruments and documents then customarily used by the Company" and that the Plaintiff failed to execute same within the time prescribed in Clause 2C, and as restated in the Goodman & Carr letter of August 12th, 1987. It is contended by the Defendant that the true situation is plainly and simply that because of the Plaintiff's refusal and/or failure to execute the tendered agreements, Second Cup could not and did not. contract with the Plaintiff. It is also contended that as the Plaintiff had gone "legal" on October 5th, 1987, he was deemed to have made an election not to renew the franchise and the Defendant felt fully at liberty in negotiating with a third party and in concluding a franchise agreement with a third party on or about December 1st, 1987. It is of interest that the cost to the third party was $180,000. The issue, accordingly, is whether or not the Defendant is to be found in breach of contract. The Plaintiff fails in its claim for damages against the Defendant. Clause 2C of the Franchise Agreement governs, and the Plaintiff elected not to execute the 1987 franchise agreement and other documents within 60 days of delivery as prescribed in Clause 2C and in the Goodman & Carr letter of August 12th, 1987. I reject the argument of Plaintiff's counsel that the 1980 prospectus governs the 1987 renewal. I also find that rights as contained in the Franchise Agreement such as renewal rights, obligations to provide plans, etc, must be said to have been eliminated as not being embodied in the "then current form of standard franchise agreement and all other agreements and legal instruments and documents then customarily used by the Company in the grant of franchises for the ownership and operation of a Second Cup store." The requirement for a 15% administration fee could have been better expressed in the 1987 prospectus and franchise agreement, but I interpret such fee as one of the "requirements that are provided for herein" as such language is found in Clause 2C. I have considerable sympathy for the Plaintiff and can understand his frustration in not receiving the information requested by him, but it must be said that he misread his contractual rights and chose a course of action that left him in the position of electing not to renew the Franchise. Ms. Strachan did not rush any information on the cost of the premises to the Plaintiff, but there were still 6 days to go on the 60 day period when the Plaintiff's Statement of Claim was filed. In the end result, no contract for the new store was concluded between the Plaintiff and the Defendant. The Plaintiff's claim is dismissed and costs may be spoken to. This Judgment has been delayed and I wish to have it issued before the Christmas break. Counsel for the Plaintiff can contact me in the New Year and, if requested to do so, I will issue Supplemental Reasons for Judgment assessing damages had the Plaintiff been successful in this action. DIXON J. |
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