Merv's Catering Restaurant & Bakery Ltd. v. Boileau

Between
Merv's Catering Restaurant & Bakery Ltd., a body corporate,
doing business under the name and style of "Merv's Bakery",
Plaintiff, and
Al Boileau and Boileau Holdings Ltd., a body corporate,
Defendants, and
Mervin Burchill, Party added by Counterclaim

[1993] N.B.J. No. 344
Action No. F/C/575/89

New Brunswick Court of Queen's Bench
Trial Division - Judicial District of Fredericton
Dickson J.

Judgment: August 2, 1993. Filed: August 5, 1993.
(15 pp.)        John Townsend, for the plaintiff and for the party added by counterclaim.
       Michael Dean, for the defendants.

1      DICKSON J.:—  In this action the plaintiff company claims against the individual defendant and the defendant company the sum of approximately $26,000 which it claims to be owing to it by the defendants as franchise fees, so-called, under a business agreement made between the parties, together with general damages for the alleged breach of the agreement by the defendants.  The plaintiff also seeks an injunction prohibiting the defendants from using the trade-name "Merv's Bakery" and from engaging in any business similar to that of the plaintiff, i.e., the manufacture and sale of doughnuts and related bakery products, and further prohibiting the defendants from divulging to anyone any information or knowledge concerning trade methods of the plaintiff.

2      The defendants deny, in effect, that any firm and binding agreement was entered into between the parties which could have the effect of creating any indebtedness on the part of the defendant to the plaintiff in the nature of that alleged in the statement of claim.  They deny entitlement of the plaintiff to the relief sought, including the injunctive relief.  The defendants had initially counterclaimed against the plaintiff and against one Mervin Burchill, its owner and proprietor, for repayment of approximately $18,000 paid by the defendants to either the plaintiff or Mr. Burchill as or on account of franchise fees, and for payment of approximately $1,350 allegedly due for goods sold and delivered to them by the plaintiff.  At trial the counterclaim was abandoned.

3      The pertinent circumstances as disclosed by the evidence were as hereunder set out, and I so find.

4      In 1973 Mr. Burchill, aided by his wife, commenced operation of a small business at Fredericton which involved the sale of pies and other bakery products, etc., from a mobile canteen.  In 1975 the business was incorporated under the name of the plaintiff in this action.  Later it operated from a converted residential premises located adjacent to a shopping mall in the Devon area.  The property was owned until about mid-1988 by Mr. Burchill.  The business was expanded in due course to cover a number of sales routes throughout southern and central New Brunswick.  Truck-drivers were engaged as well as immigrant labour and others involved in the bakery end of the operation.

5      Sales expanded significantly and the business appears to have prospered, at least as long as its proprietor took an active personal interest in it and had a direct involvement in dealing with customers.

6      But by late 1984 Mr. Burchill had become involved also in other business undertakings including the sale of real estate and the operation of other food and beverage services. Most notably he, along with others, had acquired a tavern business known as Riverside Arms and his chief preoccupation lay in managing that operation.

7      In any event the bakery business was neglected and was rapidly headed for disaster.  After discussion with his accountants the Burchills appreciated that the business could be saved only by Mr. Burchill returning and devoting his full attention to it or by the hiring of a competent manager to oversee the business.  Mr. Burchill was not disposed to follow the former alternative and it was felt that the latter would be too costly.  So, apparently on the suggestion of one Rouselle - a public accountant who did the plaintiff company's accounting work - a plan was instead devised whereby the business would be converted into some sort of franchise operation, with others induced to operate various branch franchises including the business at Fredericton as a sort of home branch.  The franchise-holders would use the plaintiff's recipes and product names, would benefit from its expertise, and would enjoy certain common advertising, all in return for payment to the plaintiff of a share of profits computed as a percentage of gross sales.

8      About this time, or in early 1985, the defendant Boileau had commenced employment with Merrittville Investments, the company which operated Riverside Arms.  He had earlier been a salesman with another company selling food products.  His job was to run the food-service end of the tavern business.  After Boileau had been with Merrittville for nine or ten months, i.e. at about the end of 1985, Burchill looked upon him as a "candidate to head up the bakery" and suggested that he "give it a try" for a few months to see if he might be interested in taking it over on a franchise basis.

9      At the start of 1986 Boileau took over the bakery on what Burchill says was a trial basis for three to six months.  The bakery had grossed about $340,000 in 1985 - even though the business had lost $17,000 in the same year - and Boileau soon became convinced that he would like to take it on, as of February 1, 1986, which he did.

10      The whole business was taken over as a turn-key operation.  The seven or eight employees stayed on; Mr. Burchill's wife continued on a part-time basis to do the books; two leased vehicles, the customer lists, recipes and baking equipment were turned over to the new owner.  Boileau had no money, as Burchill appreciated, but it was agreed that he would pay $15,000 for the equipment, which would be "paid by contras" (presumably meaning deduction from monies owing for bakery products supplied to Burchill's other undertakings).  He would also pay a 6% "franchise fee" (presumably based on gross sales), and a franchise agreement would shortly be settled upon.  The evidence is not clear but it would seem that Boileau was also to pay the plaintiff rent for the building.

11      The accountant shortly later located in a trade publication or some other type of magazine a sample franchise agreement which he and Mr. Burchill felt might be adapted to the circumstances.  Unfortunately the precedent was one which might be suited to enfranchising licensees of a large international, fast food outlet like MacDonald's or Tim Horton's, but which, without considerable further revision than it received, was ill-suited to give effect to the arrangement which the parties seem to have envisaged.

12      In any event an agreement based on the precedent appears, as the parties seem to be agreed, to have been entered into and signed about April 1986.  While two copies were apparently signed, one for each party, neither party is now able to produce a signed copy.  But there is in evidence (Exhibit #3) what purports to be a copy, unsigned, of the agreement as executed.

13      Exhibit #3 is undated.  The "licensee" shown is Mr. Boileau.  The "licensor" shown is "Merv's Bakery, the sole owner of the right to employ the name "Merv's Catering and Bakery Ltd.", a New Brunswick corporation, the sole owner of the right to employ the name "Merv's Bakery"".  The name shown as that of the licensor reflects not only the fact that no legal advice was taken by the parties, but also that they may not have had any clear idea of what they were doing.

14      The first operative section of the agreement gave to the licensee the exclusive right to engage in "the business of producing and selling at wholesale and retail doughnuts and related products under the name "Merv's Bakery" at 612 Union St., Fredericton, New Brunswick, and not elsewhere". Notwithstanding that provision, paragraph 20 provided that the licensee "will restrict all his trade operations within the boundaries as outlines (sic) on the attached New Brunswick map marked Schedule A".  No map is included in Exhibit #3 although it appears that an unmarked map of New Brunswick may have been attached to one or other of the signed copies, indicating that the sales territory was to be the whole of the Province.

15      The second operative section of the agreement provided:

Both parties are agreed that no lease agreement was in fact at any time ever entered into.  Mr. Boileau, as it appears, took over the rental of two leased trucks used in the business and acquired the bakery equipment by outright purchase for $15,000 as indicated earlier; he was also to pay rental for the premises in some amount which is not disclosed in the evidence. Here it may be said that in the summer of 1988 Mr. Burchill sold the premises in which the bakery was located to the owner of the adjoining shopping centre after the latter had threatened to erect a high wooden fence between the two properties.  The proposed sale was not discussed with Mr. Boileau although he apparently did not protest when he learned of the sale.  His understanding seems to have been that he would henceforth pay rent to the new owner although he seems not to have been provided with any secure tenure.

16      The agreement also provided that the licensee was to purchase all materials or supplies for his products from the licensor or from such other sources as might be approved by the licensor.  The parties appear, by the tenor of their discussions and the practice followed over the next couple of years, never to have contemplated that such a provision would have any binding effect, and similarly with other sections providing for standardized signs, advertising, accounting and reporting, maintenance of insurance, employment of personnel etc.

17      The agreement further provided that the licensee pay to the licensor "a royalty equal to 6% of all monthly gross sales", of which the licensor would expend 15% for advertising. The parties acknowledge that the 6% figure was agreed on as an arbitrary start-up figure and one which could be revised in the light of experience.  The only advertising done by the plaintiff company up to that time had been by way of sponsorship of a local softball team and the like.  By June 1986 it had been verbally agreed that the royalty rate would be 5% instead of 6%, with the licensee to look after his own advertising.

18      At least through 1986 the business, under Boileau's guidance appears to have prospered reasonably.  In July of that year he incorporated the defendant company which took over the operation of the business.  Mr. Burchill continued to assist and counsel Boileau and to attend almost daily at the premises although his interest was later - in mid or late 1987 - to wane.  Some effort was also made by Burchill, with considerable assistance from Boileau, to establish a second "franchise" outlet at Halifax but this effort was later to fail.

19      In 1986 the business showed a profit of some $8,000 - $10,000, although according to the accountant it lost $15,000 in 1987 and a loss of over $20,000 in 1988, with the net worth of the company "not very much" at the end of that year.  During the early part of this period the defendants paid to the plaintiff the $15,000 owing for the purchase of the equipment and over some period or other a total of $21,000 or perhaps more as royalty payments.  No evidence indicates with any precision what franchise fees were in fact paid nor does any evidence indicate with precision the amount of gross sales in any of the years from 1986 on.  Mr. Burchill did indicate that "in the first year", presumably meaning 1986, he had received "about $18,000" in fees.  Mr. Rousseau, Mr. Burchill's accountant, stated that gross sales had been about $30,000 a month "before Mr. Boileau came on the scene" and went to $35,000 and $38,000 and even close to $40,000 after Boileau took over".

20      The effort to develop a franchise at Halifax commenced in the spring of 1987 and Boileau spent two or three days a week there over a 6-month period assisting Burchill to get it established.  He provided bakery products for the Halifax business as he was also doing for the Riverview Arms business and another business at Mactaquac Park also conducted by Mr. Burchill.  Boileau testified that at one time he owed Burchill about $25,000 in franchise fees and was owed by him about an equal amount for goods supplied by the bakery but that is about as precise as the evidence in that regard ever got.

21      About this time, mid 1987, the bakery business went into a rapid decline with the result that by the end of that year it faced insolvency.  One Mrs. Mowatt in October had joined the bakery as production manager and the next spring was to invest a sizable sum of money in the operation.  Sometime in 1987 the payment of franchise fees seems to have fallen into abeyance.  Mr. Burchill's participation and interest in the defendant had substantially ceased in the latter part of the year as he was preoccupied with the difficulties encountered at Halifax and with the Riverview Arms.  Subsequently his interest was to be further diverted by the Mactaquac business.

22      Through 1988 the bakery continued to provide Mr. Burchill's businesses, and presumably to be paid for, their bakery requirements.  In mid-year the premises in which the bakery was located were sold, as related above.  The principals even then continued to entertain the hope that a franchise operation as originally contemplated could be developed in due course.  A significant prerequisite of such a development, at least in their minds, was the production of a management manual to govern the operation.

23      In November 1988 they met and came to certain arrangements.  Mr. Burchill had employed as manager of his Mactaquac business one Wynn Griffiths.  He wished to avoid the cost of retaining his services over the slack winter months and, as he had also made little progress in producing the manual, he proposed to Mr. Boileau that he take Griffiths on at the bakery over the winter months, during which time his expertise in the food industry could also be used in the preparation of the manual.  This Boileau undertook to do and Griffiths joined him at the bakery but remained for what reason the evidence does not disclose, only for a couple of weeks in December.

24      Other matters were also agreed between the parties at the November meeting.  Their nature is disclosed by a letter sent by Burchill to Boileau (Exhibit #5) on December 29.  It read as follows:

Apparently at that time Burchill had paid Griffiths $2,100 and the sum of $1,000 rent was also owing him by the defendant. Shortly later the $2,000 requested immediately was paid.

25      Other than a figure included in an invoice (Exhibit #4) sent in December 1989 by the plaintiff to the defendant, and purporting to have appeared in a 1988 year-end financial statement of the defendant, there is no indication in the evidence of what monies may have been owing or considered owing as franchise fees at that time.  The statement referred to in the invoice is not in evidence.  In any event, and notwithstanding Mr. Burchill's reluctance to acknowledge such in cross-examination, it would seem that the clear intention of the parties was that if the bakery engaged Griffiths, which it apparently was prepared to do and in fact did, then whatever liability may have existed for franchise fees, whether in arrears or current, would be forgiven.  In any event no demand for payment of any such fees appears ever to have been made before September 1989, when difficulties had somewhat suddenly developed between the parties.

26      Through 1989 until the folding-up of Riverview Arms in early June the defendant continued to supply bakery products to Merritville Investments, and through that summer to Mr. Burchill for his Mactaquac business.  By mid-August outstanding accounts then amounted to about $1,300 and further monies owing by Halifax brought the amount to over $3,000.  No payment on account had been made for at least four months. Boileau wrote to Burchill as follows about August 17:

27      This letter of course caused a rift between the parties; solicitors were brought into the act; and the present action resulted a few weeks later.  But in the interim, in early September, the defendant, apparently in response to a demand by the plaintiff that use of the then bakery name be discontinued, had registered and commenced use of a new name, Baldy's Bakery, by which the business was thenceforth known.

28      On Septembeer 12, presumably in contemplation of the pending law-suit, the plaintiff invoiced the defendant for franchise fees as follows:

29      Just why the $2,000 credit would have been given on account of franchise fees is not clear.  That sum was quite clearly demanded and paid on account of one month's rent for the bakery premises and salary paid by the plaintiff to Mr. Griffiths.  As indicated earlier, the December 31, 1988 statement is not in evidence nor is there any other evidence to indicate how the figure $23,451.67 amount was arrived at.  Nor is there evidence to support the gross sales figures for January, February and March 1989 shown in the invoice.  As to the estimated fees for April to August, 1989, Mr. Burchill suggested in his evidence at trial, even if only vaguely, that at some point Mr. Boileau and he had agreed orally that the written 1986 agreement should be amended to provide that where sales figures were not provided the monthly fees should be deemed to be $1,500.

30      The plaintiff's statement of claim claims as fees only $26,169.07, i.e. the items shown in the invoice as fees down to and including March 1989, after allowing the same $2,000 credit.  The statement of claim alleges that by letter dated September 21, 1989 the plaintiff had given notice of termination of the agreement to the defendant.  That allegation although denied in the statement of defence was not proven at trial, but perhaps that is not too material to this action.

31      I must conclude, on the basis of the evidence, that the plaintiff's claim cannot succeed, and for a variety of reasons.

32      Firstly, assuming that franchise fees were and continued to be payable in respect of gross sales of the defendants, then it was incumbent on the plaintiff to establish precisely what those gross sales were, so that the amount could be computed, and also what credit should be given for what exact payments had been made.  Alternatively it might have established, in some unequivocal fashion, that at some point a stated account had been agreed upon by the parties.  It has done neither.

33      Secondly, and again assuming liability for franchise fees, it is clear that responsibility for payment of any balance then owing for fees was forgiven by agreement of the parties made in November 1988, as evidenced by the letter of December 29, 1988 from Mr. Burchill to Mr. Boileau.  That forgiveness was predicated on the temporary employment of Mr. Griffiths by the defendant company for a period of several months.  He was so employed but apparently left after a couple of weeks.  No evidence suggests that that was the fault of the defendants or that the defendant company was unprepared to employ him for the whole period as undertaken.  The evidence in fact is silent as to what happened subsequently to Mr. Griffiths.  The evidence does not suggest that any subsequent demand for franchise fees was ever made until the rift had developed between the parties in August 1988 and the foundation was being laid for the law-suit.

34      Thirdly, the whole agreement as to a franchise operation must be considered to have been frustrated and aborted at an early stage.  None of the ingredients for such an operation were ever in fact present, except perhaps for the provision of certain recipes for doughnuts and the like.  No effective advertising was ever carried out.  No production materials were ever provided by the franchisor nor was any plan ever provided for the coordination of franchises.  No chain of franchises was ever established.

35      Although no original copy is in evidence, I am satisfied that the written agreement identical to Exhibit #3 was in fact entered into by the parties about April 1986.  But at best it seems only to have been designed to provide a temporary basis for getting the franchise operation concept under way, and one which would be refined, amended and adapted to the circumstances as that concept developed.  It is clear that Mr. Boileau, before signing it, examined it only superficially and then over the course of only a few minutes. No legal advice was taken in such a complex matter, by either party.  Mr. Boileau says that his main concern was to obtain a written agreement which his bank had been requesting (the agreement was subsequently rejected, quite understandably, by the bank as a basis for financing).

36      The franchise operation concept never really got off the ground.  But that is not surprising, because the whole transaction was in fact basically the sale of a bakery business which was going down hill, the owner no longer having the time or the inclination to provide the hands-on management which that particular business, with its widespread sales routes required.  He was able to find a purchaser in the person of Mr.Boileau, who paid $15,000 for the bakery equipment, took certain vehicle-lease obligations off his hands, and paid a further substantial sum represented by so-called franchise fees.  In 1987 the franchise concept had not developed and the bakery was losing money.  The payment of franchise fees appears to have been discontinued at some time in 1987.  In the whole context of the circumstances, including the agreement of November 1988, it is difficult to conclude other than that the parties recognized that payment of further franchise fees should be considered as abandoned, at least until such time as a proper multi-franchise operation could be established.  It is also difficult to conclude otherwise, at least on the evidence available, than that the amounts paid by the defendants to the plaintiff probably represented fair value for the sale of the bakery business.

37      Further, as to the claim for an injunction restricting the defendants from carrying on any similar business for a period of five years, in my view provisions in that regard were included in the tentative agreement only on the assumption that a proper multi-franchise operation would be established, which was not done.  Such an injunction would in any event represent equitable relief, and it could in no way be considered equitable to grant the relief sought in all the circumstances.

38      As to the injunction sought in respect of use of the name "Merv's Bakery", the evidence indicate that that name was readily abandoned by the defendants and another name substituted on the request of the plaintiff before the action was commenced.

39      As to the claim for an injunction prohibiting disclosure of business information no evidence suggested that any information provided by the defendants would warrant the granting of such equitable relief.

40      In the result, the plaintiff's action is dismissed.  The counter-claim was discontinued only at trial. Having regard to the fact that the set of costs which would normally be allowed each of the parties would essentially offset each other, and more particularly having regard to all the circumstances, I will make no order as to costs.

DICKSON J.