More Than Meats (Forest City) Inc. v. 1058335 Ontario Inc.

Between
More Than Meats (Forest City) Inc., John DeBlock and Diane
DeBlock, plaintiffs, and
1058335 Ontario Inc. and David Frey, defendants

[1999] O.J. No. 664
Court File No. 20263/95

Ontario Court of Justice (General Division)
London, Ontario
Leitch J.

Heard: May 12-14, 1998.
Judgment: February 26, 1999.
(25 pp.)

Counsel:

1      LEITCH J.:— The plaintiffs claim against the defendant 1058335 Ontario Inc. for damages for breach of a franchise agreement, against the defendant David Frey for damages for negligent misrepresentation and/or breach of fiduciary duty, and against both defendants an accounting of all monies received by either of the defendants as rebates or "kickbacks" from the plaintiffs' suppliers and punitive and/or exemplary damages.

2      John and Diane DeBlock met David Frey in a bar while on vacation in Aruba in late November 1993.  At the time Diane DeBlock worked at a chartered bank earning $22,000 to $24,000 a year and Mr. DeBlock was selling residential real estate, an occupation he pursued since July 1989.  Prior to that time Mr. DeBlock had worked as a loans officer for a chartered bank and as a real estate appraiser.  Both of the DeBlocks have a grade 12 education.

3      Mr. Frey informed the DeBlocks that he was in the process of starting up a franchise to compete with M & M Meats.  He had operated a "Meat Box" franchise in Woodstock, Ontario for a year and then in early 1993 decided to operate independently and changed his store name to "More Than Meats." The DeBlocks found this very interesting because Mrs. DeBlock was not particularly satisfied with her career in banking and they found it attractive to have an opportunity to enter a franchise early in its inception.

4      The DeBlocks understood that Mr. Frey charged an initial fee of $25,000 and a further fee of $25,000, but did not charge any ongoing royalties, premiums, or mark-ups on products.  As a result, his More Than Meats franchise was less expensive to operate than an M & M Meats franchise.  Mrs. DeBlock was particularly interested in looking into this franchise as an opportunity for herself.  She said she knew nothing about running a frozen food business but Mr. Frey indicated that he provided training for people.  Mr. Frey acknowledged that neither of the DeBlocks had any experience in the boxed meat business and that Diane DeBlock had no retail experience.

5      Mr. and Mrs. DeBlock said they talked things over on their return from their vacation and just before Christmas they contacted Mr. Frey and asked to get together.  They met Mr. and Mrs. Frey in their home at a social gathering in December and had the opportunity to speak further to Mr. Frey They sampled some products at this social gathering and obtained from Mr. Frey a document which was described on its face as a franchising portfolio.  (Tab 1, Ex.1)

6      Mrs. DeBlock said that Mr. Frey again indicated that there was money to be made in this business and that they would have a $50,000 profit in their first year.

7      The franchising portfolio included a document entitled a "mission statement" which included the following statements:

8      The portfolio also included a document entitled "Our Commitment" which listed the following:

               - two weeks of training at the head office location;

               - two weeks of training at the new location;

       Train you in inventory management and control

       Develop your advertising portfolio

               - local newspapers and shopping news

               - our monthly sale flyer

       Annual business reviews

9      Mr. DeBlock testified that of particular importance to he and his wife was the fact that the franchisor would conduct a market survey because he was aware that location is critical to the success of a business. Additionally, he and his wife considered training very important because, as he said, they knew absolutely nothing about the frozen food business.

10      The portfolio included a third document entitled "Start-up Costs" which indicated that with the start-up fee, the cost of the freezer, signage and other items outlined, $80,000 would be required to get a store up and running.  The portfolio also included what were referred to as "example financial statements" which outlined annual expenses, projected sales, cost of sales, gross profit and net profit for three different examples.  The DeBlocks were advised by Mr. Frey that the average store was within example #2 which showed a net profit of $94,918.

11      The portfolio also contained a document entitled "Break Even."  In example #2, the break even level of sales was $144,300 per year or $12,025 a month or $2,775 a week based on a 45% mark-up and a 31% gross profit margin.

12      Mr. DeBlock testified that Mr. Frey informed them that the examples came from stores that he operated.  The DeBlocks said that Mr. Frey spoke of Woodstock as being his flagship location and that he had sold a franchise for a store which opened in Stratford in July 1993, that a St. Thomas store joined his franchise in the fall of 1993, and that franchises in Tillsonburg and Ingersoll were being considered.

13      Mr. DeBlock asked Mr. Frey to show him a copy of the financial statement for the stores in operation which were the basis for the example financial information contained in the portfolio.  Mr. Frey showed Mr. DeBlock a copy of the financial statement for the Woodstock store.  Mr. DeBlock was given an opportunity to look at the statement but then had to return it to Mr. Frey.

14      The DeBlocks testified that this financial information looked reasonable based upon what Mr. Frey was saying.

15      The DeBlocks said that what they found particularly attractive was that Mr. Frey, for a $50,000 franchise fee, offered training and the opportunity to participate in a buying group to ensure that they bought product at the lowest possible price with no mark-ups or royalties.  Mr. Frey informed the DeBlocks that these attributes distinguished his franchise from an M & M Meat Store.  The DeBlocks had no knowledge with respect to operations of an M & M Meat Store and relied solely on Mr. Frey for this information.

16      Mr. and Mrs. DeBlock met with Mr. and Mrs. Frey in late January or early February 1994 and reviewed the portfolio documentation.

17      At the conclusion of that meeting they indicated very strongly that they were interested in Mr. Frey's concept. Mrs. DeBlock remembered Mrs. Frey being very excited that night because they had just sold the Woodstock store for $250,000.  According to the DeBlocks, Mr. Frey indicated that if they didn't make $50,000 in the first year of operation he would give them their money back.  Mr. DeBlock testified that Mr. Frey was very happy that they were interested and suggested that they should be open by May 24th from a marketing perspective.

18      The DeBlocks left the meeting having informed Mr. Frey that they were very interested and wanted to be open by the May 24th weekend.  The DeBlocks made it clear to Mr. Frey that they had $25,000 to invest in a store and Mr. Frey indicated that he could arrange financing for them for the balance of the start-up costs.  They incorporated a company More Than Meats ( Forest City) Inc. on February 18, 1994.

The Location Issue

19      Within a week or two after their meeting Mr. DeBlock arranged to meet with Mr. Frey to look at various locations.  Mr. DeBlock testified that he was familiar with London and therefore showed Mr. Frey various mall locations that met Mr. Frey's marketing profile.  The DeBlocks testified that Mr. Frey indicated that the customer profile group were females aged 20 to 65 who had a low income and who lived in high-density apartment housing.  The DeBlocks testified that Mr. Frey informed them that their store would attract a lower income family and that in his business he cashed all government cheques to attract this lower end income group. This customer profile was the reason, according to the DeBlocks, that Mr. Frey rejected a store location in the north end of the City.  Specifically, Mr. DeBlock indicated that the Masonville area did not meet the customer profile that Mr. Frey described.  Ultimately, they looked at a location in Bellwood Plaza and Mr. DeBlock testified that Mr. Frey indicated that the plaza was in a high density area which met his customer profile.  Mr. DeBlock testified that he asked Mr. Frey for the market survey that he had referred to but Mr. Frey indicated that he could not release the survey.  He confirmed that he had seen a survey that had been secured by other people interested in London but it simply wasn't possible for him to give the survey to Mr. DeBlock.

20      There is no doubt that while Mr. DeBlock, as a realtor, was familiar with commercial locations in London, the DeBlocks relied on Mr. Frey's opinion with respect to the location for their store.  They considered him an expert who had experience operating their prospective business in other locations.  There is no doubt in my mind that Mr. Frey reiterated to the DeBlocks that he knew what he was talking about and that his knowledge had enabled him to transform his Woodstock location into a successful store.  The DeBlocks' reliance on Mr. Frey with respect to the location of their store is consistent with the commitment contained in the franchising portfolio.

21      Mr. Frey, in his evidence, minimized his role in selecting the location for the DeBlock store.  He testified that he suggested to Mr. DeBlock that he get expertise from people in his industry and specifically mentioned certain people who worked in Mr. DeBlock's office.  He also testified that Mr. DeBlock imposed a requirement that the store be located in close proximity to his office.  However, Mr. Frey also testified, to justify his franchise fee, that he gave assistance to the DeBlocks in selecting their location. Although the written commitment contained in the portfolio referred to a market survey, Mr. Frey acknowledged that he did not commission a market survey for London and relied on his own knowledge.  He went on to say, however, that by no means did he hold himself out as an expert with respect to locations for a boxed meat business and said that he had no real estate experience.  He denied that the DeBlocks would have been guided by what he said about locations and testified that he deferred any inquiries from the DeBlocks to people he referred to as commercial real estate experts within Mr. DeBlock's office.  On his cross-examination Mr. Frey specifically denied the suggestion that he would have indicated who he considered a target customer.  However, once referred to his evidence on his examination for discovery, he acknowledged that he advised Mr. DeBlock that he could assist him in the location of a store and agreed that he did not guide Mr. DeBlock away from Bellwood Plaza, based on his knowledge of which areas and locations seemed to work in the boxed meat business.

22      A further issue which arose from Mr. Frey's evidence was whether he was aware that a frozen food store had closed its business in Bellwood Plaza before the DeBlocks signed the lease.  Mrs. DeBlock testified that Mr. Frey had indicated to them that there had been a frozen food store previously in the Bellwood Plaza and therefore there would be a market for her store.  However, Mr. Frey testified that he did not discover that the DeBlocks were renting the exact location where the boxed meat store had previously operated until three months after the DeBlocks opened their store. That evidence was of course inconsistent with Mrs. DeBlock's evidence, and also inconsistent with his evidence at his examination for discovery where he indicated that he did not make this discovery until six months after the DeBlocks opened their business.  However, later on in his examination for discovery in response to a further question as to his opinion of the Bellwood Plaza location prior to the DeBlock's leasing in that location, he testified that the location was good in one sense because a boxed meat store had operated in the Bellwood Plaza quite successfully for eight, nine or ten years according to the information he had obtained from suppliers to the store.  Clearly Mr. Frey's evidence as to when he became aware that the DeBlocks' store location had previously been occupied by a boxed meat business varied during his examination for discovery and at trial.  He explained these inconsistencies by indicating that he was either wrong during the latter part of his examination for discovery or confused by the question put to him.  He reiterated his position that he did not know that the boxed meat store had operated from the DeBlocks' location until after the DeBlocks opened for business in Bellwood Plaza.  In my view, Mr. Frey's inconsistency on this issue is a significant factor in assessing his credibility.  It is difficult to accept his explanation for the variation in his evidence.

23      I find Mrs. DeBlock's evidence the most credible.  I find therefore that Mr. Frey was aware that a frozen food store had previously operated in Bellwood Plaza and that he represented to the DeBlocks that that was a positive factor to consider with respect to their proposed location as it indicated a market for their business.

24      As a result of their discussions with Mr. Frey, the DeBlocks drew up a leasing agreement and ultimately a lease was entered into between their corporation and the landlord at Bellwood Plaza.  The lease was conditional until February 28, 1994 on the DeBlocks' corporation obtaining written approval from its franchisor.  Mr. DeBlock testified that he inserted that condition because he wanted to make sure that he had the proper location and, as he put it, his franchiser's blessing.  Mr. DeBlock testified that he informed Mr. Frey that he secured the Bellwood Plaza location subject to Mr. Frey's approval.  Mr. Frey acknowledged that he was aware of the condition Mr. DeBlock had placed in the lease agreement, but Mr. Frey indicated that that condition was inserted so that he could be used as a scapegoat if something didn't work out and if, for example, Mr. DeBlock could not obtain his financing, or if the DeBlocks changed their mind. There is simply no basis on which to accept Mr. Frey's assertion in this regard.  The DeBlocks had no real concerns with respect to their ability to obtain financing and in fact were able to obtain their financing very quickly.  Mr. Frey's contention that this clause was inserted for the reason he asserted is incredible and completely inconsistent with the written commitment in the franchise portfolio to assist potential franchisors in selecting their location based on his market survey.  Mr. Frey's evidence on this issue reflects his desire to distance himself from any responsibility for the DeBlocks' business failure.  Mr. Frey's evidence was also inconsistent with what his corporation, 1058335 Ontario Inc., as franchisor, undertook as its responsibility according to Schedule "A" of the franchise agreement, namely, "find the location for the store".

25      I have no doubt that Mr. Frey was instrumental in the DeBlocks' selection of the Bellwood Plaza location and that at the time the lease was entered into, as he ultimately acknowledged, he thought it was a good location.

Banking Arrangements

26      Mr. Frey set up an appointment for Mr. DeBlock with his bank, the Bank of Montreal.  To prepare for that meeting the DeBlocks completed a New Ventures loan application.  (Tab 4, Ex. 1).  The business plan described in that application was created with Mr. Frey.  Mr. DeBlock testified that he wrote the plan but Mr. Frey gave him the information to insert into the form.  Specifically, as Mr. Frey acknowledged, the information on the application with respect to the objectives, competition, suppliers, and customers was dictated by Mr. Frey and inserted into the application by Mr. DeBlock.

27      There is no issue that the details for the business plan and the start-up costs were all provided by Mr. Frey and were estimated at $110,000.  Mr. DeBlock indicated in the business plan that this $110,000 would be satisfied by personal cash of $40,000, a New Venture loan from the bank of $15,000 and a small business loan from the bank of $55,000. Mr. DeBlock said the $40,000 figure for the personal cash injection caused him some concern because they only had $25,000 to contribute.  However, Mr. Frey indicated to him that the costs for the freezer and cooler which were part of the $110,000 were inflated by a sufficient amount to provide the DeBlocks with an extra $15,000 to enable them to advance $40,000.

28      Mr. DeBlock also prepared a cashflow forecast for the first twelve months of operation as part of the loan application and he said that Mr. Frey gave him the information with respect to prospective monthly sales.  Mr. DeBlock testified that Mr. Frey told him that they should have sales of $750,000 the first year based on the Woodstock store, but Mr. DeBlock wanted to be more conservative.  Mr. Frey then suggested that they adjust their estimated annual sales numbers down to $500,000.  Mr. DeBlock said that Mr. Frey reiterated that those numbers were too low.

29      Mr. DeBlock said that he queried Mr. Frey as to whether the first month's sales should be lower than the $40,000 he projected, but Mr. Frey indicated that based on past experience sales would build after the grand opening and keep on going.  The DeBlocks projected no income to themselves and $1,000 per month to their daughter, who was going to work in the store.  Based on these forecasts, the projected profit for the store's first year of operation was $94,980.  Mr. DeBlock had no knowledge or information independent from Mr. Frey with respect to sales.  The DeBlocks testified that they relied on Mr. Frey and took his word that the forecasts were correct.  As Mr. DeBlock said, Mr. Frey's expertise was the reason they were willing to pay a $50,000 franchise fee.  Mr. Frey indicated that he had experience in previous stores and, in fact, told them that the information he was giving Mr. DeBlock was based on his Woodstock store and that the Stratford and Ingersoll stores were doing the same kind of numbers.

30      On his cross-examination Mr. Frey indicated what financial information he had when he helped the DeBlocks with their New Ventures Loan application.  He testified that he based the numbers on the information he had gathered with respect to the "Meat Box" stores as well as his own store in Woodstock.  Mr. Frey testified that he did show Mr. DeBlock the financial statement for the Woodstock store but did not let him have a copy.  He went on to say that he thought he also showed him the financial statements for a Port Colborne "Meat Box" location but once referred to his evidence from his examination for discovery, he agreed that the only financial statement that he showed Mr. DeBlock was for his Woodstock store's operations for the period ending September 30th, 1993. Mr. Frey testified that he considered the cash flow forecasts in the DeBlocks' New Ventures Loan application to be very reasonable based on his experience and he indicated that if Mr. DeBlock made the same effort as he did in Woodstock, they shouldn't have any problem producing $500,000 in sales the first year.

31      Mr. Alyea's experience in making application for a bank loan was similar to the DeBlocks'.  He testified that Mr. Frey prepared most of the application and provided all the information for the sales and profit projections.

32      Mr. Frey was asked on his cross-examination if he ever told Mr. DeBlock that the numbers in the forecast were too high.  Mr. Frey responded very evasively and never did answer the question directly.  Rather, he said that he wasn't certain what kind of involvement Mr. DeBlock would have in the franchise although he acknowledged it was never his impression that Mr. DeBlock would work full-time in the store.  He then testified that Mr. DeBlock convinced him that he was comfortable with the numbers.  Finally, Mr. Frey acknowledged that he never indicated to the DeBlocks that the numbers were too high, but rather he indicated to the DeBlocks that they were realistic and he was comfortable with the numbers in the loan application and with the effort the DeBlocks told him they would make.

33      I find Mr. Frey's suggestion that Mr. DeBlock wanted to use higher numbers incredible, particularly considering that Mr. Frey also acknowledged that all the financial information with respect to the operations of the business came from him.  Mr. Frey was very proud of his Woodstock operation and I find that he provided all the information which formed part of the DeBlocks' loan application based, as he said, on the actual numbers he had from the Woodstock store, and that he indicated to Mr. DeBlock that he was comfortable with forecasting $500,000 in annual sales for their first year in operation.

34      Mr. Frey tried to minimize the extent of his influence on the DeBlocks with respect to their loan application by suggesting that he recommended that the DeBlocks speak with the bank's representative who had been involved with setting up the Tillsonburg store.  This evidence made no sense when Mr. Frey later had to acknowledge that the Tillsonburg store had only opened in February 28, 1994 and therefore the only information the bank representative had was the cash flow projections for that location.

35      Around February 24 or 25, 1994 the Bank of Montreal approved a loan for the DeBlocks.  On March 4, 1994 the DeBlocks, on behalf of their corporation, signed a promissory note for $15,000 representing the New Ventures Loan.  The DeBlocks personally guaranteed this loan.  The DeBlocks also guaranteed $13,750 of the $55,000 line of credit which was established for their business.  Ultimately, the DeBlocks' corporation borrowed $52,226.10 on this line of credit.

36      After the lease was signed and financing arranged, the DeBlocks signed their franchise agreement on March 15, 1994 at Mr. DeBlock's office.  Mr. DeBlock said he had previously reviewed the agreement with his solicitor and as a result a number of amendments were made to the franchise agreement.  In the first draft of the agreement, the franchisor was not 1058335 Ontario Inc. but was another numbered company.  When the DeBlocks signed the agreement, the other number was crossed out and 1058335 had been inserted instead.

37      On April 19th the DeBlocks paid their first instalment on their franchise fee ($25,000) and their product was delivered.  Mr. Frey attended on their business premises to organize the freezer.

38      Their grand opening was April 24, 1994.  The sales on that day were less than expected and they took in only about $4,000.  Their supplies arrived late.  Mrs. DeBlock said that she tried to contact Mr. Frey that day but he was hard to reach.  He had led her to believe there would be samples for use on the opening day but they were not forthcoming and instead she used her inventory.  She said that Mr. Frey was also to bring in a banner, which he did not do. Furthermore, Mr. Frey arrived late.  However, Mr. Frey told them it was the best opening except for his own store in Woodstock, Ontario.

39      On April 24, 1994 the day after the grand opening, Mr. Frey was in the store from 11:00 until 4:00 but was not there any other time.  Mrs. DeBlock said that prior to the store opening she had been led to believe by Mr. Frey that she grasped the necessary concepts and was a quick learner but once the store opened, she realized she had a lot to learn about food products.  She was worried about her product knowledge, did not know the phraseology, and wasn't confident that she could answer her customers' questions.  However, she was told by Mr. Frey that there would be further training.

40      Mr. DeBlock said that the second day of operations was quieter than their grand opening and business got quieter from then on.  Both of the DeBlocks said they were immediately concerned with their level of sales.  Mrs. DeBlock said she communicated her concerns to Mr. Frey when she could reach him and she also spoke to his wife and to Shawn, who operated the Woodstock store.  Mrs. DeBlock said that at first Mr. Frey indicated, contrary to what he had said previously, that it would take time.  Mr. DeBlock said he expressed further concern to Mr. Frey in June or July and Mr. Frey's response was to suggest that the business needed time and he assured Mr. DeBlock that it would turn around.  To increase sales the DeBlocks did a direct flyer distribution.

41      Mr. DeBlock said that in August 1994 he attended a hostile meeting among Mr. Frey and other store owners.  By that time in addition to the sale of the Woodstock store, the sale of the franchises in Stratford and St. Thomas and to the DeBlocks, Mr. Frey had sold franchises for stores which opened in Ingersoll and Tillsonburg in February 1994, Mr. Alyea's franchise in May 1994 and franchises in Stoney Creek and North Bay which opened in July 1994.  It was apparent according to Mr. DeBlock that none of the stores were doing as well as projected.

42      Mrs. DeBlock said that by September or October 1994 Mr. Frey was just shaking his head and saying he didn't understand.  By early fall both of the DeBlocks said they were desperate to move the store and they discussed moving to a more affluent neighbourhood.  Mr. DeBlock suggested a move to Masonville but Mr. Frey indicated that it would not be a good idea.

43      Mrs. DeBlock pursued various types of advertising.  She said she had no assistance in her advertising from Mr. Frey, except for a flyer which was distributed around December 19, 1994 advertising all stores. This was despite Mrs. DeBlock's numerous requests for assistance from Mr. Frey.

44      Mrs. DeBlock maintained daily cash sheets and balanced the till each day.  At month end, she forwarded to her accountant her cash sheets and the cash register tape. She kept detailed accounts of their sales and was careful to be accurate with her inventory because her supplies were paid C.O.D.

45      Their sales from April to December 1994 were as follows:

46      Total sales were therefore $93,339.86 versus the $375,000 projected for that period of time.  The monthly sales were not close to the $40,000 per month that had been projected.

47      By December 1994, knowing that they would be entering into a slow time in the new year, the DeBlocks concluded that they could not sustain the business and that it had to be closed.  By that point in time they had lost thousands of dollars.  They closed the store December 31, 1994 after advising the bank that the store couldn't continue.  The inventory and equipment were sold and the proceeds paid to the bank.

48      Mr. Frey testified that the reason for the DeBlocks' business failure was the DeBlocks' lack of effort. Mr. Rick Walker, a sales broker of retail food products, was prepared to express his opinion that the store was poorly managed even though he only delivered product twice to the DeBlock store.  Mr. Thompson, the retail product manager with Meat Factory, thought Diane DeBlock had poor product knowledge.  In my view Mr. Thompson's opinion probably reflects her lack of training as outlined further in these reasons.  Mr. Mancary, the sales manager for a major food supplier, thought Diane DeBlock's product knowledge was reasonable for someone fairly new to the business.  Mr. Alyea, who had been in Diane DeBlock's store and seen her in action observed no problems with her operation.  Ms. Inglis and Ms. Russeau, customers of the DeBlocks' store found the store well-organized, neat and clean.  They thought Diane DeBlock, who was always in the store when they visited, was very helpful.  On the whole, I am satisfied that the DeBlocks fulfilled their obligations under the franchise agreement and made a concerted effort to protect their investment and make the business profitable.

49      The DeBlocks acknowledge that they did not obtain Mr. Frey's written consent to the store closure.  However they testified that he was well aware that the store had to close in December 1994.  The DeBlocks testified that Mr. Frey had been unwilling to assist with a change of location or to provide other assistance, and in their discussions Mr. Frey did not raise the issue of their ongoing obligations under the franchise agreement.

50      Mrs. DeBlock got a job at a deli to provide her with income to assist in making the loan repayments.  The DeBlocks have repaid the loan of $13,750 that they guaranteed, and are still paying the New Venture loan that they are responsible for.  They lost their deposit paid to the landlord.

51      The other franchises Mr. Frey had sold also closed after a relatively short period of operation.  In a period of 28 months, (between July 1993 when he sold his first franchise and November 1995 when the last franchise was sold) Mr. Frey sold 14 franchises.  Within three years, only two stores remained in operation, one being the Woodstock store which Mr. Frey reacquired after the business failed under the previous operator.

Was The Franchise Agreement Breached by 1058335 Ontario Inc.

52      According to the franchise agreement Diane DeBlock was to receive two weeks training at the franchisor's head office in Woodstock and the franchisor would have one of its representatives at her premises during business hours for the first six days of operation.

53      The DeBlocks assert that Mrs. DeBlock did not receive the two weeks of training prior to their store opening as promised in the franchise agreement.  Further, the franchisors' representative was not at their premises for the first six days of operation in accordance with the franchise agreement.  Mr. Alyea had a similar experience to the DeBlocks.  He received the same portfolio as the DeBlocks did and he too said that Mr. Frey told him that he would be provided with training.  Specifically he was promised two weeks' training at the head office and two weeks in his own business location.  Mr. Alyea said he got only two days' training and maybe not even full days in the Ingersoll store, and only several hours in his own store.  Mr. Alyea said that Mr. Frey was present at his grand opening for three hours and that constituted the training Mr. Alyea received in the store. As a result, Mr. Alyea said he had little training in product knowledge and his readiness for customers was questionable.

54      In his evidence at trial Mr. Frey testified that Diane DeBlock did not receive two full weeks of training but rather she received training at various periods of time, over 13 to 14 days, equivalent to three full days of training. This was completely inconsistent with his evidence on his examination for discovery where he testified that she received 13 to 14 days' training in the Ingersoll store.  In any event, it was clear from his evidence at trial that there was no factual issue with respect to the extent of her training but there was a contentious issue with respect to the reason why the training was so minimal.  Mr. DeBlock testified that originally two weeks of training were scheduled but Mr. Frey cancelled all but three days.  She produced her calendar which indicated that she trained in Mr. Frey's store in Ingersoll on March 23, 25 and 30, 1994.  Mr. Frey disagreed with Diane DeBlock's evidence that he had cancelled the training sessions and testified that Diane DeBlock did not attend for training on a regular basis because of medical problems with her daughter.  Additionally, he testified that he found her "difficult to nail down" and that she would call in the morning or the evening before and cancel the day's training session.  I found this evidence from Mr. Frey completely incredible.  The DeBlocks were making a significant investment in this new business and their evidence that training was essential was completely reasonable.  Given those circumstances, it is incredible that Mrs. DeBlock would not avail herself of the training which she was purchasing by her payment of the franchise fee.  The DeBlocks' evidence was completely consistent with Mr. Alyea's experience.  I therefore find that the franchisor, 1058335 Ontario Inc., failed to perform its obligations under the franchise agreement with respect to initial training before opening and during the first six days of operation.

55      With respect to ongoing training, the DeBlocks acknowledge that in the franchise agreement there was no specific reference to ongoing training beyond that provided for prior to opening and during the first six days of operations.  However, in paragraph 2 of the franchise agreement the franchisor agreed to carry out the tasks and duties listed in Schedule "A".  Schedule "A" includes as its first entry:  "copy of the franchise portfolio".  The DeBlocks therefore assert that schedule "A" incorporates by reference the portfolio which includes as part of the franchisor's commitment the provisions relating to ongoing training as earlier outlined.

56      On the other hand, Mr. Frey asserts that pursuant to the franchise agreement, and specifically Schedule A, his only obligation was to provide a copy of the franchise portfolio to the DeBlocks.  By this assertion Mr. Frey takes the position that he had no obligation to fulfill what was identified as "our commitment" in the franchising portfolio. Mr. Frey's assertion simply cannot be accepted.  He delivered a franchise portfolio to potential franchisees to market the sales of More Than Meat franchises.  His assertion that once the franchise agreement was entered into, his only obligation was to deliver a copy of that franchise portfolio and that the portfolio meant nothing once the franchise agreement was signed is simply beyond belief.  I therefore find that in considering whether 1058335 Ontario Inc. fulfilled its obligations under the franchise agreement, the written commitment outlined in the franchise portfolio is relevant.

57      Considering that commitment, I find that 1058335 Ontario Inc. did not fulfill its written commitment outlined in the franchise portfolio in a number of respects.  It was obvious from Mr. Frey's evidence that he did not commission a market survey for London and therefore the commitment made in the franchising portfolio that the franchisor would "find a location for the store based on our market survey" was not fulfilled.  As earlier noted, the initial training was not provided as contemplated specifically in the franchise agreement and as also outlined in the commitment contained in the franchising portfolio, nor was the periodic six month sales training update at the head office provided to the DeBlocks.  Further, it was clear from the DeBlocks' testimony that Mr. Frey did not provide them with assistance in developing their advertising portfolio despite having outlined that as part of the franchisor's commitment.  Additionally, as Mr. Frey acknowledged he never created a training manual nor did he provide any materials with respect to inventory control.

58      There remains the issue as to whether paragraph 10 of the franchise agreement was breached.  Pursuant to that paragraph, all franchisees were obliged to only order stock and inventory from the suppliers recommended and designated by the franchisor.  The franchisees were obliged to place their own orders for stock or inventory directly with the supplier and the franchisor agreed that it "shall not charge any premium or mark-up to the franchisee for any inventory or stock".  The DeBlocks testified that it was very important to them that Mr. Frey had always indicated that as a franchisor, he would not charge a mark-up or premium on products and as a result of the provisions in paragraph 10 of the franchise agreement, they were content to purchase product only from suppliers designated by 1058335 Ontario Inc.  In fact, the mission statement which was part of the franchise portfolio advertised Mr. Frey's franchise as being primarily different from other franchise concepts because he did not charge royalties and the franchisor would "mainstream distribution of product at below average costs".  Both of the DeBlocks testified that they repeatedly questioned Mr. Frey about whether he or any one of his associate corporations received rebates from suppliers and that Mr. Frey always responded by emphasizing that nothing such as that was going on.  The DeBlocks assert that in fact one of Mr. Frey's companies was paid a rebate with respect to the purchases made by the DeBlocks' business from at least two suppliers, J.D. Flanagan Sales and Distribution Ltd. and Pinty's Premium Food Inc.

59      Mr. Alyea testified that he became aware several months after he opened his store that performance bonuses were being paid to one of Mr. Frey's corporations even though Mr. Frey repeatedly had represented to him that no such payments were being received.  Mr. Alyea testified that he remained a franchisee of Mr. Frey for only one year and in essence negotiated out of his franchise obligations.  He continues to operate a similar business and testified that the prices at which he now purchases his produce from Pinty's and Flanagans are lower than the prices he paid as Mr. Frey's franchisee. As a result, Mr. Alyea testified that the bottom line for his operation has improved because he is now able to buy his products cheaper than he did under the More Than Meats franchise.  Mr. Alyea testified that he has had no difficulty obtaining a rebate from his suppliers based upon the level of business he does with those suppliers.  He testified that he would definitely have been out of business if he had had to keep paying the prices that were being charged by the suppliers to the More Than Meats franchisees.

60      Mr. Frey testified that he did receive performance incentives from Pinty's and Flanagan's based on the total volume of purchases made by More Than Meats stores. He produced copies of cheques dated June 20, September 6, September 14, October 27, December 10, 1994 and February 6, 1995 confirming that performance incentives had been paid to Mr. Frey's corporation by Flanagan's and Pinty's totalling $25,640.  Mr. Frey testified that he told the DeBlocks that his corporations made money both from receiving franchise fees and performance allowances.  That evidence is inconsistent with the evidence from the DeBlocks.  I found the DeBlocks' evidence consistent throughout whereas Mr. Frey at many times testified in a manner inconsistent with his evidence previously given under oath at the examination for discovery. Mr. Frey was prepared to adjust his evidence to best suit his purposes.  Additionally, the DeBlocks' evidence was consistent with the evidence of Mr. Alyea who was an independent witness whose evidence, given in a forthright, understated manner, was completely credible.  I do not accept Mr. Frey's assertion that he informed the DeBlocks' that his corporation would receive performance allowances based on their store's purchases from suppliers.  There was no reference to any performance allowances in the portfolio.  The only reference to remuneration to Mr. Frey's corporation was the one-time franchise fee.  Similarly, in the financial statements for the Woodstock store which Mr. Frey allowed Mr. DeBlock to see there is no indication that revenue was received for performance allowances.  I am completely satisfied that Mr. Frey was not at all forthcoming with either the DeBlocks or Mr. Alyea with respect to payments he was receiving from suppliers.

61      It was suggested to Mr. Frey on cross-examination that but for the performance allowances he received, the DeBlocks would have had additional revenues in their business of $25,640.  However, Mr. Frey denied that that was so.  He was referred to his evidence on discovery where he indicated that the cheque stubs that were incorporated into his affidavit of documents were representative of sales relating to the DeBlocks' store and reflected all the money that he received from the suppliers relating to the DeBlocks' store. Mr. Frey continued to deny that that was so and testified that those rebates did not only relate to product purchased by the DeBlocks.  He was referred again to his evidence further on his examination for discovery where it was suggested to him that he had outlined all the performance allowances received from distributors with respect to the DeBlocks' store by producing the copies of cheques and he responded that that was correct.

62      I am satisfied that 1058335 Ontario Inc. breached its commitment in the franchise agreement by effectively charging a mark-up to the franchisee on its purchases of inventory and stock.  It was clear that Mr. Frey advertised his franchise as being one where the franchisors were able to purchase product at the best possible price to enhance their profitability.  Effectively by making the arrangement he did, Mr. Frey passed on the benefits of the lower pricing to his corporation and not to his franchisees.

63      I assess the damages for the breach of contract by 1058335 Ontario Inc. in the amount of $50,000.

64      I am satisfied that the defendants' counter-claim for the unpaid portion of the franchise fee ought to be dismissed and I am satisfied that it would be appropriate that I declare that the plaintiffs' obligations under the franchise agreement are terminated.

Is there Negligent Misrepresentation For Which Mr. Frey is Liable.

65      It is clear from the evidence that if any negligent misrepresentation was made to the DeBlocks, such negligent misrepresentation was made by Mr. Frey personally. There is no reference in the franchise portfolio to 1058335 Ontario Inc.  In fact, that corporation was not incorporated until the latter part of January 1994.  Further, it was clear from the evidence that all negotiations were between the DeBlocks and Mr. Frey personally.  The first time that the existence of 1058335 Ontario Inc. was indicated to the DeBlocks was when the name of the franchisor was changed from 980349 Ontario Inc. to 1058335 Ontario Inc.

66      In the 1993 case of Queen v. Cognos Inc. (1993), 99 D.L.R. (4th) 626, the Supreme Court of Canada reviewed the law relating to negligent misrepresentation, summarized the Canadian jurisprudence, and outlined five general requirements for imposing liability:

67      In these circumstances, I am satisfied that the plaintiffs and Mr. Frey had the requisite, special relationship.  Mr. Frey was endeavouring to sell a franchise to buyers he knew were inexperienced.  Mr. Frey made representations with respect to the profitability of the business for its first year of operation which formed the basis of the DeBlocks' loan application.  Mr. Frey went out of his way to represent his business as profitable.  He also represented that a market survey had been conducted.  As I found, he also represented that the fact that a frozen food business had operated in the Bellwood Plaza indicated there would be a market for their business in that location.

68      Turning to the issue of whether the representations were misleading and whether Mr. Frey acted negligently in making them, it is clear that it was completely misleading to suggest to the DeBlocks that a market survey was conducted for London when Mr. Frey acknowledged on his cross-examination that no such survey had been conducted.  Mr. Frey's negligence in making that representation is obvious. Further, Mr. Frey's representation that the fact the same business operated successfully in the plaza was indicative of a market for their business was negligent when he did not have reliable information as to whether that business was successful or why it had ceased operation, and he had no way of knowing if in fact there was a market for this business in the Bellwood Plaza area given he had done no market survey.

69      In addition, I am satisfied that Mr. Frey's version of the profitability of his Woodstock store which formed the basis for the DeBlocks' projection for sales and profitability was misleading and Mr. Frey was negligent in making that assertion.  As Mr. Frey acknowledged, the financial statement of 980349 Ontario Inc. (which operated the Woodstock store) for the period ending September 30, 1993 was the financial statement that he showed Mr. DeBlock.  According to that unaudited financial statement, that corporation had gross sales in that period of $529,844.  It was clear that Mr. Frey based the projection for the DeBlocks' store significantly on the results of the Woodstock store and as a result, annual sales for the first year of operation of the DeBlocks' store were projected at $500,000.  The operating profit was projected at $91,980.  As noted earlier, what was negligent on Mr. Frey's part was the misleading nature of his "spin" on his Woodstock operation.  According to the unaudited financial statement for the period ending September 30, 1993, that corporation's operating profit was only $39,273.  If franchise revenue of $50,000 was not included as part of its revenue, that business would have sustained a loss.  Even if the reported expenses for royalty fees paid to "Meat Box" and for management salary were deleted, the store's profitability was much less than was projected for the DeBlocks' store.  It is also clear from that financial statement that the advertising expense for the DeBlocks was significantly underestimated considering that 980349 Ontario Inc. incurred an advertising expense of $14,660 for the period ending September 30, 1993 and in the four months prior to that incurred an expense of $8,467.  It is also interesting to note that in the four months of operation for the year ending September 30, 1992 the business sustained an operating loss. The only other financial information that was provided at trial was the financial statement for the Ingersoll store for the period ending February 10, 1995.  The operating revenues of that business are consistent with the DeBlocks' experience. The business yielded only a modest profit of $13,301 with sales of just over $230,900.  That business operated as a sole proprietorship and therefore there was no labour expense included as an itemized operating expense.  Had that been taken into consideration, (as was the case with the DeBlock projections and the Woodstock operations which both operated as corporations) the Ingersoll operation would have been unprofitable.  I find it significant that Mr. Frey considered the Ingersoll location to have been doing fairly well and he testified that it generated a profit of $41,184 during its year ending February 10, 1995.  In fact, while the net income for the period was $41,184 that only resulted from including just over $27,000 of income earned from a disposal of capital assets.  Clearly, the income from operations was only $13,301.

70      Further, Mr. Frey testified that a new business always took time to build up, but in dictating the cash flow forecast for the DeBlocks' loan application this build-up time was not reflected.  It was also clear from Mr. Frey's evidence that he was aware that not all business locations generated the same level of sales as the Woodstock store.  He was aware of that from the knowledge he had gleaned about Meat Box operations and from the sales in his other franchises.

71      I am satisfied that Mr. Frey's representations as to the profitability of his Woodstock store which formed the basis for the projections he provided for the DeBlocks' store, the constant and stable level of sales projected for the first 12 months of operation, and sales projections based primarily on the Woodstock location without consideration of a market survey relating to the DeBlocks' location were misleading.  I am satisfied that Mr. Frey did not take any reasonable care to ensure that his representations were accurate and not misleading.  I am satisfied that the plaintiffs relied on those representations made by Mr. Frey and such reliance was reasonable.  The DeBlocks and Mr. Alyea all testified that they would not have bought a franchise without Mr. Frey's representation that they could reasonably expect the level of sales and profitability his Woodstock store enjoyed.  It is also significant that Mr. Frey provided no information which the DeBlocks could review with a professional adviser.  He only allowed Mr. DeBlock to examine a copy of the September 30, 1993 financial statement for the Woodstock store and did not permit him to retain a copy.  Mr. Frey's own actions required the DeBlocks to rely on his representations.

72      In these circumstances, the plaintiffs have suffered an identifiable loss as a result of their reasonable reliance on Mr. Frey's representations.  Based upon those representations, the DeBlocks have paid $13,750 pursuant to the guarantee provided to the bank and remain obliged to pay an additional $15,000.  I assess the damages for the negligent misrepresentation made by Mr. Frey at $28,750.  Although Diane DeBlock resigned from her job in order to enter into this business, I am satisfied that her loss of income is too remote a damage for her to recover in the circumstances.

73      I am satisfied that the fact that the written franchise agreement contains an "entire agreement clause" serves to protect only the party who entered into that contract, namely 1058335 Ontario Inc., and, as I have found, the representations in issue were clearly made by Mr. Frey personally.  Therefore, I need not deal with the assertion of the defendants that as a result of the application of the parol evidence rule no liability for negligent misrepresentation can be found based upon the entire agreement clause found in the franchise agreement.  Having made the findings I have, I also need not consider whether there would be an applicable exception to the parol evidence rule in the circumstances where the negligent misrepresentations were made to induce the plaintiffs to enter into the franchise agreement.

74      Although I have clearly found Mr. Frey's conduct to have been negligent and 1058335 Ontario Inc. to have breached the terms of its franchise agreement, I am not satisfied that these are circumstances which meet the requisite standard for an award of punitive damages because I have found that the defendants have acted negligently but have not found their conduct to be high-handed, cavalier or callous.

75      As a result of the foregoing, the plaintiffs shall have judgment against Mr. Frey for the sum of $28,750 and against 1058335 Ontario Inc. for $50,000.

76      If necessary, counsel may make further written submissions with respect to the issue of costs and interest within 30 days from the date of release of these reasons.

LEITCH J.