COURT FILE NO: 03-CV-245369CM2

DATE : 20060815

ONTARIO

SUPERIOR COURT OF JUSTICE

LEDERMAN, J.

Nature of Action

[1]          This action concerns the parties’ respective obligations regarding the renewal of a franchise agreement and the application of the Arthur Wishart Act(Franchise Disclosure), 2000 (the “Act”).  The Act did not exist at the time the franchise agreement was executed by the parties in 1988 but was in full force at the time it came up for renewal in 2003.

The Franchise Agreement

[2]          The plaintiff and the defendant entered into a franchise agreement dated January 25, 1988 granting the defendant the right to operate a POINTTS franchise in the area of London, Ontario (“the Franchise Agreement”).  The Franchise Agreement was for a 15-year term expiring January 25, 2003.  The initial franchise fee paid by the defendant was $30,000.  The Franchise Agreement required the defendant to pay a monthly franchise fee or royalty of 9% of gross sales and a monthly advertising fee of 4% of gross sales.  The territory granted to the defendant under the agreement covered the counties of Middlesex, Oxford and Elgin. 

[3]          The Franchise Agreement granted the defendant franchisee an option to renew for an additional term of 10 years.  The renewal provision in Article I of the Franchise Agreement provided in part as follows:

                        B.         Unless terminated as herein otherwise provided, Operator shall have the option at the expiration of the Term of this Agreement to renew the license granted hereunder by executing Pointts’ then-current form of Franchise Agreement for a term of ten (10) years …

C.        The Franchise Agreement to be executed at renewal shall require Operator to pay the initial franchise fees, the monthly franchise fees and the advertising payments, if any, then being charged by Pointts, which may be higher than those contained hereunder.  The terms of the Franchise Agreement to be executed at renewal may be different from the terms of this Agreement.

(Emphasis added)

[4]          The Franchise Agreement also reserved to the plaintiff a right to grant up to three further licences in the defendant’s territory.  Article VIII.A.5 specifically provided:

In the event that such Gross Sales, as defined, exceed Eleven Thousand Dollars ($11,000) per month for six months in any one calendar year or four consecutive months, whichever occurs first, Pointts reserves the right to further licence the territory. (sic) To a maximum total of three.

[5]          In conjunction with that right, the parties executed two addenda to the Agreement.  The first addendum granted the defendant a right of first refusal entitling it to purchase any additional franchise in the territory upon notice from the plaintiff that it intends to sell an additional franchise in the territory.  The second addendum states that the plaintiff intended to licence two additional franchises in the territory, rather than three as provided in Article VIII.A.5.  It also provided that “further licensing will not be undertaken until the financial conditions relating to such further licensing as set out in the Franchise Agreement are met” and that the royalties payable by the defendant would be reduced by 2% for each additional franchise sold in the territory.

Events Leading Up to Renewal Discussions

[6]          In July 2002, Brian Lawrie (“Lawrie”), the president of the plaintiff, sent a letter to all franchisees inviting them to participate “in a strategy of corporate renewal for POINTTS Advisory Limited and its franchisees”.  Fourteen franchises were coming up for renewal over a two to three year time frame.  Lawrie testified that he wanted uniformity in the terms of the franchise agreements and that he wanted the franchisees to renew on the same terms.

[7]          Lawrie engaged the services of Monty Doyle (“Doyle”), a consultant who had experience in working with management teams and with boards of directors of companies and associations, to assist in the renewal process.  He was also to be involved in the development of a manual of operations, which the franchisees had sought for some time. 

[8]          Doyle attempted to set up meetings with the franchisees in the Fall of 2002. 

[9]          The franchisees who are members of the PAL Franchise Association (the “Association”) established a committee that would deal with Doyle.

[10]      Doyle proceeded with the meeting with a few franchisees attending on October 5, 2002 even though the Association committee advised it could not meet with him on that occasion.  Ultimately, a second meeting was held on December 1, 2002.  At the meeting, Doyle presented a preliminary draft of a manual of procedure.  Lawrie, who also attended the meeting, reviewed the situation with respect to renewals and presented three options for renewal.  He did not present, however, a proposed renewal fee at that meeting.  Lawrie testified that with respect to each of the three options that he put forth, a Disclosure Document under the Act would be required. 

[11]      Thereafter, Doyle was no longer involved in any material way.  His only involvement after the December 1 st meeting was to prepare a re-draft of the manual. 

[12]      The defendant’s Franchise Agreement was scheduled to expire on January 25, 2003.  Under the Franchise Agreement, the renewal process was to begin by the plaintiff delivering to the defendant a notice of eligibility to renew.  This notice is to be given, according to the Franchise Agreement, two years prior to the expiry date.  It should have been given on January 25, 2001, but this was done eleven months late.  The defendant, through its solicitors, then delivered its notice of renewal by letter dated November 12, 2002 in accordance with the Franchise Agreement.  Although, subsequently, there was some contact between the solicitors, a meeting to discuss the renewal was not arranged until five days before the date set for the termination of the Franchise Agreement.

The January 20, 2003 Meeting

[13]      On January 20 th, 2003 the principals of the parties together with their lawyers met for the purpose of discussing and finalizing the terms of the renewal. 

[14]      Wayne Egan (“Egan”), the plaintiff’s solicitor, presented a two page Renewal Agreement, the nature of which was not one of the options presented at the December 1 st meeting.  It provided:

                        WHEREAS Pointts and the Operator entered into a Franchise Agreement made January 25, 1988 (the “Franchise Agreement”), a copy of which is attached hereto as Schedule “A”;

                        AND WHEREAS under the terms of the Franchise Agreement, particularly Article 1, Section B, the parties thereto may renew the Franchise Agreement upon the said renewal terms;

                        AND WHEREAS Pointts and the Operator have followed the provisions set out in the Franchise Agreement and wish to renew the Franchise Agreement as provided herein and therein;

                        NOW THEREFORE THIS RENEWAL AGREEMENT WITNESSES THAT:

                        1.         Points and the Operator hereby renew the Franchise Agreement according to the terms of Article 1, Section B for a further term of ten (10) years, until January 25, 2013.

                        2.         According to the terms of Article I, Section C of the Franchise Agreement, the parties hereto agree that the Operator shall pay upon execution of this Renewal Agreement the initial franchise fee of $75,000, and agrees to pay the monthly royalty rates being nine per cent (9%), and the advertising payments of five per cent (5%), being the current rates being charged by Pointts for franchise fees, monthly royalties and advertising payments.

                        3.         Other than the terms of the renewal set out in this Renewal Agreement, the Franchise Agreement remains in full force and effect, unamended.

[15]      The document did not attach a schedule A.  The then current form of franchise agreement was not presented at the meeting.

[16]      At the meeting, Lawrie, for the first time indicated that the renewal fee was $75,000. 

[17]      Lawrie admitted that the Renewal Agreement did not follow the renewal terms of the Franchise Agreement.  Both Lawrie and Egan testified that the purpose of the Renewal Agreement was to allow the plaintiff to qualify for an exemption under s.5(7)(f) of the Act and avoid the delivery of a Disclosure Document.  They were concerned that if the then current form of franchise agreement were signed on renewal, there could be no exemption.

[18]      At the meeting, Lawrie advised Gary Kober (“Kober”), the principal of the defendant, and his solicitor, David Kornhauser (“Kornhauser”), that the two most recent sales were for $75,000 each with a term of fifteen years. 

[19]      Kober and Kornhauser testified that they objected to the $75,000 renewal fee for a ten year term.  Lawrie stated that there was only one renewal fee, i.e. $75,000 which was for a fifteen year term.  Lawrie also stated that there was no room to negotiate the renewal fee and that he would not grant a reduced fee for a ten year term or for any other term.

[20]      Kober requested a few days to consider the Renewal Agreement and the plaintiff agreed.

Further Negotiations

[21]      On January 21, 2003 the plaintiff offered to extend the renewal term from ten to fifteen years for the same fee of $75,000.

[22]      On January 23, the defendant sought an explanation as to why the plaintiff had not reduced the renewal fee by the amounts that plaintiff would have to incur in selling a new franchise which would not have to be incurred in the renewal of a franchise.  The defendant requested clarification regarding the two Addenda to the Franchise Agreement and the plaintiff’s right to add additional franchises to the territory.  The defendant also sought assurances that there would be no other options for renewal implemented by the plaintiff.

[23]      Subsequently, the defendant advised the plaintiff that it required the threshold amount in Article VIII.A.5 of the Franchise Agreement to be increased from $11,000 to $30,000.  It was prepared to take an acknowledgement or undertaking to this effect.

[24]      The plaintiff took the position that the two Addenda would continue on the renewal as existed in the Franchise Agreement.

[25]      On January 29, 2003, the plaintiff advised that no changes to the terms of the Franchise Agreement were permissible on renewal, without compliance with the statutory disclosure requirements, except for the increase in the renewal term from ten to fifteen years.  The plaintiff then imposed a deadline of Friday, January 31 st for the completion of the renewal and, if not so completed, the plaintiff stated that it would treat the renewal as not having been exercised and would takes steps to run the franchise.

[26]      After a telephone call on January 31 st wherein Kornhauser told Egan that the defendant would accept the deal, Kornhauser wrote to Egan late on January 31 st advising that the defendant was prepared to renew the franchise for a further term of fifteen years for a renewal fee of $75,000 and monthly royalty rates, and advertising contributions of 9% and 5% respectively, but conditional upon:

a)            receipt of a statutory declaration of Mr. Brian Lawrie with respect to the following (which confirms the representations and warranties made by Mr. Lawrie in the January 20, 2003, meeting):

I)                  that the Fee payable is not more than the renewal fee charged by Pointts, and paid by other franchisees, with respect to the renewal of other Pointts franchises;

II)                 that the terms with respect to the payment of the Fee i.e. as one lump sum payment or payable over time and with or without interest, is the same as the terms provided by Pointts to other franchisees with respect to the renewal of other Pointts franchises, or with respect to the grant of additional franchise territories to existing Pointts franchisees; and

III)              that the Fee represents the amount charged by Pointts, and paid by other franchisees, with respect to the sale of Pointts franchises;

b)            that Pointts deliver to the Franchisee a Disclosure Document which complies with the Arthur Wishart Act (Franchise Disclosure) 2000 (the “Act”).  It is the Franchisee’s position that there has been a “material change” (as such term is defined in Subsection 1(I) of the Act).  As such, the exemption contained in Subsection 5(I)(c) (sic) of the Act from obligation to deliver a Disclosure Document does not apply.

[27]      Egan and Lawrie did not see Kornhauser’s letter of January 31 st until the morning of Monday, February 3 rd.  Lawrie testified that he became angry because these conditions came “out of the blue” as he was led to believe that the defendant had agreed that the renewal came within the Act’s exemption and that no Disclosure Document would be provided.  Egan advised Kornhauser that the defendant had not complied with the terms of the Renewal as contained in the Franchise Agreement and as a result the Franchise Agreement with the plaintiff was at an end.

[28]      Further correspondence took place but there was no further change in the position of the plaintiff. 

[29]      Thereafter, the plaintiff removed the defendant from the corporation website, attempted to have the defendant’s phone number terminated, attempted to have the defendant’s bank refuse to negotiate cheques under the name “Pointts”, ceased making referrals to the defendant and instructed other franchisees to stop referring clients to the defendant.

[30]      The defendant continues to operate the franchise in accordance with the terms of the original Franchise Agreement.  The amounts payable under the Franchise Agreement have continued and are being held in trust by counsel for the plaintiff pending the outcome of this litigation.

Positions of the Parties

[31]      The plaintiff takes the position that it was prepared and willing to renew the Franchise Agreement on fair and reasonable terms.  The plaintiff states that it negotiated fairly and honestly, but that the defendant did not accept the renewal terms offered by the plaintiff and the Franchise Agreement terminated without being renewed.

[32]      The plaintiff seeks a judgment declaring that the defendant failed to renew the Franchise Agreement and that it expired on February 1 st, 2003.  It also seeks judgment directing the defendant to comply with the termination provisions found in the Franchise Agreement and also seeks:

a)            damages in the amount of $100,000 arising out of the defendant’s unauthorized use of the plaintiff’s name, logo and trademark since the termination of the Franchise Agreement;

b)            damages from the defendant arising out of the defendant’s continued operations in the London area thereby depriving the plaintiff of the ability to sell a franchise in that territory; and

c)            damages for the defendant’s breach of its statutory obligation under the Act to act in good faith and fair dealing by going through the charade of negotiating a renewal and leading the plaintiff to believe that the renewal could take place without a Disclosure Document.

[33]      The defendant, on the other hand, alleges that the plaintiff breached the renewal provision of the Franchise Agreement and breached its obligation of good faith and fair dealing under the Act. 

[34]      The defendant also submits that the plaintiff did not qualify for an exemption under s.5(7)(f) of the Act in that there were “material changes” and that the plaintiff was obligated to provide a Disclosure Document but failed to do so.

[35]      Section 5(7)(f) of the Act provides as follows:

(7)   This section does not apply to,

(f)     the renewal or extension of a franchise agreement where there has been no interruption in the operation of the business operated by the franchisee under the franchise agreement and there has been no material change since the franchise agreement or latest renewal or extension of the franchise agreement was entered into;

[36]      “Material change” is a defined term in the Act:

                        “material change” means a change in the business, operations, capital or control of the franchisor or franchisor’s associate, a change in the franchise system or a prescribed change, that would reasonably be expected to have a significant adverse effect on the value or price of the franchise to be granted or on the decision to acquire the franchise and includes a decision to implement such a change made by the board of directors of the franchisor or franchisor’s associate or by senior management of the franchisor or franchisor’s associate who believe that confirmation of the decision by the board of directors is probable; (“changement important”). 

[37]      The defendant submits that a number of material changes have occurred since the Franchise Agreement was entered into, namely:

a)            The then current franchise agreement by its nature contains clear differences in terms from the original Franchise Agreement entered into fifteen years earlier and are significant enough so as to constitute material changes requiring disclosure under the Act.  For example, the requirement in the then current form of franchise agreement that the principal of the franchisee execute a personal guarantee in this case is a material change that warrants the plaintiff complying with its disclosure obligations under the Act.  No such obligation to provide a personal guarantee was contained in the original Franchise Agreement.

b)            Under the original Franchise Agreement, the defendant was obligated to pay 4% of gross annual sales for advertising.  Of that amount 3% was paid to the advertising cooperative.  The increase of 1% in monthly advertising payment to be paid to the cooperative would amount to a further yearly payment by the defendant of about $3,000 - $4,000.  The defendant contends that such a change might reasonably be expected to have a significant adverse effect on a person’s decision to acquire or renew the franchise, particularly when franchises outside of Toronto may not believe they are receiving full value for such payments.

c)            Lawrie transferred his 51% interest in the plaintiff to his wife in 1992 and she now owns 100% of the shares of the plaintiff.  The defendant states that as a result, there has been a change in control of the plaintiff which would reasonably be expected to have a significant adverse effect on the value or price of the franchise or on the decision to acquire the franchise particularly because of the circumstances in which the change of control occurred.  At the time of the Franchise Agreement, Lawrie was the plaintiff’s majority shareholder.  There were no executions against Lawrie at the time.  The defendant submits that the plaintiff had insolvency issues in the mid-1990s.  Lawrie himself had been involved in litigation with the Law Society of Upper Canada which resulted in a significant costs order against him.  The Law Society filed executions against Lawrie and petitioned him into bankruptcy but that proceeding was resolved.  The defendant submits that the transfer of control out of the hands of the directing mind of the plaintiff to his wife, particularly in these circumstances, might reasonably be expected to have a significant adverse effect on a person’s decision to acquire or renew a franchise, or on the price to be paid.

d)            The term of renewal was increased from the ten year term provided in Article I.B of the Franchise Agreement to fifteen years, an increase of 50%.  The plaintiff offered the increase in turn for the same renewal fee that it demanded for a ten year term.  The defendant submits that it was reasonable in those circumstances to question the reason behind the plaintiff’s offer.  The defendant submits that the increase of 50% is clearly material and in the circumstances of this case, might also reasonably be expected to have a significant adverse effect on a person’s decision to acquire or renew the franchise or the price to be paid.

e)            The plaintiff had also made a decision to implement a new manual of operations.  The new manual would impose significantly stricter standards on the franchisees.  Five new committees would be formed in which the franchisees were expected to be involved.  The manual increased the accounting standards from “Notice to Reader” to “Review Engagement”.  Moreover, the manual required the franchisees to prepare a detailed annual business plan covering, among other things, risk assessment, contingency planning, succession planning and business expansion.  It also required the franchisees to invest in new computer systems.  The manual also imposed significant restrictions on the hiring of employees, including requiring employees to sign onerous, non-competition covenants.  The defendant submits that each of these changes and, in any event, the totality of them, might also reasonably be expected to have a significant adverse effect on a person’s decision to acquire or renew the franchise or the price to be paid.  Although the manual has not as yet been implemented, the evidence was that it was the plaintiff’s intention to do so.

f)               Paralegal regulation which is imminent (the legislation has passed second reading in the Ontario Legislature) would impose significant burdens on the operation of the defendant’s business.  Paralegals under the proposed legislation would be regulated by the Law Society of Upper Canada and will have to maintain trust accounts, and will have to take a two year course to qualify.  There will be an increase in the costs to hire staff.

[38]      In response, the plaintiff submits that a change is only a “material change” if it has an “adverse effect” on the value or price of the franchise and the Act specifies that the adverse effect must be “significant”.  It submits that none of the changes relied on by the defendant have such a significant adverse effect.  The plaintiff asserts that:

a)            Although the form of franchise agreement is different for each franchisee because there has to be some customizing for each franchisee and territory, the form of franchise agreement has stayed essentially the same since 1988 and there have been no material changes to the form of franchise agreement used by the plaintiff;

b)            The defendant spends from 10% to 11% per year on advertising.  The increase of 1% would not be significant. The redistribution of 1% of the defendants’ advertising budget to the commercial advertising co-op which itself is administered by a committee composed of franchisees would not have a significant adverse effect on the value or price of the franchise.  Moreover, this increase was contemplated in the original Franchise Agreement and agreed to by the defendant;

c)            The practical effect of Lawrie transferring his shares to his wife was to shelter the shares from possible creditors that Lawrie might have in the future.  Thus, the plaintiff submits that such a change would be protective of Lawrie’s continuing de facto control of the company and would not have a significant adverse effect;

d)            At the urging of the defendant, the plaintiff was prepared, gratuitously, to increase the term of the renewal from 10 years to 15 years for the same price as the 10 year term specified in the original Franchise Agreement and cannot constitute a “material change”.

e)            The franchisees, including the defendant, had been asking for a manual for some years.  The new manual which is still in draft form and has not yet been implemented, was created at the urging and benefit of the franchisees themselves.  The plaintiff has not been prepared to force a new operator’s manual on the franchisees if they considered that it would have a significant adverse effect on their franchises;

f)               Attempts to regulate the paralegal industry are nothing new.  They pre-existed the signing of the defendant’s Franchise Agreement and at the time of renewal in January 2003, efforts to regulate paralegals were at no more advanced a stage.  In any event, the plaintiff expects that the franchises will benefit from the anticipated regulation in that it will deter a lot of possible competition.  Any impact on franchises is purely speculative at the moment, but the plaintiff says it will more likely have a positive rather than a negative effect on the value or price of a franchise in that it will increase the profile of and enhance public confidence in paralegals.

[39]      The defendant submits that the franchisor’s fair dealing and good faith obligations would require the plaintiff to either provide a Disclosure Document prior to renewal or to continue the relationship under the terms of the original Franchise Agreement until a Disclosure Document was produced and delivered to the franchisee.  The defendant seeks orders requiring the plaintiff to comply with the provisions of the Act relating to disclosure and permitting the defendant reasonable time after disclosure to determine whether is wishes to renew the franchise by executing the form of franchise agreement current at January 25, 2003.

[40]      The defendant seeks damages for the plaintiff improperly terminating the Franchise Agreement and failing to renew the franchise agreement on the basis of the franchise fee for a ten year term and for demanding advertising payments in the amount of 5%.  It also seeks damages for the plaintiff ‘s breach of the duty of good faith and fair dealing.

Analysis

[41]      As stated at the outset, this case involves the interplay between the contractual provisions in the Franchise Agreement for renewal and the application of the Act.  The Act was not in existence when the original agreement was signed in 1988, but was in full force and effect when the franchise came up for renewal in January 2003.

Duty of Fair Dealing

[42]      The parties to a franchise agreement cannot contract out of the Act (s.11).  “There can be no waiver of the rights given under the Act.” (see 1490664 Ontario Ltd. v. Dig This Garden Retailers Inc.,[2005] O.J. No. 3040 ( C.A.) at para. 34.)

[43]      Under section 3(1) of the Act, every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement; and under section 3(3), the duty of fair dealing includes the duty to act in good faith and in accordance with reasonable commercial standards.

[44]      Accordingly, these principles as enunciated in the Act govern the parties’ conduct in the implementation of the contractual renewal provision.

Has There Been a Breach of the Contractual Renewal Provision?

[45]      The defendant states that the process chosen by the plaintiff in of itself was in breach of the contractual renewal provision in that the Renewal Agreement document was not the “then current form of franchise agreement”.  However, the plaintiff contends that recently the form of agreement may differ to accommodate negotiated terms with particular franchisees and, in any event, any differences are minor in nature and immaterial.

[46]      More importantly, the defendant submits that the plaintiff did not seek the initial franchise fee “then being charged by Pointts” being considerably less than $75000.  On the other hand, Mr. Martin, counsel for the plaintiff, submits that the initial franchise fee was, in fact, $75,000 as Lawrie had sold approximately ten franchises for that amount over all the years.  For example, Mr. Padden paid $75,000 in January 2000 and Mr. Kowenhoven purchased a franchise in Toronto for $75,000 on June 16, 2000 both for 15 year terms. 

[47]      The plaintiff admits that it also sold a number of franchises for less than $75,000.  For example, there was the sale to Mr. Clarke for $50,000 in July 2002 for a 20 year term; and a sale to Mr. Smale for $50,000 in October 2002 for a 15 year term. 

[48]      Lawrie, in his testimony, explained that in order to encourage present franchisees to purchase additional franchises and increase their stake in the company, he offered a discount of 1/3 on the purchase of an additional franchise.  He said that Mr. Clarke took advantage of this discount on his purchase in 2002 as did several other franchisees.

[49]      There was also a sale to Mr. McGregor for $65,000 in December 2002.  Lawrie, in his evidence, explained the circumstances surrounding the sale of the Sudbury franchise to Mr. McGregor in 2002 to distinguish it from other sales.  Mr. McGregor’s Sudbury franchise still had more than one year to run before it expired.  He also had an ownership interest in two other franchises at the time and he took advantage of the discount.  Mr. McGregor also agreed to service the North Bay region that could not properly be serviced by the corporate office located in Bracebridge because of distance.  Mr. McGregor ended up purchasing a new territory that included the Sudbury franchise and the City of North Bay, and when all of the factors were considered, Mr. McGregor and the plaintiff agreed on a purchase price of $65,000.

[50]      The plaintiff submits that at the time of the defendant’s renewal, $75,000 was the then current official franchise fee.  It had sold a number of franchises for $75,000 even though it offered discounts on the sale of additional franchises.  This discount, it submits, was always a function of the initial number of $75,000 and was only offered to encourage franchisees to expand and increase their stake in the company.

[51]      The reality, however, is that since the coming into force of the Act the only franchises that have been sold, have been for $50,000 to Mr. Clarke for 20 years and to Mr. Smale for 15 years.  There was also a sale to Mr. McGregor for $65,000.  The defendant says that the McGregor sale at $65,000 can be explained as a renewal and a new franchise fee.  In any event, whether it is because of an inability on the part of the plaintiff to sell new franchises because of an obligation to deliver a Disclosure Document which it has been unable to do, or for some other reason, the fact is that the then current franchise fee has not been $75,000 and seems to be $50,000.  The fee of $75,000 was not in accord with the last three franchises sold by the plaintiff.  Lawrie admitted on cross-examination that at the material time, he could not sell a franchise for $75,000 and that they only possible initial franchise fee at the time was $50,000.

[52]      Thus, the fee that was sought by the plaintiff from the defendant was not the fee “then being charged” by the plaintiff.  It should have been $50,000.

[53]      The renewal provisions of the original Franchise Agreement required the defendant to pay the initial franchise fee, royalties and advertising amounts “then being charged by Pointts”.  The defendant submits that wording is ambiguous when consideration is given to the fact that the defendant’s renewal is for a 10 year term.  Since the plaintiff was not granting 10 year terms in 2002, the defendant argues that the duty of fair dealing would require the plaintiff, in setting the defendant’s renewal fee, to consider not only its own legitimate interests, but those of the defendant.  Therefore, the defendant suggests that the plaintiff owed an obligation to take into account the fact that it would not incur the same costs on a renewal of an existing franchise as those associated with the startup of a new franchise.  The defendant’s position is that the plaintiff also should recognize that the rates that it charged in recent years was for a 15 year term and if acting in good faith in accordance with reasonable commercial standards it should adjust its 15 year fee to properly reflect a lesser 10 year term.  Moreover, even though the plaintiff was prepared to accede to a 15 year term rather than a 10 year term on renewal, the defendant states that it had the right to renew for only 10 years, but at a reasonable rate for that shorter period.

[54]      Mr. Martin argued that the Franchise Agreement provided for a 10 year renewal.  At the time of the original Franchise Agreement, the initial term was for 15 years.  He submitted that it was contemplated that the initial franchise fee for a 15 year term would apply to a 10 year renewal.  He submits that the defendant is requesting the Court to improperly read into the phrase “initial franchise fees”, a rate being charged for a 10 year term.  He argues that would be reading into the contract something that is not there, and the court would be changing the clear terms of the written contract.  Moreover, he states that although the plaintiff could have stood on a strict construction of the contract it gratuitously and at the suggestion of the defendant, was prepared to offer the defendant a 15 year term on renewal.

[55]      The duty of fair dealing relates to the conduct of the parties in the implementation of the contractual terms between the parties.  The interpretation of the renewal provision in this case is not affected by the statutory duty of fair dealing.  The parties clearly agreed that the “initial franchise fees … then being charged” regardless of the term would apply to the 10 year renewal.  It was not the intention that the Act change the terms of an agreement entered into by the parties.  Therefore, I find that “the initial franchise fee then being charged by Pointts” was $50,000 and that was the fee to apply to a 10 year renewal by the defendant.

[56]      Lawrie testified that the monthly advertising fee changed to 5% (i.e. an increase of 1% to the advertising cooperative) in late 1988.  However, a number of franchisees testified that in practice they only pay monthly advertising fees of 3% to the advertising cooperative.  That is what is currently being charged.  Accordingly, the advertising payment by the defendant on renewal should be 4% of which 3% is payable to the advertising cooperative.

[57]      Thus, on a straight construction of the contractual renewal provision, the defendant should have had the opportunity to renew its franchise for further 10 years by signing the then current franchise form and making a payment of $50,000 and paying a monthly advertising rate of 4% and a monthly royalty rate of 9%.  The defendant was never given that opportunity by the plaintiff.  The plaintiff thereby breached the contract.  The defendant should now have the opportunity to proceed with the renewal on that basis if it so desires. 

Production of Disclosure Document

[58]      With a view to avoiding the obligation to deliver a Disclosure Document, the plaintiff attempted to fit itself within the exemption under section 5(7)(f) of the Act.  It provides that the franchisor’s obligation to provide a Disclosure Document does not apply to a renewal of a franchise agreement where there has been no interruption in the operation of the business operated by the franchisee and there has been no material change since the franchise agreement was entered into.

[59]   The defendant submits that because of the material changes as set out above, the plaintiff cannot take advantage of the exemption.  It, therefore, seeks an order requiring the plaintiff to deliver to the defendant a Disclosure Document in accordance with the provisions of the Act, within 60 days of the judgment, and that the defendant should have 14 days after receipt of the Disclosure Document to determine whether it wishes to renew the franchise by executing the form of franchise agreement current as at January 25, 2003.

[59]      There is nothing in the Act that gives the court the power to compel the plaintiff to deliver a Disclosure Document even if the exemption under section 5(7)(f) does not apply.  Although the Act sets out obligations of disclosure, the only remedies provided to a franchisee in respect of those obligations are rights of rescission (s.6) and damages for failure to comply with its section 5 obligations to deliver a Disclosure Document (s.7).

[60]      If the proper disclosure is not provided, the Act requires that the franchisee be placed in the position it was prior to entering into the franchise agreement.  Under section 6(1) of the Act, a franchisee may rescind the franchise agreement no later than 60 days after receiving the Disclosure Document if the franchisor failed to provide the disclosure within the time required by section 5 or if the contents of the Disclosure Document did not meet the requirements of section 5.  Moreover, under section 6(2), a franchisee may rescind the franchise agreement within 2 years after entering into the franchise agreement if the franchisor never provided the Disclosure Document. 

[61]      The Act does not empower a Court to order production of a Disclosure Document to a prospective franchisee before he or she makes the decision to purchase a franchise.  If a franchisor fails to deliver a Disclosure Document 14 days before entering into a franchise agreement, the prospective franchisee must make his or her own business decision whether to enter into the agreement without a Disclosure Document and rely upon rights of rescission at a later time.

[62]      There is no indication in the Act that any greater rights are provided in the circumstance where a franchisee is considering a renewal decision pursuant to a contractual right in its original franchise agreement. It is acknowledged that the relationship between a franchisor and an existing franchisee imposes duties of good faith on both sides. Nevertheless, the duty does not go so far as to allow a Court to force a franchisor to produce a Disclosure Document to an existing franchisee before he or she decides to renew.  The structure of the Act affords rescission rights protection after entering into the renewal, just as it does to a franchisee after entering into the initial franchise agreement.

[63]      Accordingly, I decline to make an order compelling the delivery of a Disclosure Document by the plaintiff.  Therefore, the defendant has no right to insist on a Disclosure Document prior to executing the renewal and paying the initial franchise fee of $50,000 as described above. 

Exemption from Disclosure?

[64]      Having decided that a Disclosure Document cannot be compelled, it becomes unnecessary to decide whether the plaintiff does or does not come within the exemption provided under section 5(7)(f) of the Act.  It is premature for a Court to decide at this stage whether there have or have not been material changes so as to trigger the obligation to provide a Disclosure Document.  This will remain a live issue until such time as the plaintiff, in fact, presents a Disclosure Document after the renewal has been entered into, if the defendant indeed decides to renew; or if after the renewal, the plaintiff fails to provide a Disclosure Document at all and the defendant seeks to exercise rights of rescission within 2 years after the signing of the renewal.

Method of Renewal

[65]      The contractual renewal provision requires payment of the franchise fee upon renewal.  It does not provide for business terms, allowing for payment over time.  It is within the plaintiff’s right and it would conform with good faith and be in accordance with reasonable commercial standards to insist that renewal be in compliance with that provision.  Accordingly, if the defendant chooses to renew, it must pay the $50,000 upon signing the then current form of franchise agreement. 

[66]      The plaintiff is to provide by August 31, 2006 the then current form of franchise agreement in use as of January 25, 2003 to the defendant for renewal on the terms described above.  The defendant will have two weeks thereafter to sign the renewal or decline to renew.

Damages

[67]      Because the plaintiff improperly terminated the Franchise Agreement, removed the defendant’s name from the website and ordered other franchisees not to refer business to the defendant,. the defendant has not obtained the full benefit from its payment of royalties or the advertising fees paid into trust. 

[68]      The defendant has paid royalties (approximately $91,000 up until October 2005 and further monies thereafter) and advertising fees (approximately $30,000 up to October 2005 and further monies thereafter) since January 2003, but has not obtained full value from such payments.  The only benefit it received was use of the name.

[69]      The defendant is entitled to a return of some of the royalties paid into trust to compensate it for such damages.  It is appropriate to pro rate the royalty amount paid along the lines suggested by Stevenson J. in Cedar Crescent Holdings Ltd. v. Flower Retail Limited, [1982] NBJ No. 180 (N.B.Q.B.) at para. 28. The royalty rate for the period in question should be reduced by 2% (from 9% to 7%).  Thus, 2% of the amount of royalty paid and held in trust should be returned to the defendant 

[70]      Moreover, as the advertising fees were not used for the defendant’s benefit at all, those funds held in trust should be repaid to the defendant. 

Conclusion

[71]      The plaintiff’s action is dismissed.  Judgment to go on the counterclaim in accordance with these Reasons.  If the parties cannot agree on the amounts in question, I may be spoken to.  The parties are encouraged to agree as to costs of the action, but if unable to, they may be addressed in writing within 30 days.

___________________________

                                                                                                                        LEDERMAN, J.

DATE:            August 15, 2006

COURT FILE NO: 03-CV-245369CM2

DATE: 20060815

DATE:             August 15, 2006