Between
Ed Tierney and Ed Tierney Service Centre Limited, plaintiffs,
and
Coffee Time Donuts Incorporated, George Papadopoulos and WMP
Developments Ltd., defendants
And between
Coffee Time Donuts, plaintiff by counterclaim, and
Ed Tierney and Ed Tierney Service Centre Limited, defendants
by counterclaim
[1998] O.J. No. 6174
Court No. 95-CU-90530 CM
Ontario Court of Justice (General Division)
Toronto, Ontario
Spence J.
Oral judgment: March 26, 1998.
(51 paras.)
Counsel:
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Edward Tierney, self-representation. |
1 SPENCE J. (orally):— The Plaintiffs claim for fundamental breach of the agreement of purchase and sale dated April 1, 1994, the franchise agreement dated May 17, 1994, and the sublease agreement dated May 17, 1994.
2 The agreement of purchase and sale is made between the individual Plaintiff and George is made between Coffee Time and the Plaintiffs, as is the sublease agreement.
3 The Plaintiffs say that the improvements, and chattels, and fixtures installed at the premises by or for Mr. Papadopoulos and WMP were of an atrocious quality. The opening of the store was delayed. Numerous problems were suffered in the operation of the business as a result of these deficiencies. Customers have been alienated. The coffee shop's reputation has been damaged, and there has been a massive loss of revenue.
4 The Plaintiffs have defaulted on the repayment of a loan for the purchase and a related guarantee.
5 The Bank of Montreal has obtained judgment against the Plaintiffs under the loan mortgage and the guarantee. The Plaintiffs ceased making certain required payments under the franchise agreement and the sublease as time passed without any satisfaction being received in respect of the Plaintiff's complaints. By the summer of 1995, they were in default on the franchise, royalty, advertising fee and the rent, and it would appear certain other payments, as well.
6 On October 2, 1995, the Plaintiffs left the premises and surrendered them to Coffee Time.
7 The Plaintiffs seek damages for the loss of the prospect of a thriving business, the rescission of the agreements, repayment of the purchase price, and loss of profits since June 24, 1994.
8 The legal relationships between the parties is important. The Plaintiffs purchased the business assets from Papadopoulos, and entered into the franchise agreement and the sublease with Coffee Time.
9 Papadopoulos, in making the agreement of purchase in respect of the business assets, was acting in trust. The beneficiary of the trust was his company, the defendant WMP Developments. Papadopoulos had had regular business dealings with Coffee Time over many years. These deals frequently involved transactions such as this one in which he "developed" a site, i.e., built and outfitted it, for use as a Coffee Time franchise, and then sold the assets to an intending franchisee who entered into a franchise agreement and a sublease with Coffee Time.
10 Nothing in these dealings as they were carried out in this case or in the instruments executed by the parties ma de Papadopoulos the agent for Coffee Time in respect of the agreement to purchase and sale.
11 The obligations of the vendor under the agreement are obligations of Papadopoulos and not of Coffee Time. The acknowledgement signed by the Plaintiffs, dated June 7, 1994, states that they do not rely on any representations or warranties of Coffee Time with respect to the subject business, and it releases Coffee Time from liability. This acknowledgement relates to the agreement of purchase and sale.
12 None of the allegations or submissions of the Plaintiffs seem to relate to a breach by Coffee Time of any of its obligations as set out in the franchise agreement.
13 The Plaintiffs did not refer specifically to the provisions of the sublease in respect of the obligations of Coffee Time as sublandlord.
14 A copy of the offer for head lease was placed in evidence as part of the closing documents. In the head lease offer, the landlord covenants for quiet enjoyment. The offer allocates certain obligations to the landlord and others to the tenant, Coffee Time.
15 Clause 5.05 of the sublease exempts Coffee Time from any responsibility for the duties and liabilities of the head landlord under the head lease, except to demand the head landlord to perform its obligations.
16 There were no submissions from the Plaintiff that any of the matters of which they complained are matters for which Coffee Time is specifically responsible under the sublease. While that might well be the case in certain instances, for example, the leaking roof, no determination can be made solely on the evidence now before the Court.
17 For these reasons, the Plaintiffs have no claim against Coffee Time in respect of the deficiencies in the equipment and workmanship provided pursuant to the agreement of purchase and sale.
18 Consequently, there is no justification for the Plaintiffs defaulting on the payments under the franchise agreement and on the rent under the sublease. It appears that Coffee Time would have been entitled to terminate the franchise agreement and the sublease much earlier than the October 2, 1995 departure of Mr. Tierney from the premises. Coffee Time undertook to Mr. Tierney to operate the business and offer it for sale, and if a sale occurred, to assess whether any monies were available to go to Mr. Tierney. The undertaking is vague. Coffee Time has operated the business since Mr. Tierney's departure and does so now. Coffee Time did try to sell the business, but no sale occurred. It appears Coffee Time is not in default of its undertaking.
19 No basis for liability against Coffee Time has been established. The action of the Plaintiffs against Coffee Time is to be dismissed. Accordingly, a cross claim of Coffee Time against Papadopoulos and WMP Developments is also to be dismissed.
20 The claim of the Plaintiffs against Papadopoulos and WMP relates to the alleged breaches of the agreement of purchase and sale by reason of the alleged deficiencies in the equipment, and workmanship, and related delays, and lack of responsiveness.
21 The Plaintiffs and Papadopoulos entered into an arrangement prior to closing that with respect to $ 7,000 of the purchase price, that amount would be left outstanding at closing and would be represented by a promissory note against which the Plaintiff could in effect charge the amounts which became payable for matters covered by the agreement which had to be completed after the closing. The amounts paid by the Plaintiff on account of the deficiencies complained of, in total, come to approximately $ 2500. The Plaintiff also paid Mr. Papadopoulos $ 1,000 in the note. So the net amount still outstanding on the note is $ 3500, subject to the other issues.
22 The Plaintiff also complains that the drive-through component was never completed.
23 Sales in the summer of 1994 reached a level in the order of $33,000 per month, a level which Mr. Tierney said pleased him. The sales in the summer of 1995 were in the order of $40,000 per month. The sales in the winter were considerably lower, but the Plaintiff acknowledged that the business was seasonal.
24 There is no evidence that the deficiencies had such an effect on the reputation of the business that the number of customers was significantly adversely affected.
25 The Plaintiff's evidence was that the net profit from the business fell drastically from 1994 to 1995, and that for the periods ended April 30, 1995 and October 31, 1995, the business suffered losses.
26 The evidence as to these losses is not satisfactory. Two financial statements were presented, but they are inadmissible as hearsay. Even if they were admitted, they are simply based on information from management without any further verification, and they exclude expense items which Mr. Tierney indicated he, in fact, did not pay for a number of the months covered. Mr. Tierney acknowledged that as at October, 1995, if he had had a lower debt load, he could have made a go of the business if he had wanted to keep at it. He said he was angry with the failure of Coffee Time and Papadopoulos to respond to his many and frequent complaints and requests. I accept that there were significant problems which caused trouble for Mr. Tierney in the operation of the business, as a result of which he was distressed about continuing to operate it, and was angry about the situation with Coffee Time and Papadopoulos.
27 One issue to be determined is whether the deficiencies and their consequences were so significant as to amount to a fundamental breach of the agreement of purchase and sale so as to warrant a rescission of the agreement and repayment to the Plaintiffs.
28 Leaving the deficiencies themselves to one side for the moment, the consequences of the situation taken by themselves do not appear to have involved a fundamental deprivation of the business prospect that Mr. Tierney could reasonably have had in mind so those consequences would not support a finding of a fundamental breach. Certainly, the Plaintiff's decision to leave occurred at a time, October, 1995, which was well over a year after the principal problems were first encountered, and at least in part addressed.
29 With respect to the deficiencies themselves, and the claim for damages by reason of deficiencies, the evidence is at least somewhat unsatisfactory. The Plaintiff had to make a number of repairs and adjustments to deal with the deficiencies. He did so. And he made payments and charges against the note as indicated earlier. It does not seem that after taking into account the note reductions, he has any unrecovered expenses.
30 The alleged business losses, as I have said, are not proven on the evidence. The drive-through was never completed, but there is no evidence that the Plaintiff incurred expenses in this regard which have gone unrecovered or that the lack of a drive-through affected sales.
31 However, these considerations do not entirely dispose of the Plaintiff's claim. The Plaintiff's evidence is that as shown, for example, in the pictures he put in evidence that he took shortly before he left the premises, there were many respects in which the equipment and fixtures were inadequate or incomplete in terms of the assets to be purchased and the quality they should have had.
32 The Plaintiff paid for equipment and fixtures that while not in all cases new were to have been in good and workmanlike condition. Based on those parts of his evidence in this regard which were not uncontradicted by the Plaintiffs, there were deficiencies in comparison to these requirements. The complaints set out in the Plaintiff's letter to his lawyer dated June 27, 1995 filed as Exhibit 44 are largely unanswered. The Plaintiff purchased a turn-key operation. Considering all of the evidence, I am obliged to conclude that what he received for the purchase price was an operation that fell materially short of the requirements. In that respect, he has suffered damages for which the defendants, Papadopoulos and WMP Developments, are liable.
33 There is no evidence before me on which I could determine, in any detailed way, the damages of the Plaintiff in this regard. However, in view of the price paid for the business, $ 180,000, and the many continuing deficiencies, I think the damages must be considerably more than the $ 3500 remaining outstanding under the note. The Plaintiff is entitled to judgment against these Defendants in the amount determined in this regard as set out below.
34 Coffee Time has a counterclaim against the Plaintiffs. I would allow the counterclaim in respect of the unpaid royalty and advertising fees of $ 12,122.42, and four months unpaid rent of $ 10,000. There are also unpaid utilities, but I cannot determine the amount. Coffee Time is to have judgment on its counterclaim against the Plaintiffs for the total of the two amounts.
35 Mr. Papadopoulos and WMP have a cross-claim against Coffee Time. The cross-claim pleads no facts that would support it, and I have not been made aware of any evidence of Mr. Papadopoulos or otherwise that would support it. The cross-claim is to be dismissed.
JUDGMENTS:
36 For the reasons given above, judgment is to go as follows:
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No.1. The claim of the Plaintiffs against Coffee Time is dismissed; |
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No. 2. The cross-claim of Coffee Time against the other Defendants is dismissed; |
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No. 3. Coffee Time is to have judgment against the Plaintiff Corporation, as franchisee and sub-tenant, and Ed Tierney as guarantor for the amount of $ 22,142.42 with interest; |
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No. 4. The Plaintiffs are to have judgment against the Defendants, George Papadopoulos and WMP Developments Ltd., for an amount which, subject to any submissions as to the manner of determination to be employed, I would set at $ 9,000, being 5 per cent of the $ 180,000 purchase price, an amount that I think fairly reflects the seriousness of the deficiencies, but also reflects the element of exaggeration that I think was present in some of Mr. Tierney's evidence. Of this amount, $ 3500 would be applied to satisfy the amount outstanding on the note; |
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No. 5. The Bank of Montreal proceedings will be disposed of on the above basis, subject to any further submissions as to whether any adjustments are necessary for that purpose. |
37 I will hear any submissions on the matters mentioned above and on the matter of costs.
38 Thank you, reporter. We may need you again shortly.
Submissions on Costs.
39 THE COURT: Two additional orders will go as follows:
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First, the third party claim made in the case of Bank of Montreal against Ed Tierney Service Centre Limited, and Edward Tierney, under Court file number 71659A/96 as against Coffee Time Donuts Incorporated is dismissed. And as against George Papadopoulos and WMP Developments Inc., judgment is to go in favour of Ed Tierney Service Centre Limited, and Ed Tierney on the basis that the amount of the liability of the Defendants is determined to be $ 5500 net, being the same amount as that determined in the present proceedings. And the amount of $5500 is to be paid to the Bank of Montreal on account of the indebtedness of Ed Tierney Service Centre Limited and Edward Tierney to the Bank of Montreal. |
40 THE COURT: Is that it, Mr. Drummie.
41 MR. DRUMMIE: Yes, Your Honour.
42 THE COURT: Thank you.
43 That takes care of those two matters. And as to costs.
JUDGMENT FOR COSTS:
44 And as to costs, in the case of the judgment in favour of Coffee Time, Coffee Time is to have its costs against the Plaintiffs determined on a solicitor and client basis from and after June 25, 1997 and on a party and party basis up to that date. Costs to be assessed on that basis, and to be payable to Coffee Time if demanded.
45 With respect to the judgment in favour of the Plaintiffs against the other Defendants, George Papadopoulos and WMP Developments Inc., costs are to go to the Plaintiff on a party and party basis. In both cases above, costs are to be assessed if not agreed.
46 Is there anything else on costs?
47 MR. HENDERSON: Not from me, Your Honour.
48 MR. DRUMMIE: No, thank you, Your Honour.
49 THE COURT: I'll endorse the record with reference to the oral reasons. I won't write everything on the record again.
50 March 26, 1998: Judgment for Coffee Time on the counterclaim against the Plaintiffs; judgment for the Plaintiffs on their claim against George Papadopoulos and WMP Developments. Details and related judgments and orders all are set out in reasons given orally today.
51 I think that takes care of everything, counsel. Thank you.
