1117304 Ontario Inc. (c.o.b. Harvey's Restaurant) v. Cara Operations Ltd., [2008] O.J. No. 4370

The plaintiff franchisee, 117304 Ontario Inc., a former Harvey’s and Church’s Chicken franchisee, sought damages from the franchisor, Cara Operations Limited, alleging a breach of contract following the latter’s termination of the Harvey’s franchise agreement due to unpaid royalties and advertising fees. The franchisor filed a counterclaim against the franchisee and the guarantors sought unpaid royalty, advertising and other fees.

The franchisee’s claims pertaining to the breach of franchisor’s duty of good faith and fair dealing raised the following allegations: i) the franchisor failed to properly investigate the suitability of the restaurant site prior to approving it, ii) the franchisor failed to adequately project sales in the Pro Forma financial projection it had provided to the franchisee, iii) the franchisor failed to assist the franchisee in dealing with a dispute with its landlord regarding the square footage of the premises, iv) the franchisor failed to properly provide adequate training to the franchisee, v) the franchisor failed to control the circulation of a memorandum, which in turn tainted the relationship between the parties and portrayed the franchisee as a bad operator, vi) the franchisor failed to treat the franchisee fairly with respect to operational issues related to the store inspections, vii) the franchisor failed to provide financial assistance to the franchisee, viii) the opening of another Harvey’s franchise located near the franchisee’s location was in breach of the franchisor’s duty of good faith in that it was aware that franchisee’s restaurant would be negatively affected, ix) the franchisor terminated the franchisee’s Church’s Chicken franchise before the expiration of its term, thus breaching the franchisor’s duty of good faith and fair dealing and x) the franchisor failed to compensate the franchisee for the leasehold improvements and equipment from which the franchisor benefited once it took over the franchisee’s restaurant.

Regarding the issue of whether the franchisor breached its obligations by failing to properly investigate the suitability of the location of the restaurant, the Court concluded that, given the restaurant’s profitability during the first three years and the concerns expressed by the franchisor regarding the restaurant’s viability, the franchisor did not breach its duty of good faith and fair dealing.

With respect to the second allegation, the Court dismissed the franchisee’s claims pertaining to the sales projections in the Pro Forma documents provided to the franchisee stating that there was no evidence of any representation, warranty and/or guarantee relating to the sales volume and potential profits. Moreover, the projections contained a disclaimer clause which the plaintiff acknowledged. Furthermore, the Court concluded that franchisor did not have an obligation to identify any risks relating to restaurant sales.

Regarding the franchisor’s duty to assist the franchisee in its dealing with its landlord, the Court found that since the franchisor was not a party to the lease, or if it was, it was only a party for the purpose of its enforcement, the franchisor did not have a duty to negotiate the disputed square footage with the landlord. The Court also concluded that there was no evidence indicating a loss of staff or loss of business resulting from a lack of training. Thus, it dismissed the franchisee’s claims pertaining to franchisor’s failure to properly provide adequate accounting and managerial training.

With respect to the franchisee’s contention pertaining to the franchisor’s failure to control the circulation of a memorandum, the Court found that there was no breach of the franchisor’s obligations. Although one of the franchisor’s employees did not act appropriately by circulating a memorandum which included negative comments related to the franchisee’s operators, the said memorandum did not taint the relationship between the franchisee and the franchisor. To a certain extent, the memorandum was prepared for internal use by the franchisor to make proposals for dealing with the problem. The Court also found that the problematic situation with one of the franchisee’s employees did not materially impact the latter’s operations.

Regarding the claim that the defendant breached its duty of good faith and fair dealing by failing to treat the plaintiff fairly with respect to operational issues relating to store inspections, the Court found no unfair treatment by the defendant. The restaurant was classified as “average to good,” and the notice of default and notice of termination did not refer to any operational problem.

With respect to providing financial assistance, the Court found that the franchisor did not have an obligation to provide such financial assistance to the franchisee. The argument pertaining to defendant’s breach, stemming from the opening of another Harvey’s restaurant close to the franchisee’s location, was also not accepted by the Court. The Court concluded that the franchisor acted in conformity with the franchise agreement, and that the other Harvey’s franchise was located outside the limits of the protected zone provided for in the franchise agreement.

Regarding the early termination of the Church’s Chicken franchise, the Court found that the franchisor did contravene its duty of good faith and fair dealing since it did not adequately compensate the franchisee for such early termination. As such, the Court awarded damages in the amount of $20,480 for compensating the franchisee’s inability to use the equipment. The Court did not, however, award any compensation for lost profits due to a lack of evidence on this issue.

With respect to the claim seeking compensation for leasehold improvements and equipment which benefitted the franchisor after taking possession of the restaurant, the Court dismissed the franchisee’s argument stating that there was no reason why the franchisee would be entitled to receive compensation considering the equipment was financed by the bank and that the franchisee owed rent arrears and royalty fees.

The Court granted the franchisor’s counterclaim against the franchisee and the guarantors in the amount of $80,477.70 representing royalties, advertising and other fees which remained unpaid.