



COURT OF APPEAL FOR ONTARIO

CITATION:
3574423
    Canada Inc. v. Baton Rouge Restaurants Inc., 2013
ONCA 39

DATE: 20130124

DOCKET: C54761

LaForme and Watt JJ.A. and Lederman J. (
Ad Hoc
)

BETWEEN

3574423 Canada Inc.

Plaintiff (Appellant)

and

Baton Rouge Restaurants Inc./Les Restaurants Baton
Rouge
  Inc.,
Baton Rouge Restaurants Company/Compagnie
Les Restaurants Baton Rouge (now known as Sara-Mammas
Corporation Inc.), John Mavromichalis, Kostas Mavromichalis
, Vasilios
  Varvaris (also known as Billy Varvaris), Anthony Varvaris
  (also known as Tony Varvaris),
4077822 Canada Inc.,
4089537 Canada Inc. and Mikes Restaurants Inc. (now known as
Imvescor Restaurants Inc.
)

Defendants (Respondents)

Paul J. Pape and Nicolas M. Rouleau, for the appellant

Timothy J. Hill and Atoosa Mahdavian, for the respondents
    Baton Rouge Restaurants Company/Compagnie Les Restaurants Baton Rouge (now
    known as Sara-Mammas Corporation Inc.) and Mikes Restaurants Inc. (now known as
    Imvescor Restaurants Inc.)

Bryan B. Skolnik and Rob L. Winterstein, for the
    respondents John Mavromichalis and  Kostas Mavromichalis, 4077822 Canada Inc.,
    and 4089537 Canada Inc.

Heard:  December 14, 2012

On appeal from the judgment of Justice David M. Brown of
    the Superior Court of Justice dated November 14, 2011.

Lederman J. (
ad hoc
):

Overview

[1]

The appellant, 3574423 Canada Inc., became a
    franchisee of the Baton Rouge restaurant franchise in 1999, assuming ownership
    of a franchise in the Eaton Centre in the City of Toronto. It had a contractual
    right of first refusal (ROFR) over the next franchise in the Greater Toronto
    Area.  Over the years, the respondent franchisor, at the time Baton Rouge
    Restaurants Inc (BRRI)
[1]
,
    offered a few franchise locations, including a site in Thornhill in 2000. The
    appellant turned each offer down.  When it was given a second opportunity, in
    2001, to acquire the Thornhill location, the appellant again passed it up
.

[2]

The appellant commenced an action for damages
    on the basis of: (1) breach of a contractual duty of good faith, and (2) breach
    of the statutory duty of fair dealing pursuant to the
Arthur Wishart Act

(Franchise Disclosure), 2000
, S.O. 2000, c. 3 (
AWA
)
. The
    claim in respect of the breach of a contractual duty of good faith was in
    relation to a franchise location in North York; that property is not at issue
    in this appeal.

[3]

In the action, the appellant took the position
    that when it was given the opportunity in 2001 to acquire the franchise at the revived
    Thornhill location, the franchisor failed in its obligation to properly and
    fully notify the appellant in accordance with the
AWA
. The appellant
    claimed that the franchisors notification was premature and that it withheld
    critical information.  As a result, the appellant claimed that it waived its
    ROFR on a franchise that, with full disclosure, it would otherwise have
    purchased. The trial judge dismissed the action, and the appellant now appeals
    from that decision
.

Issues

[4]

The appellant argues that the trial judge
    erred in applying the statutory duty of good faith and fair dealing in s. 3 of
    the
AWA
to the question whether the franchisor provided the appellant
    with sufficient disclosure in respect of the availability of the revived
    Thornhill location.

[5]

The appellant does not take issue with any
    findings of fact made by the trial judge except for the following statement, in
    para. 307 of his reasons: I therefore cannot accept their submission at trial
    that their June 28, 2001 election to pass on the Thornhill location was not an
    informed one.  The issue on appeal, therefore, is narrow: namely, whether the
    trial judge erred in finding no breach of s. 3 of the
AWA
.

[6]

The appellant also argues that the respondents John and Kostas
    Mavromichalis, former owners of BRRI, intentionally interfered with its
    economic relations, due to their role in the provision of insufficient
    disclosure with respect to the revived Thornhill location.

[7]

For the reasons that follow, I disagree with
    the appellants submissions and I would dismiss the appeal
.

The Appellants
    Submissions

[8]

Given the narrow ground of appeal it will not
    be necessary to provide a detailed factual history of this dispute, which is
    long and torturous. I will, however, set out those facts necessary to describe
    the appellants position on appeal; facts which it says go directly to the
    trial judges error.  The appellants core argument is that two types of material
    facts were withheld in the 2001 offer: (1) the final lease for the Thornhill
    property, and (2) the size of the territory for that location.  As a result,
    the appellants decision not to exercise its ROFR with respect to the revived
    Thornhill location was not an informed one. Withholding these material facts,
    it asserts, constituted a breach of s. 3 of the
AWA
.

(i)      The
    differences in the lease

[9]

The appellant submits that the franchisor notified
    it of the revived Thornhill opportunity in June 2001 through an amended offer
    to lease the property. This offer largely tracked an earlier December 6, 1999 offer
    to lease. The appellant submits that it was not advised that the terms of the
    underlying lease were still being negotiated.

[10]

The appellant submits that the terms of the final lease,
    which reflected changes from the amended offer to lease, would have been material
    to the appellants decision whether or not to exercise its ROFR. Therefore, it
    argues, the amended offer to lease was put to it prematurely, and it did not
    constitute sufficient information upon which to make a considered decision.  It
    argues that the situation was fluid and the Thornhill location should not have
    been offered until the terms of the lease were finalized.

[11]

The appellant contends that the amended offer was less
    detailed and less favourable to the appellant than the final lease as signed in
    August 2001.  The lease is said to contain the following material differences
:

(a)     The
    possession date changed from October 30, 2001 to February 21, 2002, giving more
    time for the appellant to move in and make payments;

(b)     The building pictured in the
    offer to lease was different from the building that was developed;

(c)     Detailed provisions on the
    landlords liability for damages were included; and,

(d)     Provisions were made for use of
    common areas on the premises.

[12]

On the basis of these differences, the appellant suggests
    that it may have been in the financial position to pursue a second restaurant
    location, and it would have gained more confidence in the ability of the
    landlord to complete construction on time (lack of confidence in the landlord
    being one reason it gave for turning down the revived Thornhill offer)
.

(ii)    The
    size of the territory

[13]

The trial judge observed that the appellant had the same
    quality of information about the territory size for the Thornhill location in
    June 2001, when it received the second offer, as it had in January 2000, when
    it turned down the first offer.  The trial judge, in para. 305 of his reasons, referred
    to evidence that the issue of territory size was not discussed as a precursor
    to the exercise of the ROFR
:

Regarding the failure to disclose how large the Thornhill
    territory would be, the evidence of the Mavromichalis brothers was that they
    did not discuss precise territory size with the Bozikis brothers.  They
    regarded that as a matter for discussion once the Bozikis brothers had
    expressed an interest in taking the Thornhill location.  Instead, in 2001 the plaintiff
    passed on the location.

[14]

The appellant submits that this cannot be fair dealing. It
    argues that there was an obligation on the franchisor to fully disclose the
    scope and details of the territory, beyond the generality that it was a big
    territory, as the size of the Thornhill exclusive territory was a material fact
.

[15]

The appellant submits that it was entitled to specific
    information, including the fact that the Thornhill locations territory would
    be the largest of all Baton Rouge territories (approximately 320 square
    kilometres in size), and that it would encompass the proposed future site of a North
    York location, a site in which the appellant says it had been interested since
    1999. Without this information, the appellant argues that it did not know it
    was foregoing rights to the eventual North York location by waiving its ROFR on
    the Thornhill location
.

[16]

Although the appellant does not argue that s. 5 of the
AWA
applies, it points out that the contents of a s. 5 disclosure document include
    a description of any exclusive territory granted to the franchisee: O. Reg.
    581/00, s.6(12).  It submits that this should inform the standard of fair
    dealing required by s. 3 of the
AWA
.

Analysis

[17]

Section
    3 of the
AWA
provides as follows:

Fair
    Dealing

3.(1) Every franchise agreement imposes on each party a duty of
    fair dealing in its performance and enforcement.

Right of
    Action

(2) A party to a franchise agreement has a right of action for
    damages against another party to the franchise agreement who breaches the duty
    of fair dealing in the performance or enforcement of the franchise agreement.

Interpretation

(3) For the purpose of this section, the duty of fair dealing
    includes the duty to act in good faith and in accordance with reasonable
    commercial standards.

[18]

Accordingly,
    the provision calls for a balancing of the rights of both franchisees and
    franchisors:
4287975 Canada Inc. v. Imvescor Restaurants Inc.
2009
    ONCA 308, 98 O.R. (3d) 187, at para. 40.

[19]

As
    explained by MacFarland J.A., in
Personal Service Coffee Corp. v. Beer (c.o.b.
    Elite Coffee Newcastle)
, (2005) 256 D.L.R. (4th) 466 (Ont. C.A.), at para.
    29:

[W]hile the Act imposes fairly onerous disclosure requirements
    on franchisors, it is not entirely one-sided.  In particular, s. 3 of the Act
    imposes a duty of fair dealing on each party" to a franchise agreement
    with respect to performance and enforcement and gives the parties a right to
    damages for breaches of this duty of fair dealing. In this way, the Act obliges
    both the franchisor and the franchisee to deal fairly with one another.

[20]

The
    extensive prior dealings between the parties in this case inform the standard
    of fair dealing between them.  I will address each of the appellants two
    assertions of unfair dealing in turn.

(i)      Differences
    in the lease

[21]

The
    appellant was provided with a copy of the amended offer to lease under cover of
    a letter from BRRIs lawyer, Mr. Analytis, dated May 28, 2001. The trial judge
    rejected the appellants contention, at trial, that they never received this
    letter. From that letter, it would have been readily apparent to the appellants
    principals that a final lease document had not yet been negotiated and
    finalized. If they had any interest in the Thornhill location as of June 2001,
    they could have exercised their right of first refusal, subject to final review
    and negotiation of all terms, or requested any further information required.
    Instead, they decided to turn down the opportunity without seeking any further
    information.

[22]

The
    appellants principals were, as the trial judge repeatedly observed,
    sophisticated and practical businessmen. They had considerable experience in
    the restaurant business and in managing an existing Baton Rouge franchise, and
    had sufficient information upon which to make their decision about Thornhill. They
    were not interested in the Thornhill opportunity for other reasons.

[23]

Further,
    as it turns out, the terms of the final lease document relating to Thornhill
    were not materially different from those contained in the offer and amended
    offer to lease. The final lease had all of the same basic provisions, namely
    term, rent, square footage, renewal terms, minimum rent-free period and tenant
    allowances.  Having regard to commercial sense, the changes were minor and
    would not have made any difference to the appellant.

[24]

As
    the trial judge found, the appellants principals made their own determination
    to pass on the Thornhill location in 2001 because they were not in a financial
    position to pursue the franchise at that time and, in any event, they had no
    confidence in the landlords ability to meet construction deadlines.
    Accordingly, the fact that the final lease pushed back the possession date by a
    further period of three months would not have enhanced the appellants
    confidence in this landlord.

[25]

I
    see no error in the trial judges findings in respect of this issue. Therefore,
    I would reject this submission.

(ii)     The
    size of the territory

[26]

The
    trial judge implicitly found that the appellant knew at the time of the second
    offer that Thornhill would have a much larger territory than the appellants
    existing franchise in the Eaton Centre. As experienced franchise operators, the
    appellants principals knew that franchises located in dense, urban areas would
    likely enjoy smaller territories than those in less-densely populated suburban
    areas; this makes commercial sense.

[27]

Moreover,
    although the Thornhill territory was the largest of the Baton Rouge
    territories, its size was not unusual and was not inconsistent with the size of
    other suburban Baton Rouge locations, including the adjacent Vaughan territory.
    The appellant had previously rejected both the Vaughan and Square One
    opportunities without inquiring into or ascertaining the size of the exclusive
    territory for those locations, and without considering it necessary to receive
    extensive documentation in order to make an informed decision in respect of the
    ROFR. They rejected Square One because there was no external access to the
    restaurant location.

[28]

What
    is clear is that the actual size of the exclusive Thornhill territory was not a
    significant factor, despite what the appellant now contends. If it were
    otherwise, the appellants principals would have followed up regarding the size
    of the territory and obtained further information. Seeking further information
    in this particular relationship would have made commercial sense. In addition, the
    question whether the franchisor acted in good faith and engaged in fair dealing
    must be informed by the fact that the duty is not one-sided.  This argument has
    no merit.

Conclusion

[29]

In
    the end, the appellants principals are essentially asking this court to ignore
    the numerous credibility findings made against them by the trial judge and ask
    that we now accept that, if only they had known the precise size of the
    Thornhill territory and the terms that were ultimately incorporated into the
    final lease document, they would have elected to take the Thornhill location in
    June 2001. Such an inference would defy logic and cannot be drawn in the face
    of the knowledge of the parties and the history of dealings between them.

[30]

The
    trial judge considered all of the evidence, including the history of the
    parties dealings, and found that the appellants principals were unreliable
    witnesses who had changed their evidence to try to support their case. The
    findings of fact made by the trial judge are amply supported by the evidence in
    the record and are entitled to deference.  I see no basis to interfere with his
    conclusion that the franchisor did not breach its duty of fair dealing in
    respect of notifying the appellant of the revived Thornhill opportunity under the
    ROFR, and that the franchisor acted in good faith and in a commercially
    reasonable manner towards the appellant consistent with s. 3 of the
AWA
.

[31]

Absent
    any finding of a breach of the appellants rights, it is unnecessary to
    consider whether the personal respondents may be responsible for intentional
    interference with economic relations due to their role in the provision of
    insufficient disclosure and their interest in obtaining the Thornhill and North
    York locations for themselves.

Disposition

[32]

For
    these reasons I would dismiss the appeal
.
Counsel for the appellant takes no issue with the respondents costs.
    Therefore, the respondents, now known as Sara-Mammas Corporation Inc. and
    Imvescor Restaurants Inc., will have their costs of the appeal fixed at
    $52,102.19, inclusive of disbursements

and all
    applicable taxes, and the respondents, John Mavromichalis, Kosta Mavromichalis,
    4077822 Canada Inc. and 4089537 Canada Inc., will have their costs of the
    appeal fixed at $23,817.68, also inclusive of disbursements and all applicable
    taxes.

Released:
January 24, 2013 HL

S.N.
    Lederman J. (
ad hoc
)

I
    agree H.S. LaForme J.A.

I
    agree David Watt J.A.





[1]
BRRI has now succeeded to the respondent Imvescor Restaurants Inc.


