





CITATION:
1470568
          Ontario Limited (East Side Mario's) v. Prime Restaurants of Canada
          Inc., 2011 ONCA 9





DATE:
          20110110



DOCKET: C51891



COURT OF APPEAL FOR ONTARIO



Weiler, Laskin and Goudge JJ.A.



BETWEEN



1470568 Ontario Limited carrying on business as East
          Side Marios



Respondent (Appellant)



And



Prime Restaurants of Canada Inc.



Applicant (Respondent)



Marc A. Munro, for the appellant



Domenico Magisano, for the respondent



John Russo, for the receiver



Heard: September 23, 2010



On appeal from the order of Justice Geoffrey B. Morawetz of
          the Superior Court of Justice dated March 22, 2010.



Goudge J.A.:



INTRODUCTION

[1]

The respondent is the Canadian
    franchisor of the East Side Marios restaurant brand. The appellant is the
    franchisee of an East Side Marios restaurant in Brampton Ontario.

[2]

On the respondents application,
    Justice Morawetz appointed a receiver of the appellants business on March 22,
    2010. The application judge held that it was just and convenient to do so
    because the appellant was not making the required franchise payments to the
    respondent or the required PST payments to the provincial government. He dismissed
    the appellants arguments that the respondent had forgiven its material
    cumulative debt in letters of March 23, 2009 and November 23, 2009 and that
    alleged PST default could not be considered because it was not included in the
    respondents notice of application.

[3]

The appellant repeats these
    arguments in this court. For the reasons that follow I reject them, as the
    application judge did, and I would therefore dismiss the appeal.

THE FACTS

[4]

In late 2005, the appellant took
    over an East Side Marios restaurant in Brampton as a franchisee. The
    appellants relationship with the respondent was governed by the Franchise
    Agreement and the Security Agreement between them. The Franchise Agreement
    required the appellant to remit franchise payments to the respondent made up of
    royalty and service fees of 5% of gross revenues, and advertising contributions
    of a further 3% of gross revenues.

[5]

From the beginning, the appellant
    did not comply with the payment obligations required by the Franchise
    Agreement. When negotiations to resolve this broke down, the respondent sent a
    notice of default to the appellant on January 18, 2010, setting out the amounts
    it said were owing for royalty and service fees and for advertising
    contributions. Then on February 10, 2010, it commenced this application
    pursuant to the
Bankruptcy and Insolvency
    Act
, R.S.C. 1985, c. B-3 (the BIA) to have a receiver appointed. Among
    other things, its supporting affidavit material also disclosed a claim against
    the appellant by the provincial government for PST arrears of $101,541.  On consent, an interim receiver was appointed
    on February 23, 2010, pending argument of the application itself. The report to
    the court of the interim receiver dated March 16, 2010 ascertained that the PST
    default in fact was $270,657.57.

[6]

On March 22, 2010, on the return of
    the application, the appellants position was that until the January 18, 2010
    notice of default, the respondent had not claimed either royalties and services
    fees or advertising contributions from the time the appellant assumed the
    franchise, and further, that these had been expressly forgiven by the
    respondent in the letters of March 23 and November 23, 2009.

[7]

The March 23, 2009 letter begins as
    follows:

We
    outline below a plan that will assist you to keep your restaurant operational.

Current Debt

If
    we were to calculate your debt to Prime without any amendment to your Franchise
    Agreement, you would owe the following:





Royalty and
            Service Fees *

Advertising
            Fund Contributions *

Total *



F '09 (Gross Revenue earned to
            04 Jan 09)

$82,214.70

$49,328.82

$131,543.52



F '10 (Gross Revenue earned
            from 05 Jan 09 to 03 Jan 10)

$13,161.45

$7,896.87

$21,058.32



Grand Total



$152,601.84




*  Plus GST

Although Prime is not obliged to do so, in view of
    your commitment to improve operations of your restaurant and cooperation with
    Prime, we hereby confirm that the foregoing debt of $152,601.84 is forgiven. Furthermore,
    in the interest of resolving the issues in your business, Prime is willing to
    extend concessions to you, subject to certain conditions, as described below.

[8]

The
    letter then addressed certain conditions and obligations proposed for F 10 (i.e.
    the fiscal year ending January 3, 2010), for F 11, for franchise renewal and
    for lease assignment.  It closed with a
    proposed release by the appellant from all claims against the respondent and a
    signature line for the appellant. The last paragraph of the letter reads:

We trust you can see our sincere efforts to reduce
    your current financial and emotional burdens. If you agree, please sign (below)
    and return the enclosed duplicate copy of this letter by March 31, 2009.

[9]

With
    one difference, the letter of November 23, 2009 is essentially identical,
    except that the closing sentence adds a deadline for signing and returning a
    copy of the letter, without which this proposal shall be null and void. Apart
    from this, the one difference between the two letters was the calculation of
    current debt which reads as follows:





Royalty and
            Service Fees *

Advertising
            Fund Contributions *

Total *



F '09 (Gross Revenue earned to
            04 Jan 09)

$82,214.70

$49,328.82

$131,543.52



F '10 (Gross Revenue earned
            from 05 Jan 09 to 15 Nov 09 -- $1,175,243)

$58,762.00

$35,257.00

$94,019.00



Grand Total



$225,562.52




*  Plus GST

[10]

Neither letter was ever signed and returned by the
    appellant.

THE DECISION APPEALED FROM

[11]

The
    application judge dismissed the appellants arguments. He found that the two
    letters relied on by the appellant did not constitute express forgiveness by
    the respondent. Rather, he held that they must be read in context, which made
    it clear that in both cases, the entire letter constituted an operating plan, as
    the introductory sentence says, and that since the plan was never accepted by
    the appellant, the forgiveness never came into effect. The application judge
    pointed out that if the appellants interpretation were correct, the cumulative
    debt referred to in the November 23, 2009 letter would have reflected only the
    increase from March 23, 2009, and it does not.

[12]

The
    application judge also relied on the report of the interim receiver which found
    that the provincial government had a deemed trust claim against the appellant
    of $270,657.57 for failure to pay PST. This default was a breach of the
    Security Agreement binding the appellant.

[13]

The
    application judge concluded as follows:

In
    my view the Applicant has established that the Respondent is in breach of the
    Franchise Agreement in not making the required Franchise Payments and is also
    in breach of the Security Agreement with respect to the Franchise Payments and
    the PST payments.

The
    position of the Applicant has been put at risk as a result of the failure of
    the Respondent to comply with the provisions of both the Franchise Agreement
    and the Security Agreement.

An
    appointment of a receiver is, in my view, both just and convenient in the
    circumstances.

[14]

Having
    reached this conclusion, it was not necessary for the application judge to
    determine whether the pre F 09 or post January 5, 2009 debts owed by the
    appellant for royalty and service fees and advertising contributions, or its
    performance issues raised by the respondent, would be enough to justify the
    appointment of a receiver.

ANALYSIS

[15]

In
    this court, the appellant reiterates its position that the letters of March 23
    and November 23, 2009 constitute debt forgiveness by the respondent. It also
    makes three additional arguments in this court, none of which was raised at
    first instance:

(i)

the application was advanced contrary to the
Rules of Civil Procedure,
leaving the
    application judge without jurisdiction to grant the relief sought;

(ii)

the application judge erred and went beyond
    his jurisdictional authority by considering the PST default, since this was not
    a ground of relief sought in the notice of application;

(iii)

the application judge erred in failing to find
    that the respondent had waived its rights to the outstanding debts and was
    thereby estopped from enforcing any rights to them.

I will deal with all four arguments in turn.

THE DEBT FORGIVENESS ISSUE

[16]

For
    the reasons he gave, I agree with the application judges reading of the
    letters of March 23 and November 23, 2009. Read as a whole, each letter
    contains the proposal of a plan to the appellant. The opening sentence of the
    letter says so explicitly. The last paragraph says so implicitly. Between the
    opening and the closing, the rest of the letter describes the proposal. By its terms
    it required the appellant to agree, and to sign and return a copy of the
    letter. Since that never happened, none of the proposed terms, including that
    concerning debt forgiveness, came into effect.

[17]

The
    appellants reading of these two letters is that each contains a stand alone
    forgiveness of the debt that is complete and binding on the respondent without
    the letter being signed and returned by the appellant.

[18]

I
    do not agree. As the application judge observes, if this were so, forgiveness of
    the F 09 debt of $131,543.52 was accomplished by the March 23, 2009 letter.
    That debt would not appear again as a debt to be forgiven in the November 23,
    2009 letter. Yet it does.

[19]

In
    my view this ground of appeal fails.

THE RULES OF CIVIL PROCEDURE ISSUE

[20]

The
    appellant argues that the notice of application refers to Rule 14.05(3)(g),
    which permits an application for a receiver when that relief is ancillary to
    other relief being sought. This application is not that, and as a consequence,
    says the appellant, the motion judge lacked jurisdiction.

[21]

However
    the notice is explicitly brought under the BIA. Section 243 of that Act permits
    a court to appoint a receiver on application. Rule 14.05(2) provides that a
    proceeding may be commenced by an application if a statute so authorizes. The
    BIA does so. Rule 3 of the rules under the BIA provides that the Ontario rules
    apply to the extent they do not conflict with the BIA rules and no such
    conflict is advanced here.

[22]

I
    conclude that this proceeding was properly launched and I would reject this
    ground of appeal.

THE PST DEFAULT ISSUE

[23]

The
    appellant argues that the notice of application does not raise an issue of any
    PST default by the appellant and says that it must do so in order to prevent
    surprise and unfair advantage.

[24]

However,
    the respondents affidavit supporting the application alleges just such a
    default. Moreover the interim receiver, appointed on consent, reported to the
    court on the default, as it was obliged to, and quantified it at a
    significantly higher amount than the supporting affidavit did.

[25]

These
    circumstances do not permit the appellant to properly claim prejudice or
    surprise. They also provide an ample basis for the application judge to
    conclude that the appellant owed significant PST arrears to the provincial government
    and that this constituted a breach by the appellant of the Security Agreement.

[26]

This
    ground of appeal fails.

THE WAIVER OR ESTOPPEL ISSUE

[27]

Finally, the appellant argues that waiver and estoppel
    apply to prevent the respondent from relying on any outstanding debts owed to
    it by the appellant.

[28]

Since this argument was not raised before the
    application judge, he did not make any findings of fact with this in mind.
    Nonetheless, given his reading of the letters of March 23 and November 23,
    2009, with which I agree, it is clear that neither constitutes the respondents
    unequivocal and conscious abandonment of its right to claim the debts, required
    for waiver, nor the representation that it would not do so, required for
    estoppel. Nor can I find anything else in the record that would serve this
    purpose. Finally, the appellant does not advance any resulting reliance or
    change of position that would be necessary for either concept to apply.

[29]

This argument also fails.

[30]

For these reasons, I would dismiss the appeal. In the
    circumstances I would order costs to the respondent fixed at $5,000 inclusive
    of disbursements and applicable taxes.

RELEASED:  JAN 10 2011
    (K.M.W.)

S. T. Goudge J.A.

I agree. K. M. Weiler J.A.

I agree. J. I. Laskin J.A.


