Country Style Food Services Inc. v. 1304271 Ontario Ltd. et al., (2005) 200 O.A.C. 172 (CA)

• Judge: MacPherson, Cronk and Lang, JJ.A.
• Court: Court of Appeal (Ontario)
• Case Date: June 30, 2005
• Jurisdiction: Ontario
• Citations: (2005), 200 O.A.C. 172 (CA)

Country Style Food v. 1304271 Ont. (2005), 200 O.A.C. 172 (CA)

MLB headnote and full text

Temp. Cite: [2005] O.A.C. TBEd. JL.007

Country Style Food Services Inc. (plaintiff/appellant) v. 1304271 Ontario Limited, Marc Mesic and Zeljko Vukovic (defendants/respondents)

1304271 Ontario Limited, Marc Mesic and Zeljko Vukovic (plaintiffs by counterclaim/respondents) v. Country Style Food Services Inc. and 1176847 Ontario Limited (defendants by counterclaim/appellants) and 1176847 Ontario Limited (third party/appellant)

(C39693; C39708; C41167)

Indexed As: Country Style Food Services Inc. v. 1304271 Ontario Ltd. et al.

Ontario Court of Appeal

MacPherson, Cronk and Lang, JJ.A.

June 30, 2005.

Summary:

A donut shop franchisor leased premises in a shopping center development, then sub-leased the premises to its franchisee. Attached to the head lease was a site plan for the overall shopping center, which was incorporated by reference into the sub-lease. After the franchised restaurant was in business for approximately one year, the landlord unilaterally developed the mall pursuant to a new site plan. The franchisee claimed that this detrimentally affected its business and ceased paying rent. The franchisor obtained a writ of possession and an order terminating the sub-lease and sued the franchisee for damages. The franchisee counterclaimed against the franchisor and the landlord. The franchisor third partied the landlord.

The Ontario Superior Court, in a decision reported at [2003] O.T.C. 100, granted judgment of $400,000 plus costs in favour of the franchisee, jointly and severally, against the franchisor and the landlord. In a decision reported at [2003] O.T.C. 1087, the court ordered the landlord to fully indemnify the franchisor for the monies owed to the franchisee. The landlord and the franchisor appealed.

The Ontario Court of Appeal dismissed the appeals by the landlord and the franchisor arising from the main action and allowed the landlord's appeal in the third party action.

Equity - Topic 3716.2

Fiduciary or confidential relationships - Commercial relationships - Distributorship or franchise agreements - A trial judge observed that "The relationship of franchisor to franchisee is a complex one. The franchisor's duty of care, the duty to act in good faith, while not elevated to the status of a fiduciary, speaks to concepts of loyalty, respect and fair dealing." - The Ontario Court of Appeal agreed - See paragraph 97.

Estoppel - Topic 1164

Estoppel in pais (by conduct) - Representation - By conduct - Course of conduct by litigant - A donut shop franchisor leased premises in a shopping center development, then sub-leased the premises to its franchisee - Attached to the head lease was a site plan for the overall shopping center, which was incorporated by reference into the sub-lease - After the franchised restaurant was in business for approximately one year, the landlord unilaterally developed the mall pursuant to a new site plan - The franchisee claimed that this detrimentally affected its business and ceased paying rent - The franchisor obtained a writ of possession and an order terminating the sub-lease and sued the franchisee for damages - The franchisee counterclaimed against the franchisor and the landlord - The franchisor third partied the landlord - In the main action, the franchisor aligned itself fully with the landlord, claiming, inter alia, that there was no breach of duty or contract by the landlord and no damages - Alternatively, the franchisor claimed contribution and indemnity from the landlord - In the third party action, the landlord also sought contribution and indemnity respecting the main action and, contrary to its pleaded position in the main action, claimed that the landlord's alterations breached the head lease and detrimentally affected the restaurant - The Ontario Court of Appeal held that the franchisor was estopped from taking a contrary position from that taken in the main action to its benefit and the landlord's prejudice - See paragraphs 117 to 125.

Franchises - Topic 2067

Franchise agreement - Duties of franchisor - Duty of good faith - [See Equity - Topic 3716.2 ].

Franchises - Topic 2067

Franchise agreement - Duties of franchisor - Duty of good faith - A donut shop franchisor leased premises in a shopping center development, then sub-leased the premises to its franchisee - Attached to the head lease was a site plan for the overall shopping center, which was incorporated by reference into the sub-lease - After the franchised restaurant was in business for approximately one year, the landlord unilaterally developed the mall pursuant to a new site plan - The franchisee claimed that this detrimentally affected its business and ceased paying rent - The franchisor obtained a writ of possession and an order terminating the sub-lease and sued the franchisee for damages - The franchisee counterclaimed against the franchisor and the landlord - The franchisor third partied the landlord - The Ontario Court of Appeal held that the franchisor breached its duty of good faith to the franchisee - The structure of the tripartite leasing arrangement placed the franchisor, as the party in a direct contractual relationship with the landlord, in the best legal and business position to influence the landlord regarding the development's redesign and to hold the landlord to its obligations under the head lease - When litigation ensued, the franchisor sought to advance its own interests by denying the franchisee's claims, supporting the landlord's position in its pleadings and at trial, and confining the third party action to a recovery claim that, if successful, would benefit only it - See paragraphs 95 to 102.

Fraud and Misrepresentation - Topic 2506

Misrepresentation - General principles - Innocent misrepresentation - A donut shop franchisor leased premises in a shopping center development, then sub-leased the premises to its franchisee - Attached to the head lease was a site plan for the overall shopping center, which was incorporated by reference into the sub-lease - After the franchised restaurant was in business for approximately one year, the landlord unilaterally developed the mall pursuant to a new site plan, without notice to the franchisor or franchisee - The franchisee claimed that this detrimentally affected its business and ceased paying rent - The franchisor obtained a writ of possession and an order terminating the sub-lease and sued the franchisee for damages - The franchisee counterclaimed against the franchisor and the landlord - The Ontario Court of Appeal affirmed a judgment of $400,000 in favour of the franchisee, jointly and severally, against the franchisor and the landlord - The court affirmed that the landlord and the franchisor owed a duty of care to the franchisee - The court held, inter alia, that the landlord negligently misrepresented and the franchisor innocently misrepresented the mall development to the franchisee - See paragraphs 1 to 93.

Fraud and Misrepresentation - Topic 2508

Misrepresentation - General principles - Negligent misrepresentation - [See Fraud and Misrepresentation - Topic 2506 ].

Cases Noticed:

Housen v. Nikolaisen et al., [2002] 2 S.C.R. 235; 286 N.R. 1; 219 Sask.R. 1; 272 W.A.C. 1, refd to. [para. 44].

Waxman et al. v. Waxman et al. (2004), 186 O.A.C. 201; 44 B.L.R.(3d) 165 (C.A.), leave to appeal refused (2005), 339 N.R. 200 (S.C.C.), refd to. [para. 44].

H.L. v. Canada (Attorney General) et al. (2005), 333 N.R. 1; 262 Sask.R. 1; 347 W.A.C. 1; 2005 SCC 25, refd to. [para. 44].

Queen (D.J.) v. Cognos Inc., [1993] 1 S.C.R. 87; 147 N.R. 169; 60 O.A.C. 1, refd to. [para. 46].

Hercules Management Ltd. et al. v. Ernst & Young et al., [1997] 2 S.C.R. 165; 211 N.R. 352; 115 Man.R.(2d) 241; 139 W.A.C. 241, refd to. [para. 47].

Anns v. Merton London Borough Council, [1978] A.C. 728 (H.L.), refd to. [para. 47].

Nielsen v. Kamloops (City) and Hughes, [1984] 2 S.C.R. 2; 54 N.R. 1, refd to. [para. 47].

Shelanu Inc. v. Print Three Franchising Corp. (2003), 172 O.A.C. 78; 64 O.R.(3d) 533 (C.A.), refd to. [para. 49].

Clark's-Gamble of Canada Ltd. v. Grant Park Plaza Ltd., [1967] S.C.R. 614, dist. [para. 59].

Black v. Lakefield (Village) (1998), 113 O.A.C. 74; 41 O.R.(3d) 741 (C.A.), refd to. [para. 87].

Lister (Ronald Elwyn) Ltd. et al. v. Dunlop Canada Ltd., [1982] 1 S.C.R. 726; 42 N.R. 181, refd to. [para. 93].

Morguard Trust Co. v. Lawtons Drug Stores Ltd. (1987), 84 N.B.R.(2d) 14; 214 A.P.R. 14 (T.D.), refd to. [para. 93].

Toronto Housing Co. v. Postal Promotions Ltd. (1982), 39 O.R.(2d) 627 (C.A.), dist. [para. 116].

Ryan v. Moore et al. (2005), 334 N.R. 355; 247 Nfld. & P.E.I.R. 286; 735 A.P.R. 286; 2005 SCC 38, refd to. [para. 124].

Maracle v. Travellers Indemnity Co. of Canada, [1991] 2 S.C.R. 50; 125 N.R. 294; 47 O.A.C. 333, refd to. [para. 124].

Counsel:

Alan J. Lenczner, Q.C., and Estée Garfin, for the appellant, 1176847 Ontario Ltd.;

Arnold H. Zweig, for the appellant/respondent, Country Style Food Services Inc.;

Wolfgang W. Kaufmann, for the respondents, 1304271 Ontario Ltd., Marc Mesic and Zeljko Vukovic.

This appeal was heard on January 19 and 21, 2005, by MacPherson, Cronk and Lang, JJ.A., of the Ontario Court of Appeal. Cronk, J.A., delivered the following decision for the court on June 30, 2005.