Kentucky Fried Chicken Canada v. Scott's Food Services Inc. et al.

• Jurisdiction: Ontario
• Court: Court of Appeal (Ontario)
• Citation: (1998), 114 O.A.C. 357 (CA),1998 CanLII 4427 (ON CA),1998 CanLII 4427 (NS CA),41 BLR (2d) 42,[1998] CarswellOnt 4170,[1998] OJ No 4368 (QL),114 OAC 357,83 ACWS (3d) 382
• Date: 02 November 1998

KFC Can. v. Scott's Food Services (1998), 114 O.A.C. 357 (CA)

MLB headnote and full text

Temp. Cite: [1998] O.A.C. TBEd. NO.013

Kentucky Fried Chicken Canada, a Division of Pepsi-Cola Canada Ltd. (plaintiff/respondent) v. Scott's Food Ser­vices Inc. and Scott's Hospitality Inc. (defendants/appellants)

(C28208)

Indexed As: Kentucky Fried Chicken Canada v. Scott's Food Services Inc. et al.

Ontario Court of Appeal

Moldaver and Goudge, JJ.A., and Ferrier, J.(ad hoc)

November 2, 1998.

Summary:

Kentucky Fried Chicken Canada (KFC) and Scott's Food Services Inc. entered into a master franchise license agreement and a master development agree­ment as an adden­dum thereto. Scott's Food was a wholly owned subsidiary of Scott's Hospital­ity. KFC, the franchisor, and Scott's Food, the franchisee, disputed the proper interpretation to be given to the agreement. The main issues were 1) the ability of Scott's Food and Scott's Hospitality to transfer shares of Scott's Food, Scott's Hospitality or other corpor­ations under the license agree­ment and 2) the remodelling and upgrading of Scott's Food outlets covered by the license agree­ment and addendum.

The Ontario Court (General Division), in a decision reported at 41 O.T.C. 241, inter­preted the agree­ment and deter­mined the issues accordingly.

The Ontario Court (General Division), in a decision reported at 44 O.T.C. 366, amended the decision to correct an error and deter­mined the matter of costs. Scott's Food and Scott's Hos­pitality appealed.

The Ontario Court of Appeal allowed the appeal.

Evidence - Topic 6755

Parol evidence rule - Interpretation of a legal act - Evidence of surrounding cir­cum­stances - Setting in which agreement made - [See Franchises - Topic 2004 ].

Franchises - Topic 2004

Franchise agreement - General - Interpre­ta­tion - Parties to a franchise agreement disputed the proper interpretation to be given to the agreement - The trial judge determined that it was not a case of ambi­guity and declined to consider evidence of the subjective intentions of the parties which were not communicated to each other - He also excluded the various draft documents leading up to the license agree­ment - However, he did consider the rela­tionship between the parties and the in­dustry custom, including the licensing agreements between the franchisor and other Cana­dian franchisees as part of the factual matrix that must be looked at in interpret­ing the agreement - The Ontario Court of Appeal agreed with this approach - See paragraphs 24 to 27.

Franchises - Topic 2022

Franchise agreement - Breach of agree­ment - What constitutes - KFC, a fran­chisor, and Scott's Food entered into a master fran­chise license agreement - Scott's Food was a wholly owned sub­sidi­ary of Scott's Hospi­tal­ity - Scott's Hospi­tality was not a party to the agree­ment - KFC argued that Scott's Food and Scott's Hos­pital­ity required its consent to any change in own­ership of the franchisee, failing which it could ter­minate the agree­ment - Alter­na­tively, certain transac­tions involving the Scott's companies and a nonparty trig­gered a right of first refusal - The Ontario Court of Appeal interpreted the franchise agree­ment and rejected KFC's arguments - See para­graphs 6 to 54.

Franchises - Topic 2022

Franchise agreement - Breach of agree­ment - What constitutes - A franchisee failed to enhance 5 to 10% of its outlets - The trial judge held that: the failure was a "material and substantive" breach of the franchisee's obligations under its license agreement and addendum thereto which entitled the fran­chi­sor to terminate the license; and, to avoid termination, all the outlets had to be upgraded within three months - The Ontario Court of Appeal held that the termi­nation notice provision did not give a substantive right to termin­ate for any failure by the franchisee to discharge its enhancement obligations where another provision set out the enhancement obliga­tions that, if breached, justified termination - Thus, to correct the "material and sub­stantive" failure justifying ter­mina­tion, the franchisee only had to ensure that no more than 5% of its outlets were sub­stan­dard within three months - See para­graphs 55 to 65.

Franchises - Topic 2201

Franchise agreement - Termination - Gen­eral - [See second Franchises - Topic 2022 ].

Franchises - Topic 2206

Franchise agreement - Termination - No­tice - [See second Franchises - Topic 2022 ].

Franchises - Topic 7010

Transfer of franchises - General - Consent of franchisor - [See first Franchises - Topic 2022 ].

Cases Noticed:

Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen, [1976] 1 W.L.R. 989 (H.L.), refd to. [para. 25].

Consolidated-Bathurst Export Ltd. v. Mu­tual Boiler and Machinery Insurance Co., [1980] 1 S.C.R. 888; 32 N.R. 488; 112 D.L.R.(3d) 49; [1980] I.L.R. 1-1176, refd to. [para. 26].

Toronto (City) v. W.H. Hotel Ltd. (1966), 56 D.L.R.(2d) 539 (S.C.C.), refd to. [para. 27, footnote 1].

Scanlon v. Castlepoint Development Corp. et al. (1992), 59 O.A.C. 191; 11 O.R.(3d) 744 (C.A.), refd to. [para. 27, foot­note 2].

GATX et al. v. Hawker Siddeley Canada Inc. et al. (1996), 1 O.T.C. 322; 27 D.L.R.(2d) 251 (Gen. Div.), refd to. [para. 47].

Counsel:

Dennis R. O'Connor, Q.C., David Stockwood, Q.C., Nancy J. Spies and Timothy H, Mitchell, for the appellants;

David R. Byers, Katherine L. Kay and Christopher J. Cosgriffe, for the respon­dent.

This appeal was heard on May 4 and 5, 1998, by Moldaver and Goudge, JJ.A., and Ferrier, J.(ad hoc), of the Ontario Court of Appeal. Goudge, J.A., released the follow­ing decision for the Court of Appeal on Novem­ber 2, 1998.