Salah v. Timothy's Coffees of the World Inc., [2010] OJ No 4336 (QL)

• Court: Court of Appeal (Ontario)
• Case Date: September 16, 2010
• Jurisdiction: Ontario
• Citations: [2010] OJ No 4336 (QL);2010 ONCA 673;74 BLR (4th) 161;(2010), 268 O.A.C. 279 (CA);268 OAC 279

Salah v. Timothy's Coffees (2010), 268 O.A.C. 279 (CA)

MLB headnote and full text

Temp. Cite: [2010] O.A.C. TBEd. OC.023

Abdulhamid Salah and 1470256 Ontario Inc. (plaintiffs/respondents) v. Timothy's Coffees of the World Inc. (defendant/appellant)

(C51317; 2010 ONCA 673)

Indexed As: Salah et al. v. Timothy's Coffees of the World Inc.

Ontario Court of Appeal

Winkler, C.J.O., Rosenberg, J.A. and Pitt, J.(ad hoc)

October 14, 2010.

Summary:

In 2001, Salah entered into a franchise agreement with Timothy's Coffees of the World Inc. to operate a franchise store in the Bayshore Shopping Centre. Timothy's was a lessee under a head lease for a location on the third floor in the shopping centre. Salah became a sublessee under the head lease and the term of the franchise agreement was tied to the length of the head lease, which was to expire on September 30, 2005. Schedule A to the franchise agreement provided that if Timothy's entered into a new head lease with the Bayshore Shopping Centre, Salah's franchise agreement would be renewed with a new sublease. Salah assigned the franchise agreement and sublease to his company, 1470256 Ontario Inc. Prior to the expiry of the head lease on the third floor, Timothy's entered into a new lease on the second floor and signed an agreement with a new franchisee for that location. Timothy's then advised Salah that his franchise agreement would end on September 30, 2005. Salah and 1470256 (the plaintiffs) sued Timothy's, alleging breach of the franchise agreement and seeking damages arising from the breach and Timothy's conduct. Timothy's argued that the plaintiffs had no right of renewal as any right of renewal provided by Schedule A only concerned the original location on the third floor. Since Timothy's could not renew its head lease on the third floor, the provisions of Schedule A were inoperative. Timothy's also argued that because Salah had assigned his franchisee rights to 1470256, only that corporation could bring a claim against the franchisor.

The Ontario Superior Court, in a decision reported at [2009] O.T.C. Uned. P94, held that: (1) both Salah and 1470256 were franchisees of Timothy's and could be treated as one entity for the purpose of enforcing rights or seeking remedies; (2) the proper interpretation of Schedule A was that it related to the Bayshore Shopping Centre in general and was not limited to the existing third floor location; (3) Timothy's breached the franchise agreement by failing to observe the terms of Schedule A with respect to the new head lease on the second floor; (4) Timothy's breached a duty of good faith, contrary to s. 3 of the Arthur Wishart Act (Franchise Disclosure); and (5) the breach of the duty of good faith was an independent actionable wrong. The court awarded Salah damages of $230,358 for future loss of income flowing from Timothy's breach of contract, and an additional $50,000 for breach of the duty of good faith and mental distress. Timothy's appealed.

The Ontario Court of Appeal dismissed the appeal.

Contracts - Topic 6807

Assignment - Effect of assignment - [See Franchises - Topic 4 ].

Franchises - Topic 4

General - Franchisee - Who constitutes - Salah entered into a franchise agreement with Timothy's Coffees of the World Inc. to operate a franchise store in the Bayshore Shopping Centre and he became a sublessee for a location on the third floor - Salah assigned the franchise agreement and sublease to his company (1470256 Ontario Inc.) by way of an Assignment and Guarantee - The Assignment and Guarantee provided that Salah remained personally liable for all franchisee obligations under the franchise agreement - Salah and 1470256 sued Timothy's for breach of the franchise agreement - Timothy's argued that because Salah had assigned his franchisee rights to 1470256, only that corporation could bring a claim against the franchisor - The trial judge held that both Salah and 1470256 were franchisees of Timothy's and could be treated as one entity for the purpose of enforcing rights or seeking remedies - The Ontario Court of Appeal upheld the finding - There was ample evidence to support the trial judge's finding that Timothy's "maintained a relationship with both the individual franchisee and its assignee corporation. It never intended to accept the corporation in the place of Mr. Salah for all purposes" - The court stated that "it would be incongruous, not to mention unfair to Mr. Salah, if he and his corporation were treated as one entity for the purposes of franchise liabilities, but were treated as separate entities when the question of enforcing franchisee rights under the franchise agreement is at issue" - See paragraphs 10 to 14.

Franchises - Topic 5

General - Legislation - Interpretation - [See third Franchises - Topic 2067 ].

Franchises - Topic 2004

Franchise agreement - General - Interpretation - [See Franchises - Topic 2022 ].

Franchises - Topic 2022

Franchise agreement - Breach of agreement - What constitutes - Salah entered into a franchise agreement with Timothy's Coffees of the World Inc. to operate a franchise store in the Bayshore Shopping Centre - Timothy's was a lessee under a head lease for a location on the third floor in the shopping centre - Salah became a sublessee under the head lease and the term of the franchise agreement was tied to the length of the head lease, which was to expire on September 30, 2005 - Schedule A to the franchise agreement provided that if Timothy's entered into a new head lease with the Bayshore Shopping Centre, Salah's franchise agreement would be renewed with a new sublease - Salah assigned the franchise agreement and sublease to his company, 1470256 Ontario Inc. - Prior to the expiry of the head lease on the third floor, Timothy's entered into a new lease on the second floor and signed an agreement with a new franchisee for that location - Timothy's then advised Salah that his franchise agreement would end on September 30, 2005 - Salah and 1470256 (the plaintiffs) sued Timothy's, alleging breach of the franchise agreement and seeking damages arising from the breach and Timothy's conduct - Timothy's argued that the plaintiffs had no right of renewal as any right of renewal provided by Schedule A only concerned the original location on the third floor - Since Timothy's could not renew its head lease on the third floor, the provisions of Schedule A were inoperative - The trial judge held that Schedule A related to the Bayshore Shopping Centre in general and was not limited to the existing third floor location, Timothy's breached the franchise agreement by failing to observe the terms of Schedule A, and Timothy's breached a duty of good faith, contrary to s. 3 of the Arthur Wishart Act (Franchise Disclosure) - The trial judge awarded Salah damages of $230,358 for future loss of income flowing from Timothy's breach of contract, and an additional $50,000 for breach of the duty of good faith and mental distress - Timothy's appealed - The Ontario Court of Appeal dismissed the appeal - The trial judge's conclusions that the franchise agreement and Schedule A applied to the whole shopping centre and that Timothy's conduct, which effectively amounted to a refusal to allow Salah the option of renewing the franchise agreement, constituted a breach of contract, were unassailable - The trial judge's findings that Timothy's deliberately withheld information about its intentions from Salah supported the conclusion that there was a breach of the duty of good faith - The court declined to interfere with the trial judge's decision as to damages - See paragraphs 15 to 30.

Franchises - Topic 2025

Franchise agreement - Breach of agreement - Damages - [See Franchises - Topic 2022 ].

Franchises - Topic 2067

Franchise agreement - Duties of franchisor - Duty of good faith - [See Franchises - Topic 2022 ].

Franchises - Topic 2067

Franchise agreement - Duties of franchisor - Duty of good faith - Salah entered into a franchise agreement with Timothy's Coffees of the World Inc. to operate a franchise store in the Bayshore Shopping Centre - Timothy's was a lessee under a head lease for a location on the third floor in the shopping centre - Salah became a sublessee under the head lease and the term of the franchise agreement was tied to the length of the head lease, which was to expire on September 30, 2005 - Schedule A to the franchise agreement provided that if Timothy's entered into a new head lease with the Bayshore Shopping Centre, Salah's franchise agreement would be renewed with a new sublease - Salah assigned the franchise agreement and sublease to his company, 1470256 Ontario Inc. - Prior to the expiry of the head lease on the third floor, Timothy's entered into a new lease on the second floor and signed an agreement with a new franchisee for that location - Timothy's then advised Salah that his franchise agreement would end on September 30, 2005 - Salah and 1470256 sued Timothy's for breach of the franchise agreement - The trial judge found that Timothy's breached the franchise agreement and that Timothy's breached a duty of good faith, contrary to s. 3 of the Arthur Wishart Act (Franchise Disclosure) - Timothy's appealed, arguing that its conduct leading up to the expiration of the franchise agreement could not constitute a breach of the duty of good faith because s. 3(1) of the Act only imposed the duty of good faith and fair dealing in the "performance or enforcement" of the existing franchise agreement - The Ontario Court of Appeal rejected the argument - The conduct at issue arose squarely within the "performance or enforcement" of the franchise agreement - See paragraphs 20 to 21.

Franchises - Topic 2067

Franchise agreement - Duties of franchisor - Duty of good faith - Salah entered into a franchise agreement with Timothy's Coffees of the World Inc. - Salah assigned the franchise agreement to his company, 1470256 Ontario Inc. - Salah and 1470256 sued Timothy's, alleging breach of the franchise agreement - The trial judge found that Timothy's breached the franchise agreement and that Timothy's breached a duty of good faith, contrary to s. 3 of the Arthur Wishart Act (Franchise Disclosure) (the Wishart Act) - The trial judge awarded damages of $230,358 for future loss of income flowing from Timothy's breach of contract, and an additional $50,000 for breach of the duty of good faith and mental distress - Timothy's appealed, arguing that it was not open to the trial judge to award damages under the Wishart Act for anything other than compensatory damages relating to pecuniary losses - The Ontario Court of Appeal rejected the argument - The court stated that "The Wishart Act is sui generis remedial legislation. It deserves a broad and generous interpretation. The purpose of the statute is clear: it is intended to redress the imbalance of power as between franchisor and franchisee; it is also intended to provide a remedy for abuses stemming from this imbalance. An interpretation of the statute which restricts damages to compensatory damages related solely to proven pecuniary losses would fly in the face of this policy initiative" - Section 3(2) of the Wishart Act permitted an award of damages for the breach of the duty of good faith, separate and in addition to any award in compensation of pecuniary losses - Taking the conduct of Timothy's as found by the trial judge into account, the court saw no error in her decision to award damages on a merged basis for the breach of duty of good faith and mental distress, either in principle or in respect of quantum - See paragraphs 25 to 29.

Franchises - Topic 2141

Franchise agreement - Renewal - General - [See Franchises - Topic 2022 ].

Statutes - Topic 8506

Remedial statutes - General principles - Interpretation - [See third Franchises - Topic 2067 ].

Cases Noticed:

Kosmopoulos et al. v. Constitution Insurance Co. of Canada et al., [1987] 1 S.C.R. 2; 74 N.R. 360; 21 O.A.C. 4, refd to. [para. 14].

3869130 Canada Inc. et al. v. I.C.B. Distribution Inc. et al. (2008), 239 O.A.C. 137; 66 C.C.E.L.(3d) 89 (C.A.), refd to. [para. 16].

Dumbrell v. Regional Group of Companies Inc. et al. (2007), 220 O.A.C. 64; 85 O.R.(3d) 616; 2007 ONCA 59, refd to. [para. 16].

SimEx Inc. v. IMAX Corp. et al. (2005), 206 O.A.C. 3; 11 B.L.R.(4th) 214 (C.A.), refd to. [para. 16].

Kentucky Fried Chicken Canada v. Scott Food Services Inc. et al. (1998), 114 O.A.C. 357; 41 B.L.R.(2d) 42 (C.A.), refd to. [para. 16].

Statutes Noticed:

Arthur Wishart Act (Franchise Disclosure), S.O. 2000, c. 3, sect. 3 [para. 19].

Authors and Works Noticed:

McCamus, John D., The Law of Contracts (2005), pp. 705 to 722 [para. 16].

Counsel:

Alan J. Lenczner, Q.C., and Jaan E. Lilles, for the appellant;

Stephen S. Appotive, for the respondents.

This appeal was heard on September 16, 2010, before Winkler, C.J.O., Rosenberg, J.A., and Pitt, J.(ad hoc) of the Ontario Court of Appeal. The following judgment of the Court of Appeal was delivered by Winkler, C.J.O, and was released on October 14, 2010.