Two recent cases demonstrate the differing results that can be achieved when claiming damages for a breach of the statutory duty of fair dealing pursuant to Section 3 of the Arthur Wishart Act (Franchise Disclosure) 2000 (the “Act”) as opposed to punitive damages. Section 3 of the Act states as follows:
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.
(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.
Generally speaking, to justify an award of punitive damages the plaintiff must demonstrate that the defendant has committed an independent or separate action causing it to suffer damages. In addition, the defendant’s conduct must be sufficiently harsh, vindictive, reprehensible, oppressive and high handed that it offends the court’s sense of decency (See Whiten v. Pilot Insurance Company, 2002 SCC 18 (CanLII),  1 S.C.R. 595) (“Pilot”).
In Salah v. Timothy’s Coffees of the World Inc., (2010 ONCA 673) affirmed 2010 ONCA 673 (“Timothy’s”), Salah entered into a franchise agreement (the “FA”) and sublease agreement, in the fall of 2001 to operate a Timothy’s franchise on the 3rd floor of the Bayshore Shopping Centre (“BSC”). At the time of FA, four years remained on the head lease. The FA was tied to the length of the head lease. Salah expressed concerns about the short term of the head lease and FA. Timothy’s included a Schedule “A” to FA to the effect that the FA would be renewed in the event that Timothy’s entered into a new head lease with BSC.
Prior to September 30, 2005, Timothy’s entered into new lease for 2nd floor of BSC and signed an agreement with a new franchisee. Timothy’s advised Salah that his FA would expire on September 30, 2005. Timothy’s took the position that the Schedule regarding the renewal of the FA applied only to the original location on the 3rd floor of BSC. As Timothy’s could not renew its lease for the 3rd floor location, it argued that the provisions of the Schedule “A” were inoperative. Salah commenced an action against Timothy’s for breach of contract, breach of the duty of fair dealing and punitive damages.
At trial, the Court found that Timothy’s had breached its contract with Salah and awarded damages totalling approximately $370,000. Further, in awarding damages for the breach of the duty of good faith the Court stated that “it is important to assess damages at a level which will prevent the franchisor from failing in this duty in the future.”[at para. 152] The trial judge determined that $50,000 was an appropriate amount for the breach of the duty of good faith, with a modest apportionment for mental distress. Interestingly, the trial judge dismissed the claim for punitive damages. The trial judge referenced the misconduct required to maintain an award of punitive damages as set out in Pilot concluding that “The conduct of the defendant in this case did not reach the level of the misconduct described above.” (emphasis added).
On appeal, in respect of determining damages for the breach of the duty of fair dealing, the Court of Appeal agreed that Timothy’s kept Salah in the dark about its intentions, that it “actively sought to keep the franchisee from finding out what was going on with the lease” and that it deliberately withheld “critical information and did not return calls”. These findings of fact, in the words of the Court of Appeal “more than support the conclusion that there was a breach of the duty of good faith that franchisors owe franchisees under s. 3(1) of the Wishart Act”.
In 1230995 Ontario Inc. v. Badger Daylighting Inc., (2010 ONSC 1587) dismissed, 2011 ONCA 442 (“Badger”), the dispute revolved around the franchisor’s removal of several “Work Zones” the franchisee considered to be part of his exclusive territory. The franchisee commenced legal proceedings against franchisor for damages for breach of the franchise agreement (again the “FA”), a declaration as to territory, an injunction for removing territory and punitive damages. The original FA signed 1998 designated certain “work zones”. In February 2002, the parties signed a “work zone amendment agreement” (“WWAA”) which gave the franchisee the right to work in listed areas not part of the original territory but which could be reassigned by the franchisor. The additional areas could become part of the franchisee’s territory if certain objectives were met.
The parties entered into a new marketing agreement (the “MA”) dated February, 2003, but signed June 2003. The MA listed territory work zones but contained no maps or other descriptions. Further, the MA contained an entire agreement clause stating that it supersedes all other agreements.
In December, 2005, the franchisor took away the work zones that were listed in the WWAA. The franchisor argued that could ignore the entire agreement clause in the MA and incorporate the terms contained in WWAA. The Court found that the Disclosure Document provided to the franchisee was incomplete. Interestingly, no claim was made by the franchisee for misrepresentations contained in the Disclosure Document.
The Court found that Badger had breached the MA and that the plaintiff is entitled to recover damages it suffered as a result of that breach. The Court awarded the plaintiff $580,000 for past and future damages. In assessing the franchisee’s claim for punitive damages, the Court utilized the test set out in Pilot. The Court held that the franchisor’s conduct did not give rise to punitive damages. Given the different tests for the determination of damages arising from a breach of the statutory duty of fair dealing compared to punitive damages, it is confusing as to why counsel for the franchisee in Badger did not assert a claim for the breach of the former.
There are two important lessons to learn from an analysis of these cases in respect of claims made by lawyers acting for franchisees:
- In claiming damages beyond actual losses suffered, the test for punitive damages is a more difficult test than the test for a breach of Duty of Fair Dealing under the Act; and
- If the Disclosure Document received by a franchisee contains a misrepresentation, Franchisees should always claim damages arising from the misrepresentation. Under the Act, a franchisee is deemed to have relied on the misrepresentation.
By David Kornhauser (BA, MBA, LLB), Corporate Counsel, Macdonald Sager Manis, LLP