The Ontario Court of Appeal confirmed that conduct can trump contract in a recent decision concerning a dispute between Coffee Time Donuts and one of its franchisees.
In a 2021 summary judgment motion,1 Coffee Time Donuts Incorporated successfully argued that 2197938 Ontario Inc. ("the franchisee") owed unpaid royalties after it continued to operate as a Coffee Time franchise following the expiry of a written franchise agreement.
The agreement between the parties was signed in 2009 for a term of five years, and did not contain a renewal clause. After the five-year term elapsed on July 31, 2014, the parties carried on their business as usual. The franchisee continued to pay royalties, purchase products from Coffee Time suppliers, and operate under the banner of the Coffee Time brand.
The harmonious relationship might have continued indefinitely had the franchisee not stopped making royalty payments to Coffee Time in 2016. Despite its delinquency, it continued to use the Coffee Time brand and supplies. "Past due" notices went ignored, and eventually, Coffee Time sued the franchisee.
At the motion for summary judgment, the franchisee offered a half-baked explanation for its conduct: it believed that "the benefit of operating as a Coffee Time franchise and using the franchisor supplier was free" and that payments made by the franchisee for almost two years after the agreement expired were made "out of courtesy."2
This explanation was especially indigestible since Coffee Time had sent the franchisee invoices for payment of royalties, followed by notices of default.
The motion judge did agree with the franchisee that a portion of Coffee Time's claim had not been commenced within two years of its "discovery" that the franchisee was not making its royalty payments. The claim was discoverable "shortly after non-payment began to occur after February 16, 2016,"3 despite Coffee Time's "hope" that the franchisee would resume payments.
The motion judge ruled that Coffee Time was entitled to royalties between August 9, 2017, and January 25, 2021, plus an annual interest of 24 percent.
The franchisee appealed the decision.
Court of Appeal Findings
The Court of Appeal found that the motion judge did not err in concluding that the agreement between Coffee Time and its franchisee continued after the expiry of their written agreement. The parties kept it alive through their actions: the franchisee continued to pay royalties for 19 months, continued to purchase products from Coffee Time's exclusive supplies, and continued to use Coffee Time branding. The existence of a written agreement was not determinative in this scenario.4
The Court of Appeal also found that the motion judge appropriately used the summary judgment mechanism to decide the issues in dispute. The appellants' submitted that there were "credibility" issues and that the affidavits sworn in support of the motion were "untested and unproven,"5 yet neither party cross-examined the affidavits. The timeline of events after the expiry of the agreement was not in dispute. The appellants argued that evidence with respect to their sales after the expiry of the contract ought to have been considered by the motion judge...but failed to file any such evidence.
The appellants' business was deemed a Coffee Time franchise until Coffee Time branding was removed from the appellants' store on January 25, 2021. This was the correct end date for calculating damages.
Finally, the motion judge did not err in concluding that only a portion of the claim prior to August 9, 2017, was barred by the Limitations Act.6 The appellants submitted in their written materials that Coffee Time's entire claim was statute-barred, yet made no oral submissions supporting this point at the appeal.
The appellants were ordered to pay the royalty amounts billed from August 9, 2017, to January 25, 2021, plus interest. As the successful party, Coffee Time was entitled to costs in the amount of $13,800.00.
In addition to reaffirming the importance of conduct alongside contractual agreements, this decision contains valuable lessons for litigants. The Court of Appeal agreed with the motion judge that the respondent should not have simply "hoped" that the appellant would repay the late royalties. The delay in commencing the action cost Coffee Time eighteen months' worth of royalty payments. The appellant hopefully learned that you cannot complain about the absence of evidence that you have not filed. If you advance an argument in written submissions, you should be prepared to speak to it on appeal.
There is no such thing as a free lunch. The court might have found the franchisees' argument that the agreement expired in 2014 more palatable had it not continued to reap the benefits of a brand that it was no longer paying to use.
1 Coffee Time Donuts v 2197938 Ontario Inc., 2021 ONSC 3109 (CanLII).
2 at para 6.
3 Ibid at para 11.
4 Saint John Tug Boat Co. Ltd. v Irving Refining Ltd., 1964 CanLII 88 (SCC) at pp. 621-22
5 Coffee Time Donuts Incorporated v. 2197938 Ontario Inc., 2022 ONCA 435 (CanLII) at para 8.
6 Limitations Act, 2002, S.O. 2002, C. 24, Sch. B.
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