Mamma Mia! Ontario Court Upholds Termination Of The Franchise Agreement Of An Overholding Franchisee

In Queen Mamma Ltd. v. 2755060 Ontario Inc., Justice Mathen of the Ontario Superior Court of Justice dealt with a factually complex dispute between a pizza chain franchisor (Mamma’s Pizza) and a former franchisee (Ozzy, operating as Queen Mamma) over the termination of Queen Mamma’s Toronto franchise in 2021. The dispute included significant cross-claims between the parties and a “he said/she said” factual record over what had occurred in respect of the deterioration of the parties’ relationship. After reviewing the evidence, which included a thorough examination of the credibility of each party’s witnesses, Justice Mathen concluded that the franchise was properly terminated but, given the overholding status of the franchise agreement between the parties, inadequate notice was given. This conclusion resulted in only token, nominal damages for Queen Mamma.

In this case, the parties had a tumultuous relationship and substantial back-and-forth communications regarding the renewal of the franchise agreement, which ostensibly had expired in 2019. The Court found that the parties had to come to terms on a renewal of the franchise agreement in 2019, which they did not. As such, the franchise operated in an overholding month-to-month capacity while negotiations were ongoing.

The franchise agreement did not expressly contemplate how an overholding franchise would be terminated. The Court held that Queen Mamma’s failure to sign a renewal agreement, coupled with an extreme deterioration of the franchise relationship, provided the basis for termination. The franchisor took the position that it was entitled to terminate on two days’ notice. The Court disagreed with this position, holding that additional notice was required, but not much more than was provided:

In my view, the above facts illustrate that the relationship was, if not dead, on life support. Ozzy had operated without a renewed franchise agreement for over a year. I am not persuaded that Ozzy would ever have signed the renewal on the terms presented. The parties were too far apart. As just one example, I am not persuaded that Ozzy would have agreed to pay the standard franchise renewal fee of $5,000. I do not think Ozzy would have paid even half that. …

Considering all the circumstances, I find that, while Ozzy was entitled to more than two days’ notice, he was not entitled to a great deal more. I find that Ozzy was entitled to 30 days’ notice. In lieu of that notice, as explained later in these reasons, Ozzy is owed $10,000.

The Court declined to grant the equitable remedy of relief from forfeiture to Queen Mamma, pointing generally to Ozzy’s ongoing poor conduct in respect of the renewal process.

The Court held that neither franchise party had breached the duty of good faith, bluntly stating: “neither party behaved particularly well during their negotiations in 2021. At the same time, neither behaved so egregiously as to breach their obligations…”

Justice Mathen dismissed the defendants’ cross-claims against Queen Mamma, which largely arose out of post-termination protests conducted by Ozzy. The Court rejected nuisance, defamation, and intentional interference with economic relations claims made by Mamma’s Pizza, generally holding that although there were strong protests made by Ozzy, they failed to meet the standard of actionable wrongs against Mamma’s Pizza. Justice Mathen did find, however, that Ozzy had glued things to his former store’s windows, which constituted trespass, and awarded nominal damages of $100 in respect of that conduct. Justice Mathen also found in favour of the defendants in respect of a nominal claim for royalties.

Takeaways

This decision can perhaps be seen as a cautionary tale concerning franchise litigation. Both parties made extravagant claims and allegations of misconduct against each other and ended up with only nominal damages awards coupled with significant legal fees from a six-day trial. Beyond this, the decision does reinforce the principle that overholding franchise agreements – particularly where a franchisee is declining or refusing to engage in renewal – can be terminated with limited notice. In other words, in the appropriate circumstances, it may be possible to end a month-to-month franchise agreement in a month.

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