Fairview Donut Inc. v. The TDL Group Corp.

CITATION: Fairview Donut Inc. v. The TDL Group Corp., 2012 ONSC 1252

COURT FILE NO.: CV-08-00356806-CP00

DATE: 20120224

ONTARIO

SUPERIOR COURT OF JUSTICE

B E T W E E N:

FAIRVIEW DONUT INC. AND BRULE

FOODS LTD.

) Jerome R. Morse, Lori Stoltz, John J. Adair

) and Khalid Janmohamed, for the Plaintiffs

)

Plaintiffs/Moving Parties on Certification )

Motion/ Respondents on Summary Judgment )

Motion )

)

- and -

)

THE TDL GROUP CORP. AND TIM

HORTONS INC.

) Peter Howard, Danielle Royal and Bevan

) Brooksbank, for the Defendants

)

Defendants/Respondents on Certification )

Motion/Moving Parties on Summary )

Judgment Motion )

)

Proceeding under the Class Proceedings Act, 1992

HEARD: August 15-18, 29-31, September 1-2,

October 5-6, 2011 and by written submissions

TABLE OF CONTENTS

I. OVERVIEW ........................................................................................................................... 3

A.

B.

C.

D.

The “Always Fresh” Conversion...................................................................................... 4

The “Lunch Menu”........................................................................................................... 4

Causes of Action .............................................................................................................. 5

Tim Hortons’ Response to the Plaintiffs’ Complaints ..................................................... 5

Page: 2

II. THE FACTS ........................................................................................................................... 6

A.

B.

C.

D.

E.

Tim Hortons’ History....................................................................................................... 6

The Tim Hortons Business Model ................................................................................... 7

The Plaintiffs and Mr. Garland ........................................................................................ 9

The Always Fresh Conversion....................................................................................... 11

Alleged Misrepresentation of Cost of Donuts under Always Fresh............................... 18

F. The Lunch Menu................................................................................................................ 25

G.

The Plaintiffs’ Expert Evidence..................................................................................... 30

Evidence of Douglas Fisher – Defendants’ Motion to Strike..................................... 30

Evidence of Howard Rosen........................................................................................ 35

Evidence of Andy Baziliauskas.................................................................................. 36

Tim Hortons’ Expert Evidence ...................................................................................... 37

Evidence of Roger Ware............................................................................................. 37

Evidence of KPMG .................................................................................................... 38

1.

2.

3.

H.

1.

2.

III. THE FRANCHISE AGREEMENT................................................................................... 39

IV. CERTIFICATION ............................................................................................................. 49

A.

B.

Introduction.................................................................................................................... 49

The Test for Certification............................................................................................... 49

(a) Cause of Action .......................................................................................................... 50

(b) Identifiable Class........................................................................................................ 51

(c) Common Issues .......................................................................................................... 54

(d) Preferable Procedure................................................................................................... 81

(e) Representative Plaintiffs............................................................................................. 83

Conclusion on Certification ........................................................................................... 84

C.

V. SUMMARY JUDGMENT ................................................................................................... 85

A.

B.

The Test for Summary Judgment................................................................................... 86

The Breach of Contract Claim ....................................................................................... 92

Introduction and Overview......................................................................................... 92

Principles of Interpretation......................................................................................... 95

Express Terms ............................................................................................................ 96

Implied Terms........................................................................................................... 102

Breach of Duty of Good Faith and Fair Dealing.......................................................... 112

1.

2.

3.

4.

C.

Page: 3

1.

2.

Arthur Wishart Act.................................................................................................... 113

Plaintiffs’ Allegations: Breach of Duty of Good Faith and Fair Dealing................ 120

Unjust Enrichment........................................................................................................ 124

Requirements of Unjust Enrichment ........................................................................ 125

Unjust Enrichment – Is a Trial Required?................................................................ 128

Always Fresh – Unjust Enrichment.......................................................................... 128

Lunch Menu – Unjust Enrichment ........................................................................... 130

Competition Act............................................................................................................ 131

The Maidstone Bakeries Joint Venture and Pricing of the Par baked Donut........... 131

Distribution and Supply Agreements ....................................................................... 133

The Pleadings ........................................................................................................... 134

The Plaintiffs’ Claims under the Competition Act.................................................... 135

Price Maintenance: Section 61 ................................................................................. 137

Conspiracy – Old Section 45.................................................................................... 145

Conspiracy – New Section 45 .................................................................................. 147

The Limitations Defence .......................................................................................... 149

D.

E.

1.

2.

3.

4.

1.

2.

3.

4.

5.

6.

7.

8.

F. The Liability of THI......................................................................................................... 153

G. Conclusions on Summary Judgment............................................................................ 156

VI. CONCLUSIONS.............................................................................................................. 158

Schedule “A”: Common Issues................................................................................................... 159

G.R. STRATHY J.

[1]

The plaintiffs move to certify this proceeding as a class action on behalf of franchisees of

the Tim Hortons restaurant chain, pursuant to the Class Proceedings Act, 1992, S.O. 1992, c. 6

(the “C.P.A.”). The defendants oppose that motion and bring a motion for summary judgment

dismissing the plaintiffs’ claims.

I.

OVERVIEW

Page: 4

[2]

The plaintiffs are Tim Hortons franchisees.¹They complain that they are required to buy

some of the ingredients that they use in their products at unreasonably high prices, thereby

eroding their profits. Their complaints target two aspects of their operations: the cost of donuts

and the cost of ingredients for soups and sandwiches, referred to as the “Lunch Menu”. I will

begin with a short summary of their complaints and of Tim Hortons’ response.

[3]

For the reasons that follow, I have concluded that the defendants’ motion should be

granted and that the plaintiffs’ individual claims should be dismissed. I will nevertheless set out

my conclusion on the certification motion, in the event there is an appeal from this decision or in

the event the plaintiffs seek leave to substitute another representative plaintiff.

A.

The “Always Fresh” Conversion

[4]

The first claim, the cost of donuts, stems from the “Always Fresh” Conversion. Until

2002, most baked goods sold in Tim Hortons stores were baked on the premises “from scratch”,

by skilled bakers, using donut mixes and other ingredients supplied by Tim Hortons. Between

2002 and 2004, Tim Hortons replaced scratch baking of donuts, timbits, cookies and muffins

with a system called “Always Fresh”, in which the dough was partially baked and flash frozen

(referred to as “par baking”) at a centralized facility and delivered frozen to the franchisees’

stores, where the baking would be completed, when needed, in specially-designed ovens. The par

baked donuts that franchisees were required to buy were supplied by a joint venture, in which

Tim Hortons had an interest.

[5]

The plaintiffs plead that, contrary to representations made to franchisees before the

Always Fresh Conversion, the cost to produce donuts and other baked goods has increased,

cutting into their profits.

[6]

They claim that Tim Hortons makes enormous profits on the sale of the par baked donuts,

at the franchisees’ expense, and that it ignored their requests for sale price hikes to offset the

increased costs. They say that Tim Hortons breached express terms of their franchise agreements

by implementing the Always Fresh Conversion, which was not for their financial benefit, and

that it breached an implied term of those agreements that ingredients would be sold to

franchisees at lower prices than they could obtain in the marketplace.

B.

The “Lunch Menu”

[7]

The plaintiffs’ second complaint relates to the “Lunch Menu”. The Lunch Menu includes

soups, sandwiches and similar items, which are sold in most stores twenty-four hours a day. The

1

The contractual agreement, discussed below, refers to Tim Hortons as the “Licensor” and to the plaintiffs as

“Licensees”. Although the agreement grants the plaintiffs a license to operate a Tim Hortons shop and to use Tim

Hortons’ trademarks, it is in substance a franchise agreement. This point is not in dispute. I will refer to Tim Hortons

as the “franchisor” and to the plaintiffs and other proposed Class members as the “franchisees”. The document also

refers to the Tim Horton Shop and the Tim Horton System. For the sake of convenience, I have simply referred to

the defendants, and to the system, as “Tim Hortons”.

Page: 5

plaintiffs say that Tim Hortons requires franchisees to sell Lunch Menu items at either break-

even prices or at a loss. They say that while they are selling these items at a loss, Tim Hortons is

making a profit through rent, royalties and advertising payments, all of which are calculated

based on franchisees’ sales. They say that this was also a breach of an implied term of their

contracts that ingredients would be sold to them at lower prices than they could obtain in the

marketplace.

C.

Causes of Action

[8]

The plaintiffs say that Tim Hortons’ conduct relating to the Always Fresh Conversion

and the Lunch Menu breached their contracts, breached the franchisor’s common law obligation

of good faith and breached the statutory duty of good faith and fair dealing under the Arthur

Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (the “Arthur Wishart Act”) and similar

legislation in other provinces.²They also say that Tim Hortons has committed the offences of

price maintenance and conspiracy under the Competition Act, R.S.C. 1985, c. C-34, giving rise to

civil causes of action under s. 36 of that statute. Finally, the plaintiffs say that Tim Hortons’

conduct has resulted in unjust enrichment and that they are entitled to equitable and restitutionary

remedies. The plaintiffs have abandoned a claim for damages for alleged negligent

misrepresentation by Tim Hortons concerning the price at which the par baked donuts would be

sold to franchisees. The misrepresentation allegations nevertheless remain relevant to the other

causes of action.

D.

Tim Hortons’ Response to the Plaintiffs’ Complaints

[9]

Tim Hortons’ answer to these claims is that it has a contractual right to determine the

price at which franchisees purchase ingredients, that it exercised its contractual rights reasonably

and in good faith and that, overall, the plaintiffs and all franchisees enjoy an exceptional rate of

return on their investments.

[10] Tim Hortons denies that the Always Fresh donut is significantly more expensive than the

one produced by scratch baking. It says that franchisees benefitted from the Always Fresh

Conversion, because it eliminated many of the difficulties associated with scratch baking,

resulted in a better product, increased efficiency in the stores and made each franchisee’s life

much easier. While there was an initial increase in the cost of raw materials, that cost has been

offset over time by increased retail prices for donuts and by other savings. Tim Hortons says that

in the long run, had scratch baking continued, the cost of a scratch baked donut today would

have substantially exceeded the cost of a par baked donut.

[11] Tim Hortons says that a Lunch Menu has been a part of its system since 1986, when

soups, sandwiches and chili were first introduced. It says that offering such products permits its

²Section 3 of the Franchises Act of Prince Edward Island, R.S.P.E.I. 1988, c. F-14.1; s. 3 of the Franchises Act of

New Brunswick, S.N.B. 2007, c. F-23.5; and s. 7 of the Franchises Act of Alberta, R.S.A. 2000, c. F-23. The

language of the other provincial legislation is similar to that of the Arthur Wishart Act.

Page: 6

franchisees to attract customers around the clock and makes them competitive with other fast

food outlets. It denies that Lunch Menu items are sold at a loss.

[12] Tim Hortons says that the Always Fresh Conversion and the Lunch Menu are permitted

by the franchise agreements and that franchisees have no right to acquire any particular product

or product line at a particular price. They say that the plaintiffs’ claims are so plainly

unmeritorious and have no chance of success that they should be dismissed at this stage, on

summary judgment.

[13] Against this background, I will turn to a more detailed examination of the facts,

beginning with an overview of the Tim Hortons franchise system. I will then describe the

circumstances of the plaintiffs. Finally, I will discuss the matters at issue in this action in more

detail and will then address the certification and summary judgment motions.

II.

A.

THE FACTS

Tim Hortons’ History

[14] The Tim Hortons franchise operation is perceived by many to be a Canadian success

story. The first Tim Hortons store was opened in May, 1964 by Tim Horton, a famous NHL

defenseman. In 1967, Horton entered into partnership with Ron Joyce, a former Hamilton police

officer and the operator of three Tim Hortons shops. They opened thirty-seven restaurants over

the next seven years. At that time, their operation was more or less coffee and donuts. As we

shall see, Tim Hortons franchisees now offer their customers an extensive and constantly

changing array of foods and beverages.

[15] Joyce continued to expand the chain after Horton’s death in 1974, buying out his widow

and becoming the sole owner of the business in 1975. In the early 1990s, Tim Hortons and

Wendy’s International Inc. became partners in real estate development and constructed

combination restaurant sites containing Wendy’s and Tim Hortons restaurants under the same

roof. In 1995, Wendy’s acquired Joyce’s interest in Tim Hortons and the company was merged

with Wendy’s. By that time, there were over 1,000 stores in the Canada-wide chain. By 2008,

Tim Hortons was the fourth largest publicly traded quick-service restaurant (“QSR”) chain in

North America. By the end of 2009, there were approximately 3,000 stores in Canada, owned by

just under 1,000 franchisees. Some franchisees owned only one store and others owned multiple

stores.

[16] In 2006, Tim Hortons sold 18% of its outstanding common stock in an initial public

offering on both the New York and Toronto Stock Exchanges. Later that year, Wendy’s

distributed its remaining 82% interest to its stockholders of record. Since then, Tim Hortons Inc.

(“THI”) has operated as a stand-alone public company.

[17] THI is incorporated under the Canada Business Corporations Act, R.S.C. 1985, c. C-44,

as amended, and carries on business in Canada through its subsidiary, the defendant, TDL Group

Page: 7

Corp. (“TDL”). Except where it is necessary to distinguish between the two corporations, I will

refer THI and TDL collectively as “Tim Hortons”.

[18] I will discuss the Tim Hortons system in more detail below, but it is quite apparent that

the face of the franchise has evolved over the years. It quickly moved from just coffee and

donuts to a menu that included soups, chili and sandwiches. The menu has continued to develop

over time, driven by changing customer demands and hot competition in the QSR business. Tim

Hortons stores now offer such exotic choices as hot and iced cappuccinos, specialty teas,

breakfast sandwiches, fajita wraps, yoghurts and gourmet cookies.

[19] Part of the challenge of running a national QSR franchise operation such as Tim Hortons

is keeping ahead of powerful and aggressive competition, including coffee operations, such as

Starbucks, Second Cup and Dunkin’ Donuts, and restaurant chains, such as McDonalds and

Subway. Tim Hortons has a large marketing department, which is constantly evaluating its own

menu offerings and monitoring what the competition is doing, in order to stay competitive in the

face of changing customer demands and stiff competition for customer loyalty.

[20] There is one aspect of the Tim Hortons franchise that the plaintiffs don’t complain about

– coffee.

[21] Coffee is what Tim Hortons has been about since the very first day. It remains so today.

Tim Hortons owns the coffee brand. It owns the trademark. The franchisee acquires the right to

use the trademark. To sell the brand. Tim Hortons calls its coffee “legendary” and describes it on

its website at “[T]he chain’s biggest calling card.”

[22] A large cup of coffee sells, at least in Toronto, for $1.57. It is, not surprisingly, extremely

profitable. The ingredient cost is very low. The cost of the labour involved in making the pot and

pouring a cup is also very low. The evidence establishes that the sale of coffee is an enormous

source of revenue for every Tim Hortons franchisee.

B.

The Tim Hortons Business Model

[23] Tim Hortons’ basic business model is simple. It identifies suitable restaurant locations,

develops restaurants on the sites, and leases the restaurants to approved franchisees, with which

it signs revenue-generating franchise agreements. The model has been enormously successful.

[24] Later in these reasons, I will discuss some of the benefits of owning a franchise. Two of

the most important of these are the opportunities to sell a nationally-recognized brand and to use

a proven and profitable business system. There is a waiting list of over 3,000 candidates hoping

to acquire the right to use the Tim Hortons system and to sell its brand.

[25] The majority of Tim Hortons stores are run by franchisees and by operators of corporate-

owned stores. Franchisees pay a non-refundable licence fee for the privilege of acquiring the

franchise. The initial fee can be several hundred thousand dollars.

Page: 8

[26] In addition to the franchise fee, franchisees pay the following:

(a) rent, based on 10% of monthly sales, to cover rental of the

land, generally owned by Tim Hortons, on which the stores are

located;

(b) a royalty, usually based on 3% of sales, as compensation for

Tim Hortons’ ongoing support, know-how, and efforts to maintain

and increase the brand; and

(c) an advertising levy of 3.5% of monthly sales (the amount

actually stated in the contract is 4%, but Tim Hortons had reduced

this amount on a voluntary and temporary basis).

[27] Tim Hortons also makes money through the distribution and sale of food ingredients,

paper, dry goods and other commodities to its franchisees. It owns a coffee roasting plant and an

interest in a bakery, to which reference will be made below.

[28] In consideration for the payments described above, franchisees are licensed to use the

“Tim Hortons System”. I will describe that system in more detail when I discuss the contractual

provisions at issue, but in essence – like most franchise operations – the franchisee is required to

abide by a set of rules and procedures, to purchase all supplies and ingredients from Tim Hortons

or from its designated suppliers, and to offer for sale only products that have been approved by

Tim Hortons. As one might expect, the franchise agreement provides that the franchisee must

adhere to rigourous standards designed to protect and enhance the Tim Hortons brand.

[29] The franchise agreements are typically for ten year terms. A franchisee has no right to

territorial exclusivity. Most franchisees are required to keep their stores open 24 hours a day.

[30] There is a formal system in place for consultation with franchisees, consisting of an

Advisory Board composed of seventeen franchisees, elected by franchisees across Canada and

the United States. There are representatives on the Advisory Board from every region in Canada.

Advisory Board members are expected to liaise with and report to franchisees in their own

region. The board meets three times a year for a day and a half or two days. Senior management

of Tim Hortons is typically present at these meetings and minutes are kept and made available to

all franchisees. At the meetings, Tim Hortons provides information to Advisory Board members

concerning the state of the business and new products or initiatives. The franchisee members

raise issues of concern to franchisees. The discussions are frequently detailed.

[31] In addition to the Advisory Board meetings, Tim Hortons meets annually with all

franchisees at spring and fall regional meetings and occasionally at a larger national convention.

These meetings are used to discuss topics of particular importance, including subjects such as

new products or initiatives, new methods or techniques, and questions and complaints from

franchisees.

Page: 9

[32] Franchisees have a say in the pricing of products. The proposed price of new product

offerings is discussed at the Advisory Board before the product comes on the market. The

franchise agreements provide that Tim Hortons may set a maximum retail price for any product,

but franchisees are free to sell at a lower price, if they wish. Before there can be an increase in

the price of a product, the franchisees in each region must vote on whether to approve the

proposed increase, which only becomes effective if approved by majority vote.

C.

The Plaintiffs and Mr. Garland

[33] The Plaintiff Brule Foods Ltd. (“Brule”) is an Ontario company. Archibald Jollymore is

the principal of Brule. He is a cousin of Ron Joyce, the former owner of Tim Hortons. He began

his association with Tim Hortons in 1977 as a member of the senior management team. When he

left management in 1994, to start up his own franchises, he held the position of Executive Vice

President.

[34] Brule is a Tim Hortons franchisee operating two stores in Burlington, Ontario. One of

those stores, store #750, is a franchised location, which has been operated by Mr. Jollymore

continuously since 1994. The franchise agreement was renewed in 2004 for a term ending in

January 2014. The renewal was documented in 2006, some considerable time after the store had

converted to the “Always Fresh” baking method in October, 2002. At the time of the renewal,

Mr. Jollymore and Brule executed general releases in favour of Tim Hortons of all claims under

the franchise agreement. Mr. Jollymore also acknowledged receipt of a disclosure statement,

provided by Tim Hortons under the Arthur Wishart Act. The disclosure statement contained the

regulatory mandated statement that “[t]he cost of goods and services acquired under the

franchise agreement may not correspond to the lowest cost of the goods and services available in

the marketplace.” The disclosure statement also confirmed that the franchisee was required to

purchase supplies from Tim Hortons or from its designated suppliers and that Tim Hortons was

entitled to receive rebates and other benefits from the designated suppliers.

[35] The other store operated by Brule, store #2267, is a corporate-owned store, operated

under what is referred to as an “80/20 operating agreement”, signed in 2002, under which the

franchisee pays a flat royalty of 20% of sales plus an advertising charge and receives 80% of the

revenue. Prior to entering into this agreement, Brule received the Ontario disclosure statement,

confirming that the price at which products were supplied by the franchisor was not necessarily

the lowest price available. It also confirmed that the franchisee was not guaranteed any particular

return on its investment.

[36] Brule had operated a third store, store #737, under a franchise agreement that it signed in

1994. That agreement was renewed by Mr. Jollymore in 2004 for an additional ten year term. In

2007, Mr. Jollymore sold the balance of the term of the agreement to Tim Hortons for $65,000.

At that time, he and Brule executed a general release in favour of Tim Hortons and its affiliates

of all claims in connection with the franchise agreement.

Page: 10

[37] The Plaintiff Fairview Donut Inc. (“Fairview”) is an Ontario company owned by Mr.

Jollymore’s wife, Anne Jollymore. Fairview has been a Tim Hortons franchisee since 1988,

when Mrs. Jollymore and her former husband acquired a franchise for store #368. Mr. and Mrs.

Jollymore married in 1994.The franchise licence for store #368 was renewed for a further 10

year term in 1998. Mrs. Jollymore later acquired store #593, which was also located in

Burlington, pursuant to a franchise agreement signed in 1992. The licence agreement for that

store was terminated in April 2001 and at the same time Fairview signed a new agreement for a

new store #593, which was established at a new location on Brant Street in Burlington. In 2008,

Tim Hortons decided not to renew Fairview’s franchise agreement for store #368. Fairview

continues to operate store #593.

[38] It is fair to say that, by virtue of their experience as franchisees, Mr. and Mrs. Jollymore

are sophisticated and knowledgeable business people who are very familiar with the QSR

business in general and with the operation of the Tim Hortons System in particular. This is

especially true for Mr. Jollymore, who had experience in the corporate office of Tim Hortons at a

very senior level.

[39] It is also fair to say that Mr. and Mrs. Jollymore have earned very significant income

from their stores. In the case of Fairview’s store #593, over the three years 2008 to 2010, sales

averaged almost $2 million per year. Average income was almost $325,000 per year. In the case

of store #368, which Fairview also operated, its sales in the last three years of its operation, 2005

to 2007, were in excess of $1 million per year, with net income around $100,000 per year.

[40] In the case of store #750, operated by Brule, the sales averaged close to $2.3 million per

year for the years 2008 to 2010. Net income averaged around $235,000 for the same period. Mr.

Jollymore’s figures for store # 2267 for the last three years of its operation, 2006 to 2008, were

averaging sales of $1.6 million and net income of about $100,000 per year.

[41] The financial information produced by both parties indicates that the plaintiffs have

received a reasonable return on their investments over the years. In spite of their complaints

about the Always Fresh Conversion and the Lunch Menu, the plaintiffs have continued to

operate their stores and have renewed their franchise agreements or have signed new agreements.

Their real complaint is not that they don’t make a reasonable profit as Tim Hortons franchisees −

but rather that they don’t make more profit. −

[42] A third important individual in this saga, and a witness on behalf of the plaintiffs, is Cyril

Garland. Mr. Garland was a former member of Tim Hortons senior management. He held the

position of Vice-President, Finance when he left the company in 1998 to become a franchisee.

Mr. Garland is the principal of 1301541 Ontario Inc., which, until November 2010, was a Tim

Hortons franchisee operating store #385, and of a Tim Hortons kiosk in an Esso station, store

#1957. Mr. Garland’s company also operated store #1536 from 1998 to January 2009. Mr.

Garland is also the principal of 1549402 Ontario Inc., which was the franchisee of store #2402

until November 2002.

Page: 11

[43] Mr. Garland had commenced a separate lawsuit alleging some of the same claims as the

Plaintiffs in this action with respect to the Always Fresh Conversion. As part of a settlement of

that proceeding, Tim Hortons purchased Mr. Garland’s stores and he released all claims against

it, except his potential claim as a class member in this action.

[44] I will now expand on the source of the plaintiffs’ complaints, the Always Fresh

Conversion and the Lunch Menu.

D.

The Always Fresh Conversion

[45] The evidence establishes that by the 1990s Tim Hortons’ business model, which required

the franchisee to bake most products, including donuts, timbits and muffins in their own stores

“from scratch”, had become a source of aggravation to franchisees. As one franchisee described

it, “donuts under scratch baking were 10% of sales but 90% of the problems.”

[46] Bagels, which had been introduced in approximately 1996, had always been supplied in a

par baked form and were prepared in the store as needed in a convection oven.

[47] By the late 1990s, only donuts, timbits, cookies, muffins, croissants and cakes were being

baked from scratch in the stores. These products made up between approximately 10% and 15%

of franchisees’ sales.

[48] Tim Hortons has adduced affidavit evidence from eleven franchisees, who have been

referred to as the “Affiant Franchisees”. Some of these were members of the “Concerned

Franchisees Group”, which had sought and was denied status as an intervenor at an early stage of

this proceeding: see Fairview Donut Inc. v. TDL Group Corp., [2008] O.J. No. 4720 (S.C.J.).

That group was made up of 436 franchisees, operating over 1300 stores, who opposed the

commencement of this proposed class action. The group represented franchisees from every

region of the country and included owners who operated only one store and others who operated

multiple stores.

[49] The problems identified by Tim Hortons concerning scratch baking, and confirmed by

the evidence of the Affiant Franchisees, included:

• the need to employ expensive skilled bakers;

• logistical problems with and costs of hiring, training and

retaining skilled bakers;

• inconsistency in product quality;

• wastage of product caused by the need to bake relatively large

quantities in advance, twice a day (unable to accurately anticipate

demand, the bakers sometimes prepared too many donuts, resulting

Page: 12

in wastage or “throws,” and sometimes baked too little, resulting in

disappointed customers and lost sales);

• maintenance and cleaning costs; and

• disruption and inconvenience for the franchisee when the baker

was sick, late, unavailable or quit.

[50] I will describe the transition to Always Fresh baking shortly, but I will note here that the

evidence of the Affiant Franchisees was uniformly positive about its benefits. They gave

evidence that the Always Fresh method permitted them to bake as required throughout the day,

allowing them to respond more effectively to customer demand and reducing the amount of

“throws”. They acknowledged that there had been an increase in food cost for the Always Fresh

par baked products, but said that this was offset by lower labour costs, reduced wastage,

improved product quality and a much easier baking method. It was their overwhelming evidence

that the Always Fresh Conversion was beneficial to the franchisees and had been an

improvement in the Tim Hortons system.

[51] A number of the Affiant Franchisees spoke of the stress and aggravation associated with

reliance on experienced bakers, including bakers calling in sick or not showing up for work,

requiring the franchisee himself or herself to get up in the middle of the night to bake. The

evidence of Mr. Oliver is typical:

Knowing what I know today, including the costs of producing

donuts, I still would have voted in favour of the Always Fresh

Conversion. Always Fresh has substantially increased my quality

of life as a franchisee and has reduced the level of stress associated

with operating my stores. It has eliminated my reliance on bakers. I

am able to train employees on the Always Fresh process in two to

three days and baking expertise is no longer required in order to

produce donuts. I am able to produce donuts in a matter of five

minutes and therefore the donuts in my stores are consistently

fresher than under the scratch baking system. As I can bake donuts

on demand, I am able to control my donut inventory and reduce

waste. I can ensure that my displays are consistently stocked with

fresh product. I am able to bake donuts in all my stores, regardless

of store size, and am no longer required to transport donuts from

one store to another. Given that the donuts are of a uniform size,

the lack of product uniformity across Tim Hortons store [sic] has

been eliminated.

In order to appreciate the benefit of the change it is also important

to note that donuts represent a relatively small percentage of our

Page: 13

revenue, but with scratch baking it used up considerable energy

and management resources.

[52] Other franchisees shared Mr. Oliver’s observations and observed that while donuts were

a relatively small part of overall store sales, issues related to donut preparation took an inordinate

part of their time.

[53] Several Affiant Franchises indicated that they had been informed by Tim Hortons, prior

to the Always Fresh Conversion, that their product costs would increase but that, over time, their

labour costs would reduce and would offset the increase in costs and said that this had, in fact,

been their experience. For example, Susan Marshall deposed in her affidavit:

Prior to the Always Fresh Conversion in 2002, TDL engaged in a

transparent consultation process with Tim Hortons franchisees.

Many meetings were held in which franchisees were encouraged to

ask questions about the new system. While I do not recall any

specific representations by TDL, I recall that TDL was clear that

the conversion would be costly, the product would cost more and

there would be changes to how owners did business. It was

emphasized by TDL, however, and widely understood by

franchisees that any increase in product cost would be

compensated by savings in labour costs and other efficiencies.

TDL’s explanation of the Always Fresh Conversion was measured

and cautious. It was also stressed to franchisees, that positive

results from the Always Fresh conversion would be impacted by

the level of effort franchisees put into the new system to ensure its

success at their stores.

There was a decrease in profitability of my stores immediately

following the conversion due in part to baking too much product,

resulting in a higher amount of “throws”; as well as labour

shortages in Alberta causing increased labour costs…

However, profitability at the Edmonton stores returned to, and

exceeded, pre-Always Fresh levels. My stores are now on average

3% more profitable than they were prior to Always Fresh.

[54] Of particular interest is the evidence of one franchisee, Mr. Gilson, who was examined by

the plaintiffs under Rule 39.03 of the Rules of Civil Procedure, R.R.O. 1990, reg. 194. Mr.

Gilson had been a Tim Hortons franchisee in Ottawa since 1991. He operated a number of stores.

He was a member of the Advisory Board, representing Eastern Ontario, between 1996 and the

fall of 2001. I will examine other aspects of Mr. Gilson’s evidence in due course, but for the

moment, it is interesting to note his enthusiastic support for the Always Fresh Conversion.

Page: 14

[55] On cross-examination by Tim Hortons’ counsel, Mr. Gilson admitted that the conversion

“absolutely” simplified operations for the franchisee, that the product was easier to work with

and that the consistency was not dependent on the baker. He agreed that under scratch baking

there had been problems with waste, because it was difficult to estimate the amount of product

that would be required on a given day, which he described as “hit and miss”.

[56] Mr. Gilson was clear that the Always Fresh Conversion was a huge benefit for his

operation and said that it would be a decidedly retrograde step to revert to the scratch baking

system. The following exchange is particularly interesting:

Q. So you would agree with me that many of the complications

and difficulties that were associated with scratch baking ---

A. I agree wholeheartedly. I would never want to go back to

scratch baking. That’s not something I would ever try to say that I

would – I was in favour of it coming and I’m still in favour of it

today.

Q. And overall it was a good thing for the business?

A. Overall, in my world, it was the best thing that happened to the

business.

Q. I think you will also agree with me that store sales have

increased since the conversion?

A. They have.

Q. In your particular stores, sales have increased since the “Always

Fresh” conversion?

A. They have. Sales have increased. Some of it is due to pricing. A

lot of it I think is just due to normal growth, and we can handle that

growth now. In the days prior to, you couldn’t always – it wasn’t

that you couldn’t handle it, but you couldn’t handle it as well,

because you don’t have the recovery time. This system helped us.

It really has. I’m not against this system in the least. It’s a great

system.

[57] Although the plaintiffs downplay the problems associated with scratch baking, there is

substantial evidence from Tim Hortons, including the evidence of the eleven Affiant Franchisees

and Mr. Gilson, that these problems were widespread and significant.

[58] At some point in the 1990s, Tim Hortons began to explore alternatives to scratch baking.

After investigating several technologies, it began to focus on the par baking method. Mr. David

Page: 15

Clanachan, a Vice President of Tim Hortons, led a team tasked with investigating par baking,

which visited a number of manufacturing facilities in Europe, England and Ireland.

[59] After conducting this due diligence and examining the application of the par baking

technology in Europe, Mr. Clanachan decided that the optimal business strategy would be to

joint venture with an Irish company, IAWS Group plc (“IAWS”), for the construction of a donut

manufacturing and par baking facility in Canada. This facility was ultimately located in

Brantford, Ontario and is referred to as “Maidstone Bakeries”. It was an indirect subsidiary of

CillRyan’s Bakery Group (“CillRyan”), which was owned by the joint venture partners until Tim

Hortons sold its interest in the joint venture to Arytza AG in 2010.

[60] Before committing to this project, Tim Hortons demonstrated the par baking method to

franchisees at a convention held in Ottawa in July, 2000. A display was set up where par baked

donuts were actually baked on site and could be sampled by franchisees. The response was

enthusiastic. Neither Mr. nor Mrs. Jollymore nor Mr. Garland attended this convention.

[61] In August 2000, the Wendy’s board authorized senior management of Tim Hortons to

proceed with the negotiation of a joint venture with IAWS for the construction of the par baking

facility at an estimated capital cost of US$94 million. There were legitimate business and

strategic reasons for this project, including those already mentioned. As well, Tim Hortons’

potential for growth in the United States market was constrained by the need to bake in-store and

the overall growth of the business in North America was being impaired by difficulties in finding

and retaining trained bakers. The Always Fresh baking method was perceived by Tim Hortons

management as an opportunity to re-vitalize and expand the donut business. It would produce

donuts of consistent size and quality. The competition was selling hot donuts and the fast in-store

baking process would allow fresh batches of donuts to be made as needed.

[62] The evidence of Mr. Clanachan makes it clear that in deciding to move to a central donut

production facility, Tim Hortons was looking to the long-term success of its brand. As he put it,

“[T]he view of TDL management was that if TDL did not adopt this technology in some fashion,

we were going to be a dinosaur and the scratch-baking part of the business was not likely to

survive.”

[63] A joint venture agreement was ultimately signed by Tim Hortons and its affiliated

companies with IAWS and others. It was publicly announced in March of 2001. As I will discuss

below, the price at which the par baked donuts would be sold to franchisees was a matter of vital

concern to both joint venture partners as it would affect the financial viability of the project and

would determine whether their capital investment could be justified by the return on investment.

The evidence, which I will discuss below, establishes that Tim Hortons wanted to ensure that the

price of the par baked donut was reasonable from the franchisees’ perspective and that it was

approximately the same price as the combined food and labour cost of the scratch baked donut.

[64] At regional meetings with franchisees in the spring of 2001, Tim Hortons discussed plans

for the conversion of all stores to the Always Fresh methodology beginning in 2002. This would

Page: 16

require franchisees to replace their scratch baking equipment with new freezers and specialized

ovens purchased from Tim Hortons.

[65] Tim Hortons expected and explained to its franchisees that the costs of raw materials –

donuts, timbits, muffins and cookies – would increase, but that their labour costs would be

reduced over time. Exactly what franchisees were told is a matter of some controversy, as will be

discussed below.

[66] There is no question, however, that from the spring of 2001 until the roll-out of par

baking was completed in 2004, there was extensive communication between Tim Hortons and its

franchisees concerning the Always Fresh system, what it would cost and how it would work. It

was anticipated that it would cost each franchisee between $30,000-35,000 to convert a store for

par baking. There was extensive discussion of the subject at Advisory Board meetings and there

was considerable investment by Tim Hortons in training and in the production of a conversion

kit and a training manual to equip its franchisees for Always Fresh production.

[67] The plaintiffs say that the Always Fresh Conversion increased their food cost for donuts

from around 7 cents under scratch baking to 18 to 20 cents under Always Fresh and that their

margins eroded as a result. Tim Hortons disputes this.

[68] The plaintiffs claim that the Maidstone Bakeries joint venture marks up the price of the

frozen donut from its actual production cost of 12 cents to 16 cents. They call this the “CillRyan

markup.” They say that this markup is not commercially reasonable and that Tim Hortons has

used the franchisees’ “captive” position to extract a “monopoly premium”. In their factum, they

use the following language to describe it:

It is a monopoly premium unnecessary to provide the [Joint

Venture] partners with a reasonable rate of return on their capital

invested in the initiative, without value to the franchisees, and

extracted from the franchisees solely by virtue of the Defendants’

decision to exploit for their own profit the captive supply

provisions in the Licence Agreement contrary to the usual

commercial purposes for which franchisees accept them.

….

In the circumstances at issue in this case, the effect of the captive

supply provisions in the Licence Agreements binding on all

franchisees was to insulate the Defendants (and their JV partner)

from the usual competitive forces in the marketplace. In this

vacuum, the Defendants had free rein to exploit those provisions to

extract from the franchisees a monopoly premium over the

commercially reasonable cost to manufacture par-baked donuts

and Timbits.

Page: 17

But for the captive supply provisions of the Licence Agreement,

franchisees unhappy with the high food cost of the Maidstone AF

donuts and Timbits could have looked elsewhere in the market to

source those products, individually or in groups. Given the

existence of those provisions, however, the only limit on the cost

of the Maidstone donuts and Timbits was the Defendants’ own

view of the highest price their market – i.e., the franchisees – could

be compelled to “sustain”. The Plaintiffs submit that the

Defendants conduct amounts to a perversion of the purpose for

which franchisees accepted the captive supply provisions and (as

will be argued below) a breach of the Competition Act.

[69] Stripping away the rhetoric, the plaintiffs are saying that but for their franchise

agreements, which require that they buy ingredients from suppliers designated by Tim Hortons

and at prices set by Tim Hortons, they could have sourced lower prices for their inputs in the

market.

[70] It is worth noting that, had par baking not been introduced, the price of producing a

scratch baked donut today would have been as high as 30 cents, due to increased labour and

ingredients costs in the intervening years. In contrast, the price of a par baked donut to the

franchisee has kept relatively constant since the Always Fresh Conversion at about 18 to 20

cents. It is also worth noting that there have been retail price increases in donuts since the

conversion, from 70 cents per donut to the current price of 90 cents per donut, although these

numbers do not reflect the fact that donuts are frequently sold in boxes of six or twelve, which

the plaintiffs say brings the average selling price of a donut down to between 56 and 57 cents.

Distribution Systems

[71] I will discuss Tim Hortons’ product distribution system in somewhat more detail when I

discuss the plaintiffs’ claims under the Competition Act. In overview, however, TDL has entered

into distribution agreements for the delivery of supplies, including frozen donuts, to the

franchisees. The typical arrangement is based on cost plus a mark-up. The product is sold to the

distributor, which is entitled to charge a mark-up to the franchisees. Tim Hortons negotiates the

maximum mark-up that can be charged by the distributor. Distributors are, however, entitled to

charge a lower mark-up and there are no provisions in their agreements that prevent them from

doing so.

[72] In addition to using third party distributors, Tim Hortons also distributes some products,

such as dry goods, directly to its franchisees. In 2006, Tim Hortons built a distribution facility in

Guelph, which it uses to distribute refrigerated and frozen products to franchisees in most of

Ontario. It charges a distribution mark-up on those products that is the same as the mark-up

charged by the third party distributors.

Page: 18

E.

Alleged Misrepresentation of Cost of Donuts under Always Fresh

[73] The Statement of Claim originally included a claim for negligent misrepresentation. That

claim was withdrawn shortly before the hearing. Allegations of misrepresentation remain as part

of the claims for breach of contract and breach of the duty of good faith and fair dealing.

[74] The plaintiffs assert that Tim Hortons misled the franchisees about the benefits of the

Always Fresh Conversion. They say that Tim Hortons misrepresented the cost at which the

frozen donuts and other baked goods would be supplied to their stores and misrepresented the

benefits that would be obtained from Always Fresh. They argue that the franchisees were

required to spend tens of thousands of dollars to replace their scratch baking equipment with the

new freezers and ovens needed for the Always Fresh baking method, but that they did so relying

on these representations. They say that only after the conversion did franchisees discover the

truth and experience significantly eroded margins on baked goods. They say that Tim Hortons

got the franchisees to buy into the Always Fresh baking method by misrepresenting the costs.

[75] The Statement of Claim pleads that, prior to the Always Fresh Conversion, the following

representations were made to the plaintiffs and other class members:

• par baking would cause quality to improve, thereby

increasing sales;

• the cost to franchisees of producing a donut using the par

baking system would increase modestly from 8 or 9 cents

to 12 cents per donut;

• the increased cost of production under the par baking

system would be offset by reductions in labour costs and

wastage; and

• the franchisees’ lives would be less stressful.

[76] The plaintiffs allege that these representations were made by Paul House, then President

and CEO of Tim Hortons, and by Mr. Clanachan, at a regional meeting held in Toronto at the

Harbour Castle Hotel on November 27 and 28, 2001. At this meeting, franchisees were given a

demonstration of the new oven and sampled the new Always Fresh donut produced by the par

baking method. The plaintiffs allege that, contrary to these representations, there was an increase

in the production cost of donuts (up to 20 cents) and other baked goods. They allege that Tim

Hortons knew the effect that the Always Fresh Conversion would have on franchisees’ revenues

and failed to disclose it to them.

[77] The pleading alleges that, in engaging in this conduct, Tim Hortons breached the

common law and statutory duty “that franchisors are to act fairly, in good faith and in a

commercially reasonable manner towards franchisees.”

Page: 19

[78] The plaintiffs’ proposed common issues ask whether Tim Hortons breached the franchise

agreement or breached the duty under the Arthur Wishart Act or other provincial statutes “to act

fairly, in good faith and in a commercially reasonable manner”:

• in representing to the franchisees through Advisory Board

members that they could deliver the frozen Always Fresh donut to

the franchisees’ stores for 11 to 12 cents; or

• in representing that the increased food cost of the Always Fresh

products would be offset by savings in labour, waste and other

operational expenses.

[79] The plaintiffs claim that Tim Hortons knew from at least September of 2000, or possibly

earlier, that the price of the Always Fresh donut leaving Maidstone Bakeries would be 16 cents

and that there would be a further mark-up for distribution, but that they got the franchisees to

“buy into” the concept by misrepresenting the price and misrepresenting the benefits of the

conversion.

[80] I will begin by examining the evidence with respect to the alleged representation.

Mr. Jollymore

[81] Mr. Jollymore deposed that in conversations with “various members” of the Advisory

Board prior to November 2001, he was told that members of the Board had expressed an interest

to Mr. House that TDL should investigate the possibility of implementing a par baking system if

the unit cost of the donut increased to 11 or 12 cents. He said that he therefore assumed that the

increase would be only 4 or 5 cents more than the existing cost. He says that in the spring of

2002, at regional meetings, franchisees were told that the cost of the frozen, unfinished donut

would be approximately 19 cents. He says that Mr. Clanachan explained that this was consistent

with the pre-Always Fresh food cost of 7 cents and a labour cost of 13 cents.

[82] I pause here to note three things. First, Mr. Jollymore’s evidence is not consistent with

the pleading that the alleged misrepresentation was made at a regional meeting in Toronto in late

November 2001. Second, the representation was not based on anything that Tim Hortons

executives had said to the Advisory Board, but rather on something the Advisory Board had

allegedly communicated to Tim Hortons management, which was of course not obliged to follow

the wishes of the Advisory Board. Third, whatever the “representation” may have been, the true

facts – that is, the real price of the Always Fresh donut – were made known to franchisees in the

spring of 2002.

[83] Mr. Jollymore stated that he had been informed by Mr. Gilson, who, as mentioned earlier,

was a former member of the Advisory Board, that at the Eastern Ontario regional meeting in the

spring of 2002, Mr. Gilson questioned Mr. House about why the cost of the Always Fresh frozen

donut was going to be 19 cents, when he had informed the Advisory Board that the cost would

be between 11 and 12 cents. Mr. House apparently responded that he had no recollection of ever

Page: 20

stating that the cost of the par baked donut would be 12 cents. Mr. Jollymore says that Advisory

Board members Gilson and Joe Zoccolli told him that they had been surprised and angry about

the announced food costs, because Mr. House had told the Advisory Board “at the time TDL was

considering implementing a par bake system that the food cost of a donut would be $0.11 or

$0.12.”

[84] Mr. Jollymore swore that Tim Hortons executives also represented that, as a result of the

Always Fresh Conversion, quality would improve, operating costs would decrease, wastage or

“throws” would be reduced and the new system would be “cost neutral”.

[85] As I will mention in connection with the summary judgment motion, it is significant that

in spite of his complaint about the “misrepresentation” of the cost of the Always Fresh donut,

Mr. Jollymore signed an operating agreement for Brule’s store #2267 in June 2002, after he was

aware of the actual cost of the Always Fresh donut. By that time, he had also received Tim

Hortons’ statutory disclosure package and certified that he was not relying on any

representations made by any employee of Tim Hortons concerning the costs of operating a Tim

Hortons restaurant or the potential earnings of the restaurant.

Mr. Garland

[86] In an affidavit sworn May 22, 2009 and included in the plaintiffs’ initial motion record

for certification, Mr. Garland swore that he attended the Ontario regional meeting of franchisees

in late November 2001 at the Westin Harbour Castle Hotel when the Always Fresh system was

presented to franchisees. He swore that at this meeting Tim Hortons did not advise franchisees of

the costs of the Always Fresh product. Again, Mr. Garland’s evidence is inconsistent with the

alleged misrepresentation being made at this meeting. Mr. Garland deposed that franchisees were

told that the product would be fresher, more consistently sized and that there would be cost

reductions due to the elimination of the highly-paid bakers. He says that franchisees were told

that donut sales would increase because the product would be baked throughout the day and

would therefore be fresher.

[87] Mr. Garland stated that, after he learned of the Always Fresh Conversion at that meeting,

“I persistently questioned TDL executives, including David Clanachan (Executive Vice

President) and Tom McNeally (Vice President, Finance), about the cost of the frozen product,

but they would not give me an answer.” Again, this is inconsistent with the plaintiffs’ assertion

that Tim Hortons was actively misrepresenting the cost as 12 cents.

[88] Mr. Garland says that he ultimately found out that Tim Hortons estimated the cost of an

Always Fresh donut to be about 20 cents in a conversation in a bar with Mr. McNeally in the fall

of 2001. He said that Mr. McNeally had suggested that this cost was the same as the pre-Always

Fresh donut, based on raw material costs of 7 cents and additional store production costs of 13

cents. Mr. Garland’s opinion is that this analysis was not correct, because it ignored the

additional labour costs that would be incurred by franchisees in processing the par baked donuts

and getting them onto their store shelves.

Page: 21

[89] Mr. Garland testified on cross examination that he first heard the 20 cent cost number

from Mr. House at the spring meeting of franchisees in 2002.

[90] Mr. Garland also stated that he had been told by Mr. Zoccolli “that TDL had stated a per

donut cost of $0.12 when the possibility of a par baked system was first presented to the

Advisory Board. The Advisory Board had agreed that TDL should investigate the possibility of

implementing a par baked system if the per donut cost would be $0.12.”

[91] Like Mr. Jollymore’s evidence, Mr. Garland’s evidence is not consistent with Tim

Hortons having made a broad-based representation to franchisees concerning the cost of the

Always Fresh donut. Nor is it consistent with the plaintiff’s claim that Tim Hortons was

attempting to pull the wool over the franchisees’ eyes by getting them to buy in to the Always

Fresh concept in the fall of 2001 based on a 12 cents donut, only to reveal the truth the following

spring. In fact, the upshot of Mr. Garland’s evidence is that 20 cents was the only number he

ever heard from Tim Hortons management prior to the Always Fresh Conversion.

Mrs. Jollymore

[92] Mrs. Jollymore swore that she signed a new agreement for her store #593 (which was

executed in July, 2001) and proceeded with the Always Fresh Conversion of store #368 in

reliance upon Tim Hortons’ representation that:

… the cost of the Always Fresh donut would be in the range of

$0.11 or $0.12, information that was known to me at the time

based upon Arch’s discussions with members of the Advisory

Board. To the best of my knowledge, this information had

circulated widely to all of the franchisees in my area at that time.

By the time the actual price of the unfinished Always Fresh donut

was disclosed to franchisees in the Spring of 2002 (at close to

$0.20), my store #593 had already been built and opened without

the fryers and other equipment required for Full-Baking. I

proceeded at that time in reliance upon TDL’s representation that

the high cost of the frozen Always Fresh donut would be offset by

cost reductions in labour, waste and other operating expenses.

[93] With knowledge of the actual cost of the Always Fresh donut, Mrs. Jollymore converted

her stores #593 and #368 to the Always Fresh method in October 2002.

Mr. Gilson

[94] Mr. Gilson was, as I have mentioned, a former member of the Advisory Board. He

described his recollection of the discussion of the Always Fresh pricing at the Advisory Board

meetings – he could not recall the exact dates - in the following terms:

Page: 22

They felt that – from what I understand, and I believe I heard it on

more than one occasion, is that they felt they could bring the

product to the store for somewhere between 11 to 12 cents.

[95] Mr. Gilson said that this information was conveyed by Mr. House. It was not

memorialized or reduced to writing or recorded in any of the minutes of the Advisory Board. In

cross-examination, Mr. Gilson acknowledged that the statement was not made in the context of a

formal presentation. “It was a discussion around the table”. Later in his examination, in response

to a question asked by plaintiffs’ counsel, Mr. Gilson described the 11 to 12 cents number as the

cost to manufacture the product at Maidstone Bakeries. This is not the same as the cost to the

franchisee.

[96] Mr. Gilson stated that he shared this information with other franchisees in the area and

that, although it was more than their current cost, they felt that the convenience of the new

system, coupled with the labour savings, would offset the additional 3 to 4 cents in costs. He says

at the time, franchisees were scratch baking donuts at around 8 to 9 cents each.

[97] Mr. Gilson says that he did not learn of the price of the “Always Fresh” product until

“[P]retty much when it arrived at my store”, which would have been in late December 2002. The

price was close to 18 cents. He said that his reaction at the time was “we had hoped that we

would be able to offset [the higher price].” The evidence in fact indicates that Mr. Gilson was

present at a meeting of the Advisory Board in September 2002 at which time the 18 cent cost

was discussed.

[98] It was Mr. Gilson’s evidence that at the regional meeting in Kingston, he asked Mr.

House, who was on the stage with Mr. Walton, Mr. Clanachan and Mr. Moir, why the price of

donuts had come out at 18 cents when the Advisory Board had been told that it would be 11 or

12 cents. He said that Mr. House replied that he did not recall ever having talked about the 11 to

12 cent donut. Mr. Gilson did not feel he could take the matter further with Tim Hortons

management. He said that following this incident, a member of TDL management, Mr. Javor,

met with him and was critical of him asking the President of the company a question that put him

on the spot.

[99] As I have mentioned earlier, Mr. Gilson testified on cross examination, in glowing terms,

concerning the benefit of the Always Fresh Conversion, saying that it was the best thing to have

happened to his business. He admitted that although his food cost had increased, there had been

price increases in the stores to offset this. He also acknowledged that Tim Hortons had done a

good job with the Always Fresh product.

[100]

It is of some interest to know that Mr. Gilson renewed the franchise agreements for two

of his stores after he became aware of the actual price of the Always Fresh donut, presumably in

recognition of the fact that he would be able to make a fair and commercial rate of return on his

business. His daughter also acquired a franchise with full knowledge of the real price.

Page: 23

[101]

One of the interesting observations made by Mr. Gilson on his examination was with

respect to coffee. He acknowledged that coffee was the most profitable item in the store: “We’re

fairly blatant that coffee is our big money. That’s what brings most of the money in the store, we

need that.” He acknowledged that coffee is the easiest product to handle, the lowest in food cost

and that the margins on coffee are “significantly higher” than the margins on other products.

Mr. Loiello

[102]

Mr. Loiello was a franchisee in Quebec who ultimately filed for bankruptcy. He was

examined by the plaintiffs pursuant to Rule 39.03. It was his evidence that at a regional meeting

in Montreal in 2001, Mr. House gave a slide presentation that showed the price of an Always

Fresh donut at 12 cents. He claims that Mr. Clanachan, Mr. Moier and Mr. Walton were also

present at the regional meeting, but he was unable to say whether they were all in the room at the

same time. It was his evidence that he did not find out the actual price of the Always Fresh donut

until he received his first delivery of the new donuts.

Mr. House

[103]

Mr. House denied making any statement at the November 2001 Toronto regional

meeting concerning the anticipated cost of the Always Fresh donut and says that he would not

have made the statement because, as of that date, Tim Hortons was in the process of determining

its estimated costs. He would not have been prepared to put forward an estimate unless the back-

up work had been done. The evidence of Mr. Clanachan is to the same effect. He confirmed that

there is no reference to any such statement in the slide presentation that was used to explain the

“Always Fresh” system to franchisees across the country.

Mr. Walton

[104]

Mr. Walton testified that he never heard Mr. House tell the Advisory Board that the

Always Fresh donut would cost 11 to 12 cents.

The Affiant Franchisees

[105]

Mr. Archibald was one of the “Affiant Franchisees”. He swore, in response to the

plaintiffs’ allegations of misrepresentation, that Tim Hortons informed franchisees “at the outset”

that food costs would increase as a result of the conversion. He said that he anticipated this

increase and that it has been offset by lower labour costs and reduced wastage.

[106]

The evidence of Danny Murphy was similar. Mr. Murphy swore that Tim Hortons

explained that food costs would increase, but also stressed savings in labour costs. He says that

his stores in Prince Edward Island experienced a “slight decline” in profitability after the

conversion but there was a return to the previous profit margins within 6 to 8 months. He

expressed the opinion that the implementation of Always Fresh baking was beneficial to

franchisees and said that he would not want to return to the old method of scratch baking.

Page: 24

[107]

[108]

Neither Mr. Archibald nor Mr. Murphy was cross-examined.

The evidence of franchisee Susan Marshall, quoted earlier, was that, Tim Hortons was

transparent about the increased product costs in the consultation process leading up to the

Always Fresh Conversion, but said that they would be offset by lowered labour costs.

[109]

Like Mr. Murphy, Ms. Marshall observed a decrease in profitability in her stores in

Edmonton immediately following the conversion. Profitability ultimately returned, however, and

her stores were on average, 3% more profitable than they were prior to Always Fresh. She

observed:

As a Tim Hortons franchisee, I personally welcomed the Always

Fresh Conversion. In light of my problems under scratch-baking, I

knew that the old system was no longer sustainable in the

Edmonton stores. I saw the conversion as an opportunity to

increase the profitability of my stores.

[110]

On cross-examination, Ms. Marshall was not challenged on her evidence concerning

the “representations” that Tim Hortons made concerning the effect of the Always Fresh

Conversion. Nor was it suggested to her that there was any representation as to a “12 cent

donut”.

[111]

Mr. Cardella was a member of the Advisory Board at the time when Tim Hortons is

alleged to have made the representation concerning the “12 cent donut”. On cross-examination, it

was pointed out that he was at a meeting of the Advisory Board in February 2000 at which

Always Fresh was discussed. The minutes recorded a discussion to the effect that one benefit of

the program would be reduced labour, but that the primary objective would be to produce a

better product, namely a warmer and fresher donut that would increase sales. He acknowledged

that, in his view, that was part and parcel of the objective of controlling costs by reducing labour,

making less donuts more frequently and increasing sales.

[112]

Significantly, the alleged representation of the “12 cent donut” was not put to Mr.

Cardella by counsel for the plaintiffs. Nor was it put to Mr. Angelini, another Affiant Franchisee

and a member of the Advisory Board at the material time. Mr. Shaw, the third Affiant Franchisee

who was a member of the Advisory Board at the material time, was not even cross-examined.

Peter Madden

[113]

Mr. Madden swore two affidavits, which were part of the evidence adduced by Tim

Hortons on the summary judgment motion. He was an employee of IAWS and of its subsidiary

Cuisine de France and was actively involved in the negotiation of the joint venture between

IAWS and Tim Hortons. It was his evidence that in negotiations with Tim Hortons, including

with Mr. House, Mr. McNeely and Mr. Clanachan, the Tim Hortons personnel were insistent that

“one of the things that was critical to the success of the project was that the joint venture had to

be in the best interest of the franchisees and that the pricing mechanisms agreed by the joint

Page: 25

venture had to be consistent with this objective.” It was his evidence that the price of 16 cents for

every kind of par baked donut was agreed to after three months of analysis and intense

negotiation. He also deposed that the price was acceptable to Tim Hortons because it was

roughly equal to the true cost of on-site scratch baking, while at the same time provided the joint

venture with an acceptable return on capital. It was Mr. Madden’s evidence that his goal in

negotiations was to achieve the highest possible product price in order to maximize his

company’s return on the venture and that the negotiated price was lower than what he had

expected it to be. I will set out Mr. Madden’s evidence on this point, in full, later in these

reasons.

[114]

Mr. Madden’s evidence substantially confirms the evidence of Mr. Clanachan

concerning Tim Hortons’ desire to achieve a single price for all varieties of donuts that was

roughly comparable to the combined labour and food costs of the scratch-baked donut.

[115]

Mr. Madden was not cross-examined on his affidavit, although the plaintiffs had

initially requested an opportunity to do so. They withdrew their request after Mr. Madden

produced his notes of the negotiations.

Conclusion Regarding Misrepresentation

[116]

As mentioned above, this action originally included a claim for negligent

misrepresentation of the cost of the Always Fresh donut. This claim was only abandoned by the

plaintiffs two weeks before the certification and summary judgment motions. It generated an

inordinate amount of affidavit evidence and cross-examinations. It is not surprising that the claim

was abandoned, given the disparate nature of the evidence concerning the alleged

misrepresentation and the case law concerning the difficulties in certifying a misrepresentation

claim: see McKenna v. Gammon Gold Inc., 2010 ONSC 1591, [2010] O.J. No. 1057 (S.C.J.) at

paras. 135-136, varied, [2011] ONSC 3782; [2011] O.J. No. 3240 (Div. Ct.).

[117]

Although the claim for misrepresentation has fallen by the wayside as a cause of action,

it remains relevant to the plaintiffs’ allegation that Tim Hortons breached its contractual duties

under the franchise agreement to maintain an advisory relationship with franchisees and to

develop new products compatible with the Tim Horton System. It also remains relevant to the

plaintiffs’ claim for breach of the duty of good faith and fair dealing.

[118]

Taken at its highest, however, the plaintiffs’ evidence does not support any common

class-wide representation having been made to franchisees concerning the cost of the Always

Fresh donut, other than a representation, which Tim Hortons admits, that food costs would

initially increase, but that labour costs and waste would come down.

F.

The Lunch Menu

[119]

The plaintiffs initially pleaded that Tim Hortons breached their contracts by requiring

them to sell Lunch Menu items. That allegation has now been abandoned and it is acknowledged

that the franchise agreement permits Tim Hortons to require franchisees to sell the Lunch Menu.

Page: 26

The plaintiffs continue to allege that Tim Hortons breached their contracts concerning the Lunch

Menu and breached the duty of good faith and fair dealing, by requiring them to buy Lunch

Menu ingredients at prices that were higher than the market price.

[120]

The plaintiffs argue that they are at Tim Hortons’ mercy when it comes to the Lunch

Menu, because Tim Hortons controls the products they must sell, the suppliers and distributors

they must use, the ingredients they must buy and the prices they must charge. They say that they

lose money on Lunch Menu items due to high ingredient costs, the high labour cost and the low

retail pricing of Lunch Menu items. Lunch Menu items are frequently sold as part of a “combo”

with other items, such as a drink, donut or cookie, further discounting the retail price.

[121]

The plaintiffs say that their franchise agreements have been breached, because they are

not able to earn a profit from selling Lunch Menu items. They say that the changes in the Lunch

Menu are not a “benefit” or improvement and that Tim Hortons has breached the franchise

agreement by failing to use reasonable efforts to develop new products and by failing to engage

in meaningful consultation with franchisees.

[122]

The sale of Lunch Menu items appears to make up 15% or less of the sales of most

franchisees. Mr. Jollymore says that Lunch Menu items represent approximately 7% of the total

sales of his stores. He says that the margin on these items results in losses and that Tim Hortons

has failed to adjust either the input costs or the selling prices of these items to prevent the erosion

of the franchisees’ margins. Mr. Garland claims that the sale of Lunch Menu items had been

fairly constant at 6% of sales in his store, but the food costs for Lunch menu items increased

from about 44% of sales in 2003 to 54% in 2008, with the result that he sold Lunch Menu items

at a loss. He claims that he discussed his complaints about the price of Lunch Menu items with

Tim Hortons executives but they refused to accept his accounting methodology and failed to

address the problem.

[123]

The evidence of the plaintiffs’ expert, Mr. Fisher, is that the food costs for Lunch Menu

items in 2008 ranged from about 51% to about 54% of sales and that, when combined with paper

costs and operating costs, these items yielded a negative contribution to operating costs. That is,

Mr. Fisher opined that franchisees lose money on the sale of Lunch Menu items. Mr. Garland’s

view is the same. He noted that, at the same time, Tim Hortons makes a profit on franchisees’

sale of the Lunch Menu, because it is paid a royalty on sales regardless of whether the particular

item is sold at a profit by the franchisee.

[124]

Mr. Fisher’s evidence is also that the sale of Lunch Menu items does not cause a

significant increase in the sale of higher margin items, such as coffee.

[125]

Mr. Fisher advances the theory of what he calls “category cost analysis”, which he says

requires an examination of each menu category – of which “Lunch” would be one – and says that

a rational approach to pricing is to ensure that each menu “category” makes a profit.

[126]

As I mentioned earlier, soup, sandwiches and chili have been part of the Tim Hortons

business model since the mid-1980s. Tim Hortons’ evidence is that most stores are required to be

Page: 27

24-hour-a-day operations and the sale of such items takes place at all hours of the day and night

and not simply at the traditional “lunch hour”. Its view is that the Lunch Menu brings customers

into the franchisees’ shops at times other than traditional “coffee time” in the morning and that

having the Lunch Menu helps to cross-sell other profitable items such as coffee and other drinks.

Moreover, the Lunch Menu is a way to sell “combos”. Thus, the loss of the sale of the sandwich

at a low price would be off-set by the sale of the other profitable items.

[127]

The sales statistics support the conclusion that the Lunch Menu probably attracts

customers to stores at times other than the traditional lunch hours. The evidence of Mr.

O’Rourke, Tim Hortons’ Director, Financial Analysis, Franchise Operations, was that an average

of only 18% of franchisees’ sales of all items were between 11 a.m. and 2 p.m. Approximately

40% to 44% of sales occur in the morning hours between 5:30 a.m. and 11 a.m. This leaves

about 38% to 42% of sales in the afternoon, evening and night time period. It is probable that,

during these off-lunch periods, the Lunch Menu attracts some people who would not otherwise

come to the store.

[128]

Tim Hortons’ evidence is that the Lunch Menu also helps to build customer loyalty. It

helps the franchisee to compete with the aggressive marketing of other QSR chains, such as

McDonalds, Subway and Mr. Submarine, that are vying for the loyalties of the lunchtime crowd

and even catering to the needs of the caffeine addicts. Without low-priced, healthy and attractive

lunch offerings, Tim Hortons risks losing some of its customer base to the competition.

[129]

The minutes of meetings of the Advisory Board show that extensive and granular

discussion takes place at these meetings concerning the Lunch Menu in general and the

introduction and pricing of particular Lunch Menu items. It is clear from these minutes that Tim

Hortons and the Advisory Board members are alive to the competitive threats in this market and

the opportunities for Tim Hortons and its franchisees. It is also clear that the introduction of new

menu items takes place only after careful consideration of the justification for a particular item,

the cost of the ingredients and the price at which it is to be sold. Considerable research and

investigation is carried out by Tim Hortons with respect to demands for particular Lunch Menu

items, costing of such items, pricing of such items and marketing. A great deal of thought goes

into removal of some products and replacement with others.

[130]

The evidence of some of the Affiant Franchisees supports the value of the Lunch Menu

as a way of cross-selling other products, bringing customers into the store throughout the day and

remaining competitive.

[131]

The evidence of Brian Archibald is reasonably representative:

My stores have offered lunch items such as sandwiches, soups and

chili since 1988. Lunch menu items have increased as a

percentage of my overall sales and have made my stores

competitive in the local lunch market in Terrace (and Prince

Rupert when I operated that franchise). The lunch program is an

Page: 28

important part of my business accounting for a range of 12-14% of

sales in my stores over the course of the last few years.

I would strongly oppose any reduction or termination of the lunch

menu. The higher associated food costs for lunch menu items are

more than offset by the price of lunch items and overall increased

sales. In particular, I believe that by offering a quality and

competitive lunch menu in my stores, I am able to increase sales of

other items such as coffee and baked goods by offering these items

together with the lunch menu products. The expanded lunch menu

attracts customers throughout the day as opposed to in the past,

when sales were concentrated only in the peak early morning

period.

[132]

Some of the Affiant Franchisees acknowledged that the profit margins on Lunch Menu

items were lower than other items, such as coffee, due to higher product and labour costs, but

said that they were still able to make a profit on these items. They said that Lunch Menu

revenues were an important part of their business. The evidence of franchisee Dale Reinke spoke

to the value of the Lunch Menu in bringing customers into the store during off-peak hours:

The main advantage of the lunch menu is its essential role in

maintaining day-time, and in particular mid-day, customer flow.

The increased lunch-hour customer volume has augmented our

traditional early morning peak period, and the lunch items have

proven popular with customers who work night shifts as well.

[133]

Graham Oliver made similar observations:

When I first became a Tim Hortons franchisee twelve years ago,

the lunch menu at my store consisted of sandwiches, soups and

chili. Since that time, the lunch menu has been consistently

expanded to include a variety of sandwiches, soups, bagels and

combos while still keeping chili. The profit margins on lunch menu

items are inevitably lower than on other items, such as coffee, due

to higher product and labour costs. However, franchisees are still

able to make profits on lunch as luncheon items are sold at higher

prices.

The expansion of the lunch menu has ensured that Tim Hortons

remained competitive. Unlike some of our competitors who have

limited their menu to coffee and donuts, Tim Hortons has become

regarded as a food option for every meal of the day. Prior to the

expansion of the lunch menu (beginning in the late 1980's), traffic

at stores was very slow after 11 a.m. The business was essentially a

Page: 29

morning coffee and snack operation. However, after 11 a.m., the

stores were still incurring overhead costs while not making any

significant sales. Today, the lunch time slot is one of the busiest

times of the day in my stores. The expanded lunch menu has

helped to create a consistent flow of traffic throughout the day.

In addition to the profits that franchisees receive from sale of lunch

menu items, franchisees are also profiting from the increased

goodwill that is generated from satisfied customers at lunch and

from other items, such as coffee, that are purchased during those

lunch hours.

I verily believe that all franchisees would agree that we are still

making profits on lunch, and that the expanded lunch menu has

allowed us to become the competitive business that we are today.

[134]

There has been a debate between the parties concerning the pricing of Lunch Menu

items. The plaintiffs maintain that due to high ingredient costs, they are required to sell Lunch

Menu items at a loss. The plaintiffs’ expert, Mr. Fisher, disputes the contention that the sale of

Lunch Menu items promotes the sale of other, more profitable, foods and beverages.

[135]

Tim Hortons says that the plaintiffs’ accounting methodology is flawed and that, in any

event, the plaintiffs do not properly account for complimentarity of demand – a customer who

buys a sandwich with a small margin or even a negative margin may also purchase a coffee or

soft drink with a high margin, with the result that the sandwich makes a positive contribution to

profits. It also says that the accounting approach followed by Mr. Garland is flawed, because he

allocates all the discount of “combo” prices to the food items and fails to apply it to the drink

items as well. Tim Hortons says that this approach tends to make the food items appear

unprofitable whereas, when allocated across all the items in the “combo”, the franchisee makes a

profit. Even the plaintiffs’ own expert, Mr. Rosen, acknowledges that the incremental sales of

donuts, beverages and other items that are included in lunch “combos” should be considered in

determining whether the Lunch menu is profitable.

[136]

It is not necessary for me to resolve the debate about whether the Lunch Menu is

profitable for the plaintiffs or for every franchisee. For the reasons set out below, it is my

conclusion that Tim Hortons has the contractual right to require all franchisees to sell the Lunch

Menu, just as it has the right to require franchisees to sell every other menu item. Franchisees are

not entitled to pick and choose between menu offerings and to sell only the most profitable ones.

[137]

It is also my conclusion that no franchisee has a contractual right to sell every one of

the numerous items on its menu at a profit. If it loses money on the Lunch Menu, it makes it up

on the sale of other items, such as breakfast sandwiches or the “Bagel BELT.” It also makes it up

on the sale of coffee, tea and other beverages.

Page: 30

[138]

I also conclude that the Lunch Menu has been developed by Tim Hortons for perfectly

rational business reasons, having regard to its own interests and the interests of its franchisees,

with due consideration of the opinions of franchisees through the Advisory Board in the selection

and pricing of Lunch Menu items. While Mr. Garland, Mr. Jollymore and Mr. Fisher may

disagree with Tim Hortons’ Lunch Menu model, and with the pricing of specific items, those

matters are within the reasonable business discretion of the franchisor. It is quite apparent from

the evidence of the Affiant Franchisees that many of them agree with Tim Hortons’ rationale and

are reasonably content with their rate of return. Although Mr. Garland did not share this view,

Tim Hortons gave reasonable consideration to his opinions, but in the end simply did not agree

with him.

[139]

I will now summarize the key conclusions of the expert witnesses called by both sides.

I will begin with the plaintiffs’ expert evidence, starting with Mr. Fisher.

G.

The Plaintiffs’ Expert Evidence

1.

Evidence of Douglas Fisher – Defendants’ Motion to Strike

[140]

The plaintiffs seek to introduce expert evidence from Mr. Douglas Fisher, the principal

of a food service and franchise management consulting firm. Mr. Fisher’s initial expert affidavit

was 187 pages long and ran to 618 paragraphs. The defendants move to strike the affidavit on the

ground that Mr. Fisher has exceeded the bounds of proper expert evidence because he has:

• engaged in the interpretation of the franchise agreement;

• expressed opinions for which there is no factual foundation;

• purported to make findings of fact on contested matters;

• engaged in impermissible advocacy; and

• expressed opinions on matters for which he has no expertise.

[141]

The key conclusions expressed by Mr. Fisher, for the purposes of the motions before

me, are:

(a)

the cost of an unfinished donut to the plaintiffs and the class members tripled as a

result of the Always Fresh Conversion, from about 6 cents per donut to nearly 18

cents per donut and this increased cost was not offset by reductions in labour,

waste and other operating expenses and failed to reflect the economies of scale

that should have been created by Maidstone Bakeries;

(b)

contrary to reasonable commercial practices, Tim Hortons entered into the joint

venture agreement to build the Maidstone Bakeries without a clear analysis of the

Page: 31

impact of the cost of donuts on franchisees or was indifferent as to what the cost

was going to be;

(c)

(d)

Tim Hortons’ communications with franchisees in connection with the Always

Fresh Conversion were inconsistent with reasonable commercial practices and the

financial numbers used to project the savings to franchisees were wrong;

the plaintiffs’ food costs for Lunch Menu items were in the range of 51.5% to

54.6% in 2008, and when combined with paper and other operating costs

associated with preparing and selling the Lunch Menu, resulted in a negative

contribution to the plaintiffs’ operating profits, while at the same time benefitting

Tim Hortons through royalty payments on sales and mark-ups on ingredient sales;

(e)

as a result of his examination of the stores operated by Mr. Garland and the

plaintiffs, Mr. Fisher concluded that the Lunch Menu does not significantly

increase the sales of higher profit items and does not offset the losses that are

incurred by franchisees as a result of selling the Lunch Menu;

(f)

it is commercially unreasonable for Tim Hortons to require that franchisees sell

the entire category of Lunch Menu items at an operating loss; and

(g)

the Always Fresh Conversion and the low price of the Lunch Menu eliminated

profits to the plaintiffs and to class members and caused economic harm to them.

[142]

Mr. Fisher also calculated that, examining the sale of baked goods as a category, the

plaintiffs experienced a negative contribution to operating profit of - 4% (negative four percent)

in 2005 and, in the same time period, the Affiant Franchisees whose records he examined came

close to breaking even on the sale of baked goods at -0.08% (negative zero point zero eight

percent). He calculated that the situation had improved somewhat by 2008, in that the plaintiffs

were basically breaking even on the sale of baked goods (zero contribution to operating profit)

and the Affiant Franchisees made a nominal profit of 1.1%.

[143]

He also concluded that the lunch prices charged by Tim Hortons are significantly lower

than those charged by its competition for similar products. It was his opinion that Tim Hortons

offered an excellent quality sandwich at a very low price and that the price/value relationship of

the Tim Hortons sandwich was better than its major competitors. It was his opinion that if

franchisees were able to charge higher prices for Lunch Menu items, they would make a better

profit. He concluded as well that the sale of Lunch Menu items did not promote sales of other,

more profitable, menu items.

[144]

One of the most significant conclusions that Mr. Fisher makes in his report, in my view,

is in response to a sworn statement by Mr. O’Rourke of Tim Hortons that Tim Hortons believes

that its franchisees receive “a return on investment for our store owners that is unmatched in the

Page: 32

quick service restaurant industry.” Mr. Fisher did not contest this statement. On the contrary, he

acknowledged that Tim Hortons franchisees receive a reasonable margin, on average. He stated:

… [Tim Hortons] provides a reasonable margin to its franchisees

on average, but that is not a reason to have the franchisees work a

Lunch Menu without any benefit for themselves or to serve donuts,

where both significantly profit [Tim Hortons], while providing the

franchisee with significantly less profit than was once available to

the franchisees in the case of donuts and no profit in the case of

lunch.

[145]

This acknowledgment is significant. Mr. Fisher acknowledged that Tim Hortons

franchisees receive, on average, a reasonable level of profit and a reasonable return on

investment. His argument – and I use that term intentionally – is that Tim Hortons should have

shared more of the profits with its franchisees.

[146]

At the same time as making this acknowledgment, however, Mr. Fisher could not resist

assuming the role of advocate, something that occurs throughout his affidavit. This is perhaps not

surprising, as the evidence shows that soon after this action was commenced, Mr. Fisher

contacted Tim Hortons, unsolicited, and attempted to obtain a retainer, suggesting that he could

assist in “stifling this matter early on”. I agree with the submission of Tim Hortons that this sort

of conduct by a putative expert should lead the court to approach his opinion with some degree

of skepticism.

[147]

One of the key areas where Mr. Fisher, and Mr. Garland differ from Tim Hortons is

with respect to what Mr. Fisher calls “product and product category analysis”. Tim Hortons takes

the view that the franchisee’s profit margin should be analyzed based on its overall food costs

from all products. As expressed by Mr. O’Rourke, Tim Hortons Director, Financial Analysis,

Franchise Operations, the rationale is simple: you cannot tell whether a customer who bought a

donut and a coffee would have bought the donut if coffee was not available and vice versa. What

matters to Tim Hortons, and what Mr. O’Rourke says really matters to franchisees, is the profit

on the sale of both items. In Mr. O’Rourke’s words:

What Tim Hortons looks at is the margin based on the overall food

cost from all products. This is for a simple reason. It is impossible

to know whether you would have sold the coffee or donut that you

did at Lunch if you didn’t also sell the soup or chili that the

customer came to the store to buy. A reasonable conclusion is that

if you did not offer the soup and sandwich, the customer likely

would not have come to the store but would have gone somewhere

else and so you would not have sold the coffee, tea, other beverage

or accompanying donut. There are any number of variations of this

theme as, for example, in the morning would you have sold the

Page: 33

coffee if you didn’t have the donut or vice versa and also the same

question arises as to the breakfast sandwich.

[148]

Mr. Fisher does not agree with Tim Hortons’ accounting methodology or its

conclusions. It is his evidence that all restaurants should be concerned about the contribution

margin of each item served and that all major restaurants track their sales and profit margins by

item (such as a donut, a bagel, a coffee or a sandwich), by category (such as lunch or breakfast)

and by the overall menu. He says that:

Smart restaurant operators try to sell those items that have the

highest contribution to overall profit and reduce the amount of

items that have a lower contribution to sales. This is managed

through suggestive selling techniques, menu placement techniques

and advertising. Certainly few, if any, restaurants promote items

that provide a minimal contribution or have a negative impact on

operating profit.

[149]

Mr. Fisher says that Tim Hortons should be doing his form of menu analysis, which

would show that franchisees rely heavily on coffee and other drinks as their most significant

source of profit. If it took his approach, it would presumably increase the retail price of Lunch

Menu items to allow the franchisee to make more money, discontinue the sale of unprofitable

menu items, and either reduce the price at which franchisees buy the par baked donuts or

increase the sale price of donuts or discontinue the sale of donuts.

[150]

The defendants say that Mr. Fisher’s affidavit should be struck. In Williams v. Canon

Canada Inc., 2011 ONSC 6571, [2011] O.J. No. 5049 (S.C.J.), I dealt with a similar motion and

set out the principles applicable to expert evidence generally and on a certification motion in

particular, at paras. 65 – 76. I adopt those observations for the purposes of this proceeding.

[151]

The objections made by the defendants are as follows:

(a) large portions of Mr. Fisher’s affidavit are unnecessary,

because they fall within the experience of the trier of fact and do

not require evidence of an expert;

(b) the evidence of Mr. Fisher includes advocacy dressed up as

opinion;

(c) the evidence contains legal conclusions, including conclusions

as to the interpretation of the franchise agreements that are at issue

in this proceeding;

(d) the witness has engaged in fact-finding – rather than

proceeding from assumptions, as an expert should, Mr. Fisher has

Page: 34

set out on a broad-ranging fact-finding expedition and purports to

come to expert opinions based on his personal observations of the

facts;

(e) he has expressed opinions that are not based on underlying

proven facts; and

(f) he gives opinions based on financial and accounting issues that

are not within his expertise.

[152]

There is considerable merit to the defendants’ objections to Mr. Fisher’s evidence.

Without in any way being exhaustive, the following are some examples:

• he conducted his own investigation into customer complaint

“web chat pages” on the internet to refute the suggestion of

Tim Hortons that the Always Fresh baking method resulted

in improved product quality;

• he frequently stated his own factual observations based on his

personal inspections or experiences of Tim Horton’s stores;

• he made observations to the effect that Tim Hortons’ conduct

was not consistent with “reasonable commercial standards”

without stating what those standards are, whose standards

they are, whether they are observed by others and, if so, how

they are observed, and why they are reasonable – it became

apparent that Mr. Fisher’s use of the term “reasonable

commercial standards” simply meant his opinion about what

reasonable commercial standards are, or should be;

• he engaged in frequent advocacy, critiquing the evidence of

Tim Hortons and its experts;

• he resisted no opportunity to challenge an assertion made by

Tim Hortons – for example, in responding to Tim Hortons’

evidence about the difficulties in retaining skilled bakers, he

stated: “I do not believe that one would need a ‘trained baker’

to work at a Tim Hortons but rather someone willing to

‘bake’ who would be called a ‘baker’ and would be

responsible for the baking process” – he follows this

statement with a recitation of information provided to him by

his wife concerning bakers’ wages; and

Page: 35

• he frequently expressed opinions without giving any

foundation for his opinion.

[153]

Mr. Fisher’s opinion is prolix in the extreme, largely because he does not confine

himself to expressions of opinion based on assumed facts or facts clearly established by other

evidence. Instead, he undertakes his own fact-finding mission, relying on facts that have not been

proven. His affidavit also includes improper legal analysis and contract interpretation and

improper advocacy.

[154]

In the final analysis, I find Mr. Fisher’s evidence of little value on the motions before

me. Whatever Mr. Fisher’s opinion may be about how the Tim Horton System should be run, it

is Tim Horton’s right to determine how that system will be run. Tim Hortons must conduct itself

in accordance with its contractual undertakings under the franchise agreement and with its other

legal obligations, including its duty of good faith and fair dealing in the performance of the

agreement; Mr. Fisher’s opinion about how Tim Hortons should manage its menu, price its

products, conduct its accounting, and split its profits with franchisees is interesting but irrelevant.

[155]

I will discuss below the duty of a franchisor to act in good faith and in accordance with

reasonable commercial standards in the performance of the franchise agreement. I do not accept

Mr. Fisher’s evidence, however, that it is “commercially unreasonable” for Tim Hortons to

consider the franchisees’ overall profit picture, as opposed to his approach using “category cost

analysis”. The latter approach may be appropriate for a single restaurant or even for a chain, but

that does not mean that it is unreasonable for a franchisor to focus on the big picture. If the

franchisor reasonably believes that an economically-priced lunch selection is a good way of

attracting customers in off-peak hours, helps to cross-sell other profitable products, and builds

customer loyalty, then, subject to the terms of its contracts with its franchisees, it is entitled to

price the ingredients as it sees fit, having regard to the franchisees’ operations as a whole, and

the return on investment they receive.

[156]

In summary, although I do not propose to strike Mr. Fisher’s affidavit, I give his

evidence little weight.

2.

Evidence of Howard Rosen

The plaintiffs have adduced expert evidence of Mr. Howard Rosen, C.A., of FTI

[157]

Consulting Canada ULC, a chartered business valuator. In summary, it was Mr. Rosen’s opinion,

based on a preliminary assessment of the available evidence, that the plaintiffs had suffered an

economic loss as a result of the Always Fresh Conversion, that the losses were capable of being

analyzed as a common issue, and that the gains realized by Tim Hortons as a result could be

calculated on an aggregate basis. With respect to the Competition Act claims, Mr. Rosen opined

that the plaintiffs had suffered an economic loss due to the mark-ups they paid on Always Fresh

products, that damages were capable of being calculated on an aggregate basis and that the gains

of Tim Hortons could be analyzed as a common issue and calculated on an aggregate basis.

Page: 36

[158]

With respect to the Always Fresh Conversion, it was Mr. Rosen’s opinion that the cost

of a finished donut to a franchisee prior to the conversion was in the range of from four and a

half cents to eight and a half cents each. By his calculation, after the conversion there was an

increase between 140% and 330% to just over nineteen cents. He concluded that the financial

information provided by Tim Hortons did not establish that these increased costs had been offset

by savings in labour and other costs.

[159]

Mr. Rosen also concluded that class members had suffered an economic loss as a result

of the mark-up of the price of donuts and timbits from Maidstone Bakeries. He concluded that

the total costs of producing a donut at the Maidstone facility was approximately 10 cents on

average. Maidstone then charged CillRyan a price of between 11 cents and 12 cents during the

period 2003 to 2009, which Mr. Rosen accepts as a reasonable arm’s length price. After paying

Maidstone for the donut, CillRyan then invoiced the distributor at a different price, to which the

distributor added its own mark-up to the franchisee.

[160]

Mr. Rosen concluded that CillRyan charged distributors 15.8 cents per donut in 2003

and this was increased to 16.3 cents in 2003 and 2009. The price initially paid by franchisees to

the distributors from 2003 to March 2007 was 17.9 cents per donut. From March 2007 onward, it

was 18.3 cents.

[161]

It was Mr. Rosen’s opinion that the mark-up by CillRyan of the donut and timbit price

did not reflect any significant value added to the product, was in excess of fair value, and was

therefore excessive and a detriment to franchisees, causing them economic loss. He concluded

that Tim Hortons made an extraordinary return on its investment in CillRyan and it made a

further return, in some cases, in its capacity as a distributor of par baked products in Ontario.

[162]

It was also Mr. Rosen’s preliminary opinion that there was evidence to establish that

the Lunch Menu resulted in negative earnings for that category, even when the sale of incidental

beverages was taken into account, and that the loss from the Lunch Menu could be determined

on a common and aggregate basis.

3.

Evidence of Andy Baziliauskas

[163]

Mr. Baziliauskas is a consulting economist, employed by Charles River Associates,

specializing in competition issues. He expressed the opinion that there was a workable

methodology for determining, on a class-wide basis, whether class members suffered economic

loss as a result of Tim Hortons’ alleged breaches of the Competition Act. Essentially, it was his

opinion that a “but for” price could be determined for donuts and timbits – namely, the price that

franchisees would have paid “but for” the alleged price maintenance and price fixing by Tim

Hortons. This price could then be compared to the actual price paid by franchisees.

[164]

Mr. Baziliauskas was asked to assume that Maidstone sold the products to CillRyan at

an average price of 12 cents and that CillRyan then sold the products to distributors (including

Tim Hortons, after 2006, for distribution in Ontario) at a price of about 16 cents each, which he

Page: 37

refers to at the “CillRyan Mark-up” or the “TDL Rebate”. He also assumed that donuts were sold

by the distributors to franchisees at a price of between 17.9 cents and 18.3 cents from 2002 to the

present. He further assumed that Tim Hortons controls or influences the supply and distribution

chain and the prices at which the products are sold by:

• its control over the specifications of the products and their

prices;

• its ability to require the franchisees to purchase the products

from designated suppliers and distributors;

• its control of the price, including the price at which Maidstone

sells the products to CillRyan, the price at which CillRyan sells

to distributors, the rebates its receives from suppliers and

distributors, and the prices charged by distributors to

franchisees; and

• the practical inability of franchisees to negotiate discounts in

prices paid for the products and their inability to purchase the

products from other sources.

[165]

Mr. Baziliauskas opined that the actual prices paid by franchisees, the “but-for” prices

and the resulting overcharges could be determined on a class-wide basis. The “but-for” price

would be determined by deducting from the actual price the amount of the CillRyan mark-up that

was found to be unreasonable and the amount of any rebates to TDL that were found to be

unreasonable.

H.

Tim Hortons’ Expert Evidence

1.

Evidence of Roger Ware

[166]

The defendants have tendered affidavit evidence from an expert economist, Professor

Roger Ware of Queen’s University. Professor Ware gives evidence concerning the economic

principles of franchising, noting that as the creator of the “brand”, the franchisor obtains returns

on its innovation that are not necessarily shared with the franchisees. It was his opinion that Tim

Hortons, as a prudent franchisor, would make production and pricing decisions to enhance the

long-term value of its brand and that the success of individual franchisees would be integral to

the long-term success of the brand. Accordingly, he describes the relationship between the

franchisor and franchisee as symbiotic, in that the success of one depends on the success of the

other.

[167]

In general, he viewed the Always Fresh baking method and the Lunch Menu as

appropriate business innovations in the development of the Tim Horton system and as positive

Page: 38

developments for franchisees. It was his opinion that as the “innovator” of the Always Fresh

baking method, Tim Hortons was entitled to receive a return from the innovation.

[168]

Professor Ware opined that the alleged “harm” to franchisees as a result of these

innovations could not be calculated on a common basis because financial performance could

only be determined on an individual basis.

[169]

Professor Ware also expressed opinions concerning the Competition Act claims. With

respect to the price maintenance claim, he thought that the setting of wholesale prices for the

products supplied by Maidstone is simply part and parcel of normal business behaviour of every

supplier in a vertical chain and is not an anticompetitive act. The determination of Maidstone’s

price is not an attempt to influence the “price at which any other person … supplies or offers to

supply the product”.

[170]

Professor Ware’s opinion, as well, is that Tim Hortons’ contractual arrangements with

its distributors, such as Gordon Food Service (“GFS”), and the royalties it receives from

distributors, are not price maintenance. Tim Hortons’ agreements with its distributors put a

ceiling on the mark-up that the distributors can charge to franchisees.

[171]

In a reply affidavit, Professor Ware disputes the evidence of the plaintiffs’ expert, Mr.

Fisher, to the effect that the Always Fresh Conversion has eroded franchisees’ profits. He also

challenges the evidence of both FTI and Dr. Baziliauskas, noting that their calculations of the

“but-for” prices charged for the Always Fresh donuts and timbits do not properly account for the

fact that Tim Hortons is entitled to make a return on its innovation.

2.

Evidence of KPMG

[172]

The defendants engaged KPMG Forensic Inc. (“KPMG”) to review and critique the

report of Mr. Fisher. In summary, KPMG points out that Fisher has no professional accounting

expertise. It says that his calculation of donut costs, both before and after the Always Fresh

Conversion, and his calculations of the costs of Lunch Menu items are “fundamentally flawed”.

It also challenged Mr. Fisher’s conclusion that the results of his analysis could be extrapolated to

all class members.

[173]

In addition, KPMG commented on the FTI report tendered by the plaintiffs, specifically

on FTI’s conclusion that the price charged to franchisees for the donuts between 2003 and 2009

was excessive. KPMG was of the opinion that FTI’s analysis failed to account for the significant

risks undertaken by CillRyan, the functions it performed and its ownership of and access to

intangible assets, including know-how and the right to produce the par baked goods, including

the recipes for the products.

[174]

In particular, KPMG disagreed with FTI’s conclusion that the “mark-up” charged by

CillRyan to distributors was excessive. It noted that CillRyan was entitled to compensation for

functions that it performed and risks it assumed. The functions it performed included: taking

Page: 39

orders, forecasting, pricing, accounts receivable, marketing, purchasing and distribution, research

and development, information technology, financing, and the development, acquisition and

protection of intellectual property. Although some of these functions may have been outsourced

to Tim Hortons, the latter was paid for the services and the responsibility for them remained with

CillRyan.

[175]

The risks assumed by CillRyan included the market risk associated with the forecasting

and pricing of the products produced at Maidstone, including risks related to changes in

consumer tastes and demands. This is not an insignificant risk in view of trends towards healthy

eating. As well, there are foreign exchange risks, credit risks and product liability risks.

[176]

In summary, KPMG concludes that considering the functions performed by CillRyan

and the risks it assumed, it was entitled to make a profit on the price that was charged to

distributors.

[177]

In a further report, dated June 10, 2011, KPMG commented on FTI’s report dated May

4, 2011. It expressed the opinion that the economic effect of the Always Fresh Conversion and

the Lunch Menu on franchisees would be extremely difficult, if not impossible, to determine on a

common basis due to the wide variety of factors affecting the financial performance of individual

stores.

III.

THE FRANCHISE AGREEMENT

[178]

As described in Frank Zaid, Franchise Law (Toronto: Irwin Law Inc., 2005) at p. 15, a

franchise agreement has certain core features:

Franchising is fundamentally a form of business investment and

ownership governing the distribution and sale of goods or services.

In a franchise, the franchisor typically develops a business system,

in association with a trade-mark, and licenses the use of that

system to a franchisee, for a period of time. The franchisee is

required to conform to the standards of the system and to pay

consideration to the franchisor, usually as a combination of an

initial fee and ongoing payments in the nature of royalties based on

gross sales of the products and services associated with the

franchise system.

[179]

The acquisition of a franchise can provide an independent business person with a

number of benefits. These include:

(a)

a

ccess to a well-recognized brand that immediately brings

customers into the store due to goodwill associated with the brand;

Page: 40

(b)

(c)

a

s

comprehensive business system with a proven track record;

ophisticated and extensive business controls and accounting

systems;

(d)

(e)

a

high quality, consistent and dependable product;

t

he ability to provide customers with affordable prices in a highly

competitive industry;

(f)

e

xtensive market research, which enables franchisees to remain

competitive in a constantly changing market;

(g)

(h)

n

ational marketing, which promotes new products; and

a

ccess to ongoing support and assistance from the franchisor.

[180]

There are, of course, disadvantages to a franchise operation. The initial purchase of a

franchise can be expensive and there are ongoing royalty expenses paid to the franchisor that

would not be incurred by an independent business person.

[181]

One of the greatest disadvantages of operating a franchise is loss of control. The

franchisee loses the freedom of choice that is the hallmark of the independent business person.

This loss of control is a necessary aspect of a franchised operation. Products, prices, menu

offerings, store set-up, hours and methods of operation are strictly controlled to create the

uniformity that is so vital to the success of the franchise as a whole.

[182]

This loss of control can impact the costs of the operation. The franchisor generally tells

the franchisee what products it must buy, from whom it must buy them, and at what price. This

affects the franchisee’s cost of sales, a key component of the franchisee’s profitability. The fact

that the franchisee might be able to buy exactly the same product from another source at a

cheaper price is irrelevant. The law recognizes that the franchisor is not required to sell products

to its franchisees at the lowest price available in the market. In Ontario, Regulation 581/00 under

the Arthur Wishart Act provides that the franchisor must disclose to a prospective franchisee that

“[T]he cost of goods and services acquired under the franchise agreement may not correspond to

the lowest cost of the goods and services available in the marketplace.”

Page: 41

[183]

Most Tim Hortons stores are operated by franchisees as “owners” of their own stores or

by “operators” of corporately-owned stores. As mentioned earlier, the store “owners” pay an

initial non-refundable franchise fee, rent, which is typically 10% of monthly sales, a service fee

of 3% of sales, an advertising and marketing fee (4% stated, but in fact 3.5%). Those who

“operate” corporate stores are also required to sign a franchise agreement, but instead of a

franchisee fee they pay a royalty of 20% to Tim Hortons, as well as the advertising fee.

[184]

Under the typical franchise agreement, Tim Hortons grants the franchisee a licence to

operate a Tim Horton Shop for a term of ten years and to use the Tim Horton trademarks and the

Tim Horton System. The franchisee agrees to devote 100% of its efforts to the business. It

acknowledges the importance of uniform standards of quality and service and the need to operate

in accordance with the system to increase the demand for Tim Hortons’ products and to protect

and enhance the reputation and goodwill of Tim Hortons. Tim Hortons undertakes to maintain a

continuing consultative relationship with the franchisee, to develop and improve its system over

time and to ensure the integrity of the system as a whole.

[185]

The recitals to the franchise agreement describe and define the “Tim Horton System”,

confirm Tim Hortons’ development and ownership of that system, and acknowledge the

franchisee’s agreement to operate in accordance with that system:

WHEREAS the Licensor, as the result of the expenditure of time,

effort and money, has acquired experience and skill in the

development, opening and operating of shops involving the

production, merchandising and sale of donuts, muffins, tarts,

cakes, pies, cookies, coffee and other related products utilizing a

specially designed building with specified equipment, equipment

layouts, interior and exterior accessories, identification schemes,

products, management programs, standards, specifications and

procedures and propriety trademarks and tradenames, all of which

may be improved, further developed or otherwise modified from

time to time and all of which are referred to in this Agreement as

the "TIM HORTON SYSTEM".

AND WHEREAS the Licensor owns all rights to, interest in and

goodwill of, and uses, promotes and licenses the trademarks and/or

tradenames 'TIM HORTONS" and "TIMBITS" and such other

trademarks and tradenames as are now designated as a part of (and

which may hereafter be designated in the Confidential Operating

Manual or otherwise in writing as part of) the "TIM HORTON

SYSTEM" (hereinafter called the "Licensor's Trademarks''), all of

which the Licensor has adopted and used to identify Tim Horton

Shop services operated pursuant to the "TIM HORTON SYSTEM"

and of the food, beverage and other products sold or used therein,

and which the Licensor continues to develop and use and control

Page: 42

the usage of, for the benefit and use of itself and its licensees in

order to identify for the public by the association of the Licensor's

Trademarks the source of goods and services marketed thereunder

and to represent to the public the high and uniform standards of

quality, cleanliness, appearance and service available at a Tim

Horton Shop;

…

AND WHEREAS the Licensee understands and acknowledges the

importance of Licensor's high and uniform standards of quality,

cleanliness, appearance and service, the value of the “TIM

HORTON SYSTEM" and the necessity of opening and operating

the Licensee's Tim Horton Shop in conformity with the "TIM

HORTON SYSTEM" and in accordance with the Licensor's

standards and specifications, which form part of such System;

[186]

I turn now to Article 3 of the franchise agreement, which is one of the provisions relied

upon by the plaintiffs. It speaks, among other things, to the franchisor’s advisory relationship

with the franchisee, the provision of information concerning Tim Hortons’ procedures,

techniques and products, and the need to develop and improve these over time. It is quite obvious

that in buying a franchise, one of the most important things that the franchisee acquires is the

right to use the franchisor’s carefully developed systems and products, the result of the

franchisor’s know-how, which have been successfully used by other franchisees over the years.

[187]

Article 3 speaks to these issues under the heading “Initial and Continuing Services

Furnished by the Licensor”:

During the term of this license, the Licensor shall provide the

following services to the Licensee:

…

(f) to maintain a continuing advisory relationship with the

Licensee, including consultation in the areas of marketing,

merchandising and general business operations;

(g) to provide a Confidential Operating Manual which contains the

standards, specifications, procedures and techniques of the "TIM

HORTON SYSTEM" and to revise, from time to time, the content

of the manuals to incorporate new developments regarding

standards, specifications, procedures and techniques;

Page: 43

(h) to use its best efforts to maintain high and uniform standards of

quality, cleanliness and appearance at all Tim Horton Shops, thus

protecting and enhancing the reputation of the Licensor and the

demand for the products of the “TIM HORTON SYSTEM" and, to

that end, shall conduct periodic inspections of the Tim Horton

Shop licensed herein and periodic evaluations of the products sold

and used therein

…

(i) to use reasonable efforts to develop new products compatible

with the “TIM HORTON SYSTEM"; to review and approve any

and all proposed advertising and promotional materials prepared

by the Licensee for use in local advertising …

[188]

These are important provisions for both franchisor and franchisee. The franchisee is

assured that it will receive advice and support from the franchisor, that it will receive an

operating manual that will be modified from time to time, and that the franchisor will maintain

high standards for the benefit of all franchisees and will develop new products compatible with

the system. By doing so, the franchisor strengthens not only the individual franchisee, but the

operation of the franchise system as a whole.

[189]

Article 5, entitled “Duties of the Licensee”, confirms the duty of the franchisee to

comply with the Tim Horton System. It also acknowledges the need for uniformity in quality,

appearance and techniques. This is important, of course, to the franchisor, but it is also important

to every other franchisee who participates in the system. It provides in part:

The Licensee understands and acknowledges that every detail of

the "TIM HORTON SYSTEM" is important to the Licensor, to the

Licensee, and to other licensees in order to develop and maintain

high and uniform standards of quality, cleanliness, appearance,

service, facilities, and techniques to increase the demand for Tim

Horton products and to protect and enhance the reputation and

goodwill of the Licensor. The Licensee accordingly covenants as

follows:

[190]

Section 5.04, entitled “Supply of Product by Licensor”, is of particular importance, in

the submission of Tim Hortons. It obliges the franchisee to purchase all supplies from either the

franchisor or from manufacturers designated by the franchisor. The evidence establishes that this

is the case with all ingredients purchased by Tim Hortons franchisees, other than milk. The

section acknowledges that Tim Hortons may make a profit or receive a commission or rebate as a

result of such purchases and the franchisee expressly renounces any entitlement to it. It provides:

The Licensee shall purchase its supplies as follows:

Page: 44

a. the Licensee agrees that all containers, cartons, bags, napkins,

spoons and other utensils shall be purchased from the Licensor or

manufacturers as designated by the Licensor from time to time and

shall comply with the specifications provided by the Licensor from

time to time. The Licensee further agrees that any and all of the

ingredients and commodities which may form any part of the

products or the whole product of any food or beverage made, sold

or consumed on the Premises and, without limiting the generality

of the foregoing, including donut flours, toppings, fillings,

frostings, flavourings, coffee, tea, chocolate, dairy products,

vegetable oil, soft drinks and vending machines, shall be purchased

from the Licensor or manufacturers as designated by the Licensor

from time to time. Payment for all of the aforementioned

ingredients, commodities and supplies shall be made on delivery or

within fifteen (15) days of delivery as specified by the Licensor

from time to time in the Licensor's sole and absolute discretion

during the currency of this Agreement. It is hereby acknowledged

by the Licensee that in purchasing such products or supplies from

the Licensor or manufacturers designated by it, the Licensor will

make a profit or receive a commission or rebate on the price of

goods sold to the Licensee and the Licensee agrees that such

profits, commissions or rebates shall be the sole and absolute

property of the Licensor and the-Licensee shall have no claim to

them in law or in equity … [emphasis added]

[191]

Section 5.06 returns to the obligation of the franchisee to conduct its operations and its

store in conformity with standards established by Tim Hortons. This includes the obligation to

use all ingredients, supplies and methods of production specified by the franchisor and to offer

for sale all products prescribed by the franchisor. In other words, the franchisee has no right to

pick and chose which of the franchisor’s products it will offer in its shop. Were this not so, the

franchisee might simply chose to offer the most profitable products, such as coffee, and refuse to

offer less profitable products, such as, to pick an example that may not be apt, a ham and cheese

sandwich. A Tim Hortons customer in Bracebridge who loves a ham and cheese sandwich for

lunch is entitled to expect, when she goes to Toronto, that she will find her favourite ham and

cheese sandwich on the menu and that it will taste just the same as it does in the store at home.

[192]

Section 5.06 provides:

Section 5.06 - Operation of Tim Horton Shop

The Licensee shall operate the Tim Horton Shop in conformity

with such uniform methods, standards and specifications as the

Licensor may from time to time prescribe in the Confidential

Operating Manual or otherwise in writing to insure that the highest

Page: 45

degree of quality and service is uniformly maintained, to refrain

from any deviation therefrom and from otherwise operating in any

manner which reflects adversely on the Licensor's name and

goodwill or on the Licensor's Trademarks associated with the

"TIM HORTON SYSTEM" and in connection therewith:

(a) to use all materials, ingredients, supplies, paper goods,

uniforms, fixtures, furnishings, signs, equipment, methods of

exterior and interior design and construction and methods of

product preparation prescribed by or which conform with the

Licensor's standards and specifications;

(b) to refrain from using or selling any products, materials,

ingredients, supplies, paper goods, uniforms, fixtures, furnishings,

signs, equipment and methods of product preparation which do not

meet the Licensor's standards and specifications;

(c) to offer for sale only such products as shall be expressly

approved for sale in writing by the Licensor and to offer for sale all

products that have been designated as approved by the Licensor;

(d) to maintain at all times a sufficient supply of approved

products for sale to the public.

[193]

Article 6.00 deals with the “Licensor’s Trademarks” and contains extensive provisions

with respect to the use of the “Tim Horton” trademarks by the franchisee. This is not surprising,

given the iconic nature of the “Tim Horton” name and coffee brand in Canada and the goodwill

attached to them. Section 6.06, entitled “Tim Horton System”, returns to the importance of the

system not only to the franchisor but to the franchisee and to other members of the franchise

chain. It provides:

The Licensee acknowledges that every detail of the “TIM

HORTON SYSTEM" is important to itself, the Licensor and other

licensees in order to develop and maintain high and uniform

standards of quality and service, and hence to protect the

reputation of Tim Horton Shops. Accordingly, the Licensee

covenants: …

[194]

There follow various undertakings with respect to the use by the franchisee of the “Tim

Hortons” name and trademarks.

[195] Article 7 deals with the Confidential Operating Manual. Section 7.00 provides:

In General:

In order to protect the reputation and goodwill of the "TIM

HORTON SYSTEM" and to maintain uniform standards of

Page: 46

operation under the Licensor's Trade Marks, the Licensee shall

conduct the Tim Horton Shop business in accordance with the

Licensor's Confidential Operating Manual which consists of a set

of manuals and guides, as they may exist from time to time (herein

collectively called the "Confidential Operating Manual"), and the

Licensor hereby lends to the Licensee such Confidential Operating

Manual for the term of the license, receipt of one (1) set of which

is hereby acknowledged by the Licensee.

…

[196]

Section 7.03 in particular is relied upon by the plaintiffs. It is entitled “Changes in

Confidential Operating Manual”:

7.03(a) In order that the Licensee may benefit from new

knowledge gained by the Licensor as to improved methods,

procedures and techniques in the preparation, merchandising and

sale of donuts and other food items, and in the operation of the Tim

Hortons Shop, the Licensor may from time to time revise the

contents of the Confidential Operating Manual and such other

manuals and materials, if any, as it may develop and the Licensee

covenants to forthwith comply with all changes to the contents of

the Confidential Operating Manual and such other manuals and

materials, if any, as the Licensor may develop, made by the

Licensor from time to time during the term of this License

Agreement provided that such changes shall not unreasonably alter

the Licensee's rights or obligations under this Agreement.

[underlined wording does not appear in all agreements]

[197]

I will return to this provision shortly. It contemplates that the franchisor will revise its

system, as embodied in the Confidential Operating Manual, from time to time, to give effect to

new knowledge and improvements in the business. Some, but not all of the franchise agreements

in use at the material time, contained the underlined words at the end of the section, “provided

that such changes shall not unreasonably alter the Licensee's rights or obligations under this

Agreement.” It appears that these words were added to licence agreements executed on or after

October 1995.

[198]

The plaintiffs rely in particular on the words: “In order that the Licensee benefit from

new knowledge gained by the Licensor as to improved methods, procedures and techniques …”.

They submit that any new methods, procedures or techniques introduced by the franchisor, and

any changes to the Confidential Operating Manual, must be improvements that have a benefit to

the franchisee. At certain points in the argument, the plaintiffs contended that “benefit” means a

financial benefit. I will return to this submission.

Page: 47

[199]

The franchise agreement contains, as might be expected, many provisions that are

standard in a commercial agreement, including an “Entire Agreement” clause, section 16.02:

This Agreement, the documents referred to herein, and the exhibits

attached hereto, if any, constitute the entire, full and complete

agreement between the Licensor and Licensee concerning the

subject matter hereof, and supersede all prior agreements written or

oral. The Licensee acknowledges and agrees that it has not been

induced to enter into this Agreement in reliance upon, nor as a

result of, any statements, representations, warranties, promises or

inducements whatsoever, whether written or oral and whether

directly related to the contents hereof or collateral thereto, given or

made by the Licensor, its officers, directors, agents, employees and

contractors. No amendment, change or variance from this

Agreement shall be binding on either party unless mutually agreed

to by the parties and executed in writing.

[200]

Under the heading “Licensee’s Acknowledgments”, section 16.13 provides that the

franchisee acknowledges, among other things, that there are business risks associated with the

venture and that no warranties have been given concerning the profits or success of the

franchisee’s operation:

(a) The Licensee acknowledges that it has read this Agreement and

that it understands and accepts the terms, conditions and covenants

contained in this Agreement as being reasonably necessary to

maintain the Licensor's high standards of quality and service and

the uniformity of those standards at all Tim Horton Shops and

thereby to protect and preserve the goodwill of the Licensor's

Trademarks.

(b) The Licensee acknowledges that it has conducted an

independent investigation of the business venture contemplated by

this Agreement and recognizes that it involves business risks and

that the success or failure of the venture is largely dependent upon

the individual business abilities and efforts of the Licensee and

general economic conditions which are beyond the control of the

parties to this Agreement.

(c) The Licensee acknowledges that it has read and received a copy

of this Agreement and has consulted with its legal and economic

advisers prior to the execution of this Agreement.

(d) The Licensor expressly disclaims the making of, and the

Licensee acknowledges that it has not received or relied upon, any

Page: 48

warranty or guaranty, express or implied, as to the potential

revenues, profits or success of the business venture contemplated

by this Agreement. The Licensee acknowledges that it has no

knowledge of any representations about the license by the Licensor

or its officers, directors, shareholders, employees or agents that are

contrary to the terms herein and further represents to the Licensor

as an inducement to its entry into this Agreement, that the Licensee

has made no misrepresentations in obtaining this license.

[201]

The franchise agreements included a provision that permitted Tim Hortons to suggest

the prices at which products would be sold by franchisees, but franchisees were permitted to sell

at lower prices, provided they did not sell at prices in excess of the maximum price suggested.

This was in order to comply with provisions of the Competition Act, discussed below, directed at

resale price maintenance. The relevant provision of the franchise agreement was as follows:

The Licensor may from time to time suggest prices for the

products sold from or at the Tim Hortons Shop. Except as

hereinafter provided, the Licensee shall have the sole right to

determine the prices of any and all products sold from or at the

Tim Hortons Shop and the Licensee shall not suffer in the

Licensee’s business relations with the Licensor or any other person

controlled by the Licensor if the price suggestions are not

followed. However, notwithstanding the foregoing, the Licensee

shall not at any time offer any products for sale at prices in excess

of the prices suggested by the Licensor for such products at such

time.

[202]

The Franchise Disclosure document provided by Tim Hortons to prospective

franchisees, including to the plaintiffs, prior to the renewal of their agreements, provided:

The Licensee shall have the sole right to determine the prices of

any and all products sold, subject however, to the fact that the

Licensee shall not at any time offer any products for sale at prices

in excess of the prices suggested by the Licensor for such products

from time to time. Provided the price set by the Licensee does not

exceed the suggested price, the Licensee may determine the price

of any and all products sold from the Tim Hortons Store and the

Licensee shall not suffer in its business relations with he Licensor

or any person controlled by the Licensor for so doing.

[203]

The foregoing evidence, and summary of the key contractual terms, provides some

background for the plaintiffs’ motion for certification and the defendants’ motion for summary

judgment. I will discuss additional evidence, as required, in the context of those motions.

Page: 49

IV.

CERTIFICATION

Introduction

A.

[204]

The primary goal of the C.P.A. is to facilitate access to justice by making litigation

practical for those who would find it difficult to litigate on their own. By permitting the

aggregation of claims, a class action promotes judicial economy by avoiding duplication of fact-

finding and legal analysis. It can also promote behaviour modification by holding wrongdoers

accountable for their conduct, when they might not otherwise be brought to task. It is well-

established that the C.P.A. should be given a generous interpretation in order to promote its

objects: see Hollick v. Toronto (City), [2001] 3 S.C.R. 158, S.C.J. No. 67 at paras. 14-16; Cloud

v. Canada (Attorney General) (2004), 73 O.R. (3d) 401, [2004] O.J. No. 4924 at paras. 36-38. As

Chief Justice McLachlin said in Hollick at para. 16, the question at the certification stage is not

whether or not the claim is likely to succeed, but whether the action can be appropriately

prosecuted as a class action.

[205]

The intersection of the C.P.A. and the Arthur Wishart Act has provided a fertile ground

for the growth of franchise class actions. As I noted in Trillium Motor World Ltd. v. General

Motors of Canada Ltd., 2011 ONSC 1300, [2011] O.J. No. 889 at paras. 46-59, there have been

a number of class actions in Ontario in the past fifteen years involving claims by franchisees

against franchisors. The existence of a group of franchisees, operating under a standard contract,

can give rise to common issues of fact or law that are capable of resolution on a class-wide basis.

The C.P.A. has proven to be an effective procedural tool to address concerns that individual

franchisees are powerless, vulnerable and lack an effective voice.

[206]

In this case, leaving aside the issue of the representative plaintiff, which I shall address

shortly, the defendants did not really dispute that if the action survives summary judgment, it

would be possible to identify a class and common issues that would make the action appropriate

for certification. The defendants say that if the action does proceed as a class action, they might

well assert common issues of their own.

[207]

B.

I turn to the test for certification and its application.

The Test for Certification

[208]

Section 5 of the C.P.A. provides:

(1) The court shall certify a class proceeding on a motion under

section 2, 3 or 4 if,

(a) the pleadings or the notice of application discloses a cause of

action;

(b) there is an identifiable class of two or more persons that would

be represented by the representative plaintiff or defendant;

Page: 50

(c) the claims or defences of the class members raise common

issues;

(d) a class proceeding would be the preferable procedure for the

resolution of the common issues; and

(e) there is a representative plaintiff or defendant who,

(i) would fairly and adequately represent the interests of the

class,

(ii) has produced a plan for the proceeding that sets out a

workable method of advancing the proceeding on behalf of the

class and of notifying class members of the proceeding, and

(iii) does not have, on the common issues for the class, an

interest in conflict with the interests of other class members.

[209]

The elements of this test are linked. There must be a cause of action, shared by an

identifiable class, from which common issues arise that can be resolved in a fair, efficient, and

manageable way that will advance the proceeding and achieve access to justice, judicial

economy, and the modification of behaviour of wrongdoers: Sauer v. Canada (Attorney

General), [2008] O.J. No. 3419 (S.C.J.) at para. 14, leave to appeal to Div. Ct. refused, [2009]

O.J. No. 402 (Div. Ct.). The causes of action, when applied to the circumstances of the

representative plaintiff and the class, must give rise to common issues of fact or law that are

capable of fair and manageable resolution on a class-wide basis. In the franchise context, as in

most cases, the devil will be in the details, which include a precise definition of the class and

carefully crafted common issues. Those areas, which in turn impact the preferable procedure

requirement, have proven particularly troublesome in this case.

(a)

Cause of Action

[210]

The test under s. 5(1)(a) of the C.P.A. is the same as that applied on a motion to strike a

pleading under rule 21.01(1)(b) of the Rules, on the ground that it discloses no reasonable cause

of action: "assuming that the facts as stated in the Statement of Claim can be proved, is it 'plain

and obvious' that the plaintiff's Statement of Claim discloses no reasonable case of action?": see

Hunt v. Carey Canada Inc., [1990] 2 S.C.R. 959, [1990] S.C.J. No. 93 at para. 33. The principles

applicable to this test have been summarized in Trillium Motor World Ltd. v. General Motors of

Canada Ltd. at para. 61.

[211]

The defendants acknowledge that any causes of action that survive summary judgment

will be appropriate for certification. I find that the plaintiffs have properly pleaded causes of

action for breach of contract, breach of the duty of good faith and fair dealing at common law

and under the Arthur Wishart Act, breach of the Competition Act, unjust enrichment and waiver

of tort. Similar causes of action have been approved in other franchise cases: see for example

Page: 51

Landsbridge Auto Corp. v. Midas Canada Inc. (2009)¸ 73 C.P.C. (6^th) 10, [2009] O.J. No. 1279

(S.C.J.) (breach of contract, breach of common law and statutory duties of good faith); Trillium

Motor World Ltd. v. General Motors of Canada Ltd (claims under Arthur Wishart Act); 2038724

Ontario Ltd. v. Quizno's Canada Restaurant Corp., 2010 ONCA 466, 100 O.R. (3d) 721, aff'g

(2009), 96 O.R. (3d) 252, [2009] O.J. No. 1874 (Div. Ct.), rev'g (2008), 89 O.R. (3d) 252, [2008]

O.J. No. 833 (S.C.J.) (“Quizno’s”), (breach of contract, conspiracy, breach of Competition Act);

1250264 Ontario Inc. v. Pet Valu Canada Inc., 2011 ONSC 3371, [2011] O.J. No. 1373 (breach

of contract, breach of duty of fair dealing under Arthur Wishart Act, unjust enrichment).

[212]

I will discuss the causes of action in somewhat more detail when I discuss the summary

judgment motion. Suffice to say for the moment, applying the “plain and obvious” test, the

causes of action pleaded by the plaintiffs meet the requirements of s. 5(1)(a) of the C.P.A.

(b) Identifiable Class

[213]

The class definition in this action has been a moving target. It continued to evolve

during the hearing.

[214]

The Statement of Claim alleges that there are currently 500 to 800 potential class

members operating approximately 2400 Tim Hortons stores across Canada. The evidence of Mr.

Clanchan of Tim Hortons is that, as of the end of 2008, there were nearly 3,000 Tim Hortons

stores in Canada, owned by 950 franchisees.

[215]

The plaintiffs propose two classes, broken down between those interested in the Always

Fresh issues and those interested in the Lunch Menu issues. Obviously many class members will

be interested in both issues.

[216]

Class A will include franchisees who are concerned with the Always Fresh issue. Class

A will be divided into two groups: Class A-1 is composed of those who converted from scratch

baking to the Always Fresh method (the “Conversion Class”); Class A-2 will be composed of

those who became franchisees after their stores were converted and who purchased Always

Fresh baked goods. The proposed Class A definitions are as follows:

Class A-1 Members – The conversion class:

“Class A-1 Members”, being all persons, including corporations,

carrying on business or who carried on business in Canada as a

Tim Hortons store under one or more License Agreement(s) or

Operating Agreement(s) with the Defendant, the TDL Group Corp.

or any of its predecessors (“TDL”), and who converted one or

more stores from the full production model for donuts, Timbits,

muffins and cookies to the Always Fresh frozen production model

for donuts, Timbits, muffins and cookies including those persons,

Page: 52

including corporations whose License Agreement(s) or Operating

Agreement(s) with TDL has since ended.

Class A-2 Members – Post-conversion franchisees purchasing AF

Baked Goods:

“Class A-2 Members”, being all persons, including corporations,

carrying on business or who carried on business in Canada as a

Tim Hortons store under one or more License Agreement(s) or

Operating Agreement(s) with the Defendant, the TDL Group Corp.

or any of its predecessors (“TDL”), and who sold Always Fresh

frozen donuts, Timbits, muffins and/or cookies at any time after

January 1, 2002 including those persons, including corporations,

whose License Agreement(s) or Operating Agreement(s) with TDL

has since ended.

[217]

Class B includes all franchisees selling the Lunch Menu. It is defined as follows:

Class B Members – The Lunch Menu

“Class B Members”, being all persons, including corporations,

carrying on business in Canada as a Tim Hortons store under one

or more License Agreements or Operating Agreements with the

Defendant, the TDL Group Corp. or any of its predecessors

(“TDL”), who have sold one or more Lunch/Soups and

Sandwiches items since January 1, 2002, including those persons

whose License Agreement(s) or Operating Agreement(s) with TDL

has since ended.

[218]

Some of the proposed common issues relate only to members of one class or sub-class

and some relate to all members of both classes.

[219]

There is no particular dispute about the principles applicable to the class definition

requirement in s. 5(1)(b) of the C.P.A. As the plaintiffs point out, the purpose of the class

definition, is to: (a) identify the persons who have a potential claim for relief against the

defendants; (ii) define the parameters of the action so as to identify those persons who will be

bound by the settlement or judgment if they do not opt out; and (iii) describe who is entitled to

receive notice and relief under the C.P.A.: Bywater v. Toronto Transit Commission (1998), 27

C.P.C. (4th) 172, [1998] O.J. No. 4913 at para. 10 (Gen. Div.); Tiboni v. Merck Frosst Canada

Ltd. (2008), 60 C.P.C. (6th) 65, [2008] O.J. No. 2996 at para. 76 (S.C.J.).

[220]

The case law has established the following requirements of a class capable of

certification:

Page: 53

(a) membership in the class should be determinable by objective

criteria without reference to the merits of the action;

(b) the class criteria should bear a rational relationship to the

common issues asserted by all class members, but all class

members need not share the same interest in the resolution of the

asserted common issues;

(c) the class must be bounded and not of unlimited membership;

(d) there is a further obligation, although not onerous, to show that

the class is not unnecessarily broad and could not be defined more

narrowly without arbitrarily excluding some people who share the

same interest in the resolution of the common issues;

(e) membership in a class may be defined by those who make

claims in respect of a particular event or alleged wrong, without

offending the rule against the class description being dependent on

the outcome of the litigation; and

(f) a proper class definition does not need to include only those

persons whose claims will be successful.

[221]

The defendants have identified some difficulties associated with these definitions. I will

begin with the Class A franchisees.

[222]

First, the defendants say that the Class A-1 group should be confined to those who were

franchisees before March 6, 2001, the date when the Maidstone joint venture was announced.

Persons who became franchisees after that date would have known that the conversion would be

taking place and they would have entered into the franchise relationship knowing that Always

Fresh was coming. They should simply be in Class A-2. I disagree. If a particular franchisee’s

knowledge of Always Fresh becomes relevant, it could be addressed as an individual issue.

[223]

Second, the defendants say that the date of January 1, 2002, chosen as the

commencement date for the A-2 Class, is arbitrary. According to the evidence, they say, the first

conversions to “Always Fresh” franchises occurred in September 2002, so that should be the

start date. I acknowledge that the date is arbitrary, but in the absence of clear evidence about

when the first store converted, it is not unreasonable to pick a definitive, if arbitrary, start date.

[224]

I would add a third concern. If Class A-2 is intended to include only those franchisees

who acquired franchises that were Always Fresh from the outset (described as “post conversion

franchisees”), the definition is too broad, because it would appear to cover members of Class A-1

as well. This concern can be addressed by describing Class A-2 as “all persons, other than

members of Class A-1”.

Page: 54

[225]

Turning to Class B, the defendants have identified two problems with the Class B

definition. First, the description of this group as franchisees “who have sold one or more

Lunch/Soups and Sandwiches items” does not coincide with the common issues which refer to

the “Lunch Menu”. During the course of the hearing, questions were also raised about the term

“Lunch Menu”, which is not defined in any way and was not a term of art in the Tim Horton

System. I agree that there should be symmetry between terms used in the class definition and the

common issues, but this is simply a definitional issue. The “Lunch Menu” could be defined, for

example, as “Soups, sandwiches, chili, stews and similar menu items”. Alternatively, a

comprehensive list of Lunch Menu items could be prepared. The class could be defined as those

“who have sold one or more Lunch Menu items since January 1, 2002”.

[226]

Second, the defendants say that the commencement date of this class is entirely

arbitrary and will give rise to limitation period issues. It is suggested that the date should be June

12, 2002, which would be 6 years prior to the commencement of the action. I agree with the

plaintiffs’ response that the possibility that the claims of some class members may be time-

barred does not make the class definition inappropriate. The class need not include only persons

whose claims will ultimately be successful. The limitation period can be raised as an individual

issue, if necessary.

[227]

I would be reluctant to approve amendments to the proposed class definitions without

further input from counsel. Had I not concluded that the plaintiffs’ claims should be dismissed

on the summary judgment motion, I would have invited counsel to discuss at a case conference

whether agreement could be reached on a class definition. Failing a consensus on a suitable class

definition, I would invite further submissions, either in writing or on motion.

(c) Common Issues

[228]

Section 5(1)(c) of the C.P.A. requires that the claims of class members give rise to

common issues. These are “common but not necessarily identical issues of fact” or “common but

not necessarily identical issues of law that arise from common but not necessarily identical facts”

(s. 1).

[229]

The parties do not take issue with the following principles concerning the common

issues, taken from Trillium Motor World Ltd. v. General Motors of Canada, Ltd., at paras. 97-98:

(a) the underlying foundation of a common issue is whether its

resolution will avoid duplication of fact-finding or legal analysis;

(b) an issue can be a common issue even if it makes up a very

limited aspect of the liability question and even though many

individual issues remain to be decided after its resolution;

(c) there must be a basis in the evidence before the court to

establish the existence of common issues;

Page: 55

(d) there must be a rational relationship between the class

identified by the plaintiff and the proposed common issues;

(e) the proposed common issue must be a substantial ingredient of

each class member's claim and its resolution must be necessary to

the resolution of that claim;

(f) a common issue need not dispose of the litigation; it is

sufficient if it is an issue of fact or law common to all claims and

its resolution will advance the litigation for (or against) the class;

(g) the answer to a question raised by a common issue for the

plaintiff must be capable of extrapolation, in the same manner, to

each member of the class;

(h) a common issue cannot be dependent upon individual findings

of fact that have to be made with respect to each individual

claimant;

(i) where questions relating to causation or damages are proposed

as common issues, the plaintiff must demonstrate (with supporting

evidence) that there is a workable methodology for determining

such issues on a class-wide basis;

(j) common issues should not be framed in overly broad terms;

and

(k) the core of a class proceeding is the element of commonality -

there must be commonality in the actual wrong that is alleged

against the defendant and some evidence to support this

[references omitted].

[230]

[231]

I will add another requirement:

(l) the common issues should be clear, neutrally-worded and fair

to both parties.

We do not assist the common issues judge by producing common issues that are vague

or ambiguous, that contain implicit factual or legal assumptions or that are biased in favour of

one party or another.

[232]

The common issues requirement has been described as a “low bar”: see Cloud v.

Canada (Attorney General), at para. 52. The plaintiffs need only establish that there is “some

basis in fact” for the existence of common issues.

Page: 56

[233]

Like the class definition, the common issues in this case have undergone wholesale

revision. The common issues were originally set out in the notice of motion for certification in

May of 2009 and were relatively straightforward. Somewhat revised common issues were

delivered with the plaintiffs’ factum in early August of 2011. There were some changes from the

earlier version, but they were not complicated and the defendants were prepared to proceed with

the certification motion in spite of the changes.

[234]

On August 16, 2011, the second day of the hearing, the plaintiffs presented a revised set

of common issues that were very different from the previous version. Those issues were revised

yet again and a further set was delivered on August 17, 2011. In connection with the revision of

the common issues, the class definition was changed, as discussed above. The defendants’

counsel argued that the revision of the common issues had significantly altered the landscape of

the action and requested an adjournment to address the new common issues. I granted that

request. The balance of the certification motion, and the defendants’ summary judgment motion,

proceeded as scheduled.

[235]

The plaintiffs delivered further revised common issues on August 24, 2011. The

hearing was later reconvened to address these revised common issues.

[236]

[237]

The common issues are attached as Schedule A to these reasons.

Looking at the plaintiffs’ claims from the perspective of 10,000 feet away, there are

two obvious factual commonalities. First, there is a standard form of franchisee agreement

which, with some variations, is applicable to all franchisees. Second, there is conduct of Tim

Hortons that is common to all franchisees. Indeed, the essence of the franchise system is that the

franchisor treats every franchisee in exactly the same way and every franchisee is expected to

behave in exactly the same way. This common factual foundation gives rise to at least two broad

categories of common issues: namely, common issues of the interpretation of the contract and

common issues with respect to the legal duties of the franchisor to its franchisees under the

contract, the common law and the Arthur Wishart Act.

[238]

The plaintiffs have produced a rather lengthy and complicated set of common issues.

During the course of submissions, I suggested that many of the common issues could be reduced

to the following two questions, which I have edited slightly from those discussed at the hearing:

A. Having regard to the contractual rights and responsibilities of

both parties, was it an express or implied term of the franchise

agreements or a requirement of the duty of good faith at common

law or under the Arthur Wishart Act that Tim Hortons would

supply ingredients to its franchisees at lower prices that they could

obtain for the same ingredients in the marketplace?

B. If so, did Tim Hortons breach that term or requirement?

C. If so, how?

Page: 57

[239]

These questions are at the core of the contractual and good faith issues concerning both

the Always Fresh Conversion and the Lunch Menu. They are, on the one hand, issues of contract

interpretation based on a contract that is common to the class and that has a common factual

matrix. While there are undoubtedly some variations in the forms of contracts and in the factual

matrix from franchisee to franchisee, the answer to the contractual interpretation question would

take the parties a long way down the road to the disposition of the issue. These questions also

raise issues concerning the statutory and common law duty of good faith. These are issues that

can be answered in common based on the nature of the relationship between the parties and the

statutory framework that applies to that relationship.

[240]

If these common issues are answered in favour of the defendants, it will likely be the

end of the inquiry, except for the Competition Act issues. If they are answered in favour of the

plaintiffs, it is quite possible that some of the other common issues would fall by the wayside as

unnecessary.

[241]

Common issues similar to these were approved in 1250264 Ontario Inc. v. Pet Valu

Canada Inc., above, and 578115 Ontario Inc. (c.o.b. McKee’s Carpet Zone) v. Sears Canada

Inc., 2010 ONSC 4571, [2010] O.J. No. 3921.

[242]

In general terms, therefore, I find that this action meets the requirements of s. 5(1)(c) of

the C.P.A. and that common issues similar to the ones I have set out would satisfy the principles

set out in (a) to (l), above.

[243]

Had I not dismissed the plaintiffs’ claims in summary judgment, I would have asked the

parties to attempt to draft a set of agreed common issues. I will, however, review the common

issues proposed by the plaintiffs.

Always Fresh Conversion

[244]

The first series of questions deals with the alleged breach of express contractual terms

in connection with the Always Fresh Conversion as it affected the Class A-1 members, the

“Conversion Class”.

Breach of Express Contractual Terms

1. Did one or both Defendants breach s.7.03(a) of the License Agreement and/or Operating

Agreement (collectively, the “Agreement”) entered into by each Class A-1 Member by:

a. requiring the franchisees to undertake the Always Fresh (“AF”) conversion;

b. following the AF conversion, requiring the franchisees to purchase the AF frozen

donuts, timbits, muffins and cookies (the “AF Baked Goods”) at commercially

unreasonable prices;

Page: 58

c. following the AF conversion, requiring the franchisees to purchase the AF Baked

Goods at prices that were not offset by savings in labour, waste or operational

savings.

[245]

As I have noted earlier, the plaintiffs interpret s. 7.03(a) of the franchise agreement to

mean that any new methods, procedures or techniques introduced by the franchisor, and any

changes to the Confidential Operating Manual incorporating those methods, procedures and

techniques, must be improvements that are a benefit to the franchisee.

[246]

The common issue as previously framed asked, in a rather convoluted way, whether the

Always Fresh Conversion was a “benefit”. The defendants argued that whether the change to

Always Fresh was a benefit was a question that could only be answered on an individual basis,

looking to the circumstances of each particular franchisee. The plaintiffs met this attack by

amending the common issue and they now say that this common issue is limited to financial

benefits capable of objective determination and that there is no need for individual inquiry into

whether the Always Fresh Conversion was a benefit to individual class members.

[247]

The problem with the question as now phrased is that, instead of being explicit, the

question now contains an imbedded implicit assumption that “benefit” in s. 7.03(a) of the

franchise agreement means a financial benefit. It ignores the obvious fact that most changes

made by Tim Hortons to the Confidential Operating Manual are likely to have both financial and

non-financial consequences and a change could be a benefit without having a specific positive

financial impact.

[248]

As a general comment, common issues 1(b) and 1(c) suffer from the same

shortcomings as many of the other common issues. They are not neutral. They are rolled-up

issues that have unfair assumptions and vague terms bundled into them. They assume, as part of

the questions, that franchisees were required to purchase Always Fresh ingredients at

commercially unreasonable prices that were not offset by labour savings or other savings. Issue

1(b) uses the expression “commercially unreasonable price” without defining that term in any

objective way.

[249]

I will turn to the individual questions.

Issue 1(a): The Always Fresh Conversion

[250]

Question 1(a) is unnecessary in light of the plaintiffs’ concession that Tim Hortons was

entitled to implement the Always Fresh Conversion – to convert the stores from scratch baking

to par baking. The plaintiffs’ complaint is with respect to the financial consequences of Always

Fresh.

Issue 1(b): Selling Always Fresh Baked Goods at “Commercially Unreasonable” Prices

[251]

The defendants say that this common issue, and the same common issue relating to the

Lunch Menu, contain an imbedded and unfair assumption that Always Fresh products and the

Page: 59

ingredients for the Lunch Menu were sold at “commercially unreasonable prices”. They

complain that the plaintiffs do not propose any common issue that addresses this question head-

on – that is, that asks whether, as a factual matter, the prices of Always Fresh products and

Lunch Menu ingredients were commercially reasonable.

[252]

This contention points to the underlying flaw in these common issues. By assuming

“commercially unreasonable prices” without defining this term, the common issues gloss over

the problem that commercial reasonableness may mean different things for different franchisees

in different circumstances.

[253]

The defendants say that this inquiry would be inappropriate for certification. They say

that it would entail the examination of the price of every product in Tim Hortons, in every

different price zone across Canada, presumably in comparison with the market prices of other

products, at various times, to determine whether the price at which each particular ingredient was

sold, in every particular region, was commercially reasonable at every particular time.

[254]

The defendants rely, in particular, on 909787 Ontario Ltd. v. Bulk Barn Foods Ltd.

(2000), 138 O.A.C. 180 [2000] O.J. No. 3649 (Div. Ct.), rev’g (1999), 93 O.R.C. 66, [1999] O.J.

No. 2973 (S.C.J.), in which the plaintiff claimed that the franchisor had breached its contractual

obligation to supply products at a price that would be at a level “generally charged or realized by

other competitive suppliers in the general market area.” The allegation was, as here, that the

franchisor was overcharging its franchisees. In that case, there were only 56 stores in the

franchise network.

[255]

In setting aside the decision of the motion judge certifying the action, the Divisional

Court found that there was no factual basis for the existence of a common issue regarding

overcharging. In addition, it found that the proceeding would be unmanageable due to the need

to examine and compare prices throughout the franchise network – at para. 28:

In order for each person to become a member of the class, he or

she must succeed in showing not just what the charge was for a

given commodity or a list of commodities supplied to them by

Bulk Barn at specified times, but that it was available locally from

other suppliers in their area at a lower price. In our view an action

of this sort would be completely unmanageable.

[256]

On the other hand, in Quizno’s, the Divisional Court was not concerned about the fact

that the amount of loss or damage sustained by class members might vary from region to region

or from time to time because of the “systemic” nature of the conduct potentially giving rise to

liability. The system included a common contract, a common pricing system and a common

distribution system. It included the addition of mark-ups and sourcing fees by the franchisor on

every single product, with an additional mark-up being added by the distributor. In Quizno’s, the

complaint was not just in relation to some products acquired by franchisees; it related to all the

Page: 60

products they sold. Moreover, the plaintiff alleged that some forty percent of Quizno’s

franchisees were operating at a loss.

[257]

The majority of the Divisional Court held in Quizno’s that the breach of contract claim

gave rise to common issues. The issue of the commercial reasonableness of the defendants’

mark-ups and sourcing fees could be addressed in common by examining the franchisor’s

conduct, the services it provided and industry standards.

[258]

The majority also held that the question of whether the franchisor had breached an

express term of the contract by charging commercially unreasonable prices could be addressed as

a common issue, in spite of the fact that proof of damages could not necessarily be made on a

class-wide basis.

[259]

In my view, a common issue could be structured in this case to ask whether Tim

Hortons breached the franchise agreement by requiring the plaintiffs to purchase Always Fresh

baked goods at the price stipulated by Tim Hortons from time to time.

Issue 1(c): Prices Not Offset by Savings

[260]

Question 1(c) asks whether Tim Hortons breached the franchise agreement by requiring

the franchisees to purchase the Always Fresh Baked Goods at prices that were not offset by

savings in labour, waste or operational savings. That question cannot be answered without

determining whether a franchisee in fact experienced labour savings, reduced waste, operational

savings or other benefits that offset the increased cost. Not only does the evidence of the Affiant

Franchisees and Mr. Gilson clearly establish that Always Fresh had beneficial effects in these

areas, but the evidence also establishes that the obvious fact that the profitability of a franchise

depends on a variety of circumstances, including the efficiency of the operator, the involvement

of the owner, the sales mix, the location of the store and the presence of competition. For this

reason, question 1(c) is not an appropriate common issue. Nor is question 2(e).

[261]

It is possible that a common issue could be worded to ask whether section 7.03(a) of the

franchise agreement permits the franchisor to make changes to the Confidential Operating

Manual to incorporate improved methods, procedures and techniques in the preparation,

merchandising and sale of donuts and other food items that are not for the financial benefit of

franchisees. If the answer is “no”, the answer would not advance the inquiry, because it would

still be necessary to examine the circumstances of each franchisee to determine whether the

consequence of the change was beneficial.

2. Did one or both Defendants breach s.3.00(f) or (i) of the Agreement by:

a. representing to franchisees, through the Advisory Board members and directly,

that they could deliver the frozen AF donut to the franchisees’ stores for 11 to 12

cents;

Page: 61

b. signing the JV agreement with IAWS Group plc (“IAWS”) on March 6, 2001

without reasonable analysis of the impact of the increased costs at the franchisee

level;

c. requiring the franchisees to undertake the AF conversion;

d. following the AF conversion, requiring the franchisees to purchase the AF Baked

Goods at commercially unreasonable prices;

e. following the AF conversion, requiring the franchisees to purchase the AF Baked

Goods at prices that were not offset by savings in labour, waste or operational

savings;

f. representing that the increased food cost of the AF Baked Goods would be offset

by savings in labour, waste and other operational expenses;

g. failing to take reasonable steps to consider and redress the commercially

unreasonable prices of AF Baked Goods;

Issues 2(a) and 2(f); Representations

[262]

While the plaintiffs have withdrawn their cause of action based on misrepresentation,

they re-introduce this issue in connection with the breach of contract and good faith claims.

[263] Common issues 2(a) and 2(f) ask whether Tim Hortons breached sections 3.00(f) and

(i) of the franchise agreement by representing to franchisees that they could deliver the Always

Fresh donut to the franchisees’ stores for 11 to 12 cents and by representing that the increased

food cost of the Always Fresh Baked Goods would be offset by labour and other savings. The

complaint really relates to the alleged breach of section 3.00(f), which requires the franchisor to

maintain a “continuing advisory relationship with the franchisee.”

[264]

The issue of misrepresentation comes up again in Common Issue 4, which asks whether

these alleged representations were a breach of the duty of good faith and fair dealing.

[265] In my view, there is no basis in fact for common issue 2(a), but there is a basis for

common issue 2(f). I will explain.

[266]

There is no evidence that there was any common representation made to the class

concerning an 11 or 12 cents Always Fresh donut. At its highest, there is some evidence of Mr.

Gilson that he was told something by Mr. House at an Advisory Board meeting. The nature of

this communication is not very clear, and it is denied by Mr. House and not recorded in the

minutes of the Advisory Board. There is no evidence that any direct misrepresentation was made

by Tim Hortons to either plaintiff. There is certainly no evidence of any written representation to

any members of the class. Further, there is no evidence that any common representation was

made to franchisees or that conclusions with respect to representations to the plaintiffs could be

Page: 62

extrapolated to all members of the class. Question 2(a) is not, therefore, an appropriate common

issue

[267]

Proposed common issue 2(f) stands on a slightly different footing, because there is

evidence, including an acknowledgment by Tim Hortons, that franchisees were told that there

would be increased food costs under Always Fresh, but that the savings would offset this cost. I

would therefore approve common issue 2(f).

Issue 2(b): Signing Joint Venture Agreement

[268]

The defendants object that this alleged breach of contract is not pleaded. I agree. In any

case, the resolution of this issue is really irrelevant to the plaintiffs’ claims unless they can

establish that the price arising from the joint venture agreement was a breach of contract.

Issue 2(c): Requiring the franchisees to undertake the AF conversion

[269]

For the same reasons set out under Question 1(a), there is no point to this question. The

plaintiffs admit that Tim Hortons was contractually entitled to undertake the conversion.

Issue 2(d): Commercially Unreasonable Prices

[270]

As I have observed in relation to issue 1(b), the question of whether a price is

commercially reasonable is not capable of a common answer.

Issue 2(e): Prices not Offset by Savings

[271]

Question 2(e) is not an appropriate common issue for reasons already discussed under

Issue 1(c).

Issue 2(f): Representing Increased Food Cost would be Offset by Savings

[272]

For the reasons set out above, a common issue based on representations would not be

an appropriate common issue.

Issue 2(g): Failing to take Reasonable steps to Redress Commercially Unreasonable Prices

[273]

This issue, as framed, contains an unfair embedded assumption that the prices were

commercially unreasonable. It also contains an assumption that Tim Hortons had an obligation to

redress prices that were commercially unreasonable. It might be appropriately phrased by asking

whether Tim Hortons had a duty to consult with franchisees in connection with the Always Fresh

Conversion, whether that duty included a duty to consult with them in connection with the price

of the product and, if so, whether that duty was breached.

Breach of Implied Term

Page: 63

[274]

The next common issue asks whether it was an implied term of the franchise agreement

that ingredients would be supplied to franchisees at commercially reasonable prices and, if so,

whether this term was breached.

3. With respect to the Class A-1 Members:

a. did the Agreement contain an implied term that the ingredients and commodities

franchisees were required to purchase from the Defendants and/or manufacturers

and distributors designated by the Defendants would be sold to the franchisees at

commercially reasonable prices?

b. if so, did one or both Defendants breach that implied term by requiring the

franchisees to purchase the AF Baked Goods at commercially unreasonable

prices?

[275]

The defendants object to these questions for several reasons. First, they say that the

questions are not neutrally worded because they assume the existence of “commercially

unreasonable prices”. This concern could be addressed by a simple change in the wording of

question 3.b. to ask: “If so, did one or both Defendants require the franchisees to purchase the

Always Fresh Baked Goods at commercially unreasonable prices?”

[276]

Second, the defendants contend that this common issue is not consistent with the

implied term that is pleaded in the Statement of Claim. I agree that there is some disconnect

between the common issue and the pleading. The common issue refers to “commercially

reasonable prices”. The pleading refers to “lower prices than the franchisees could obtain for the

same products in the marketplace”. The plaintiffs plead in paragraph 15 of the Statement of

Claim that one of the key ingredients of the Tim Hortons distribution system was that:

… the ingredients and commodities franchisees were required to

purchase from the Defendants and/or manufacturers, suppliers

and/or distributors designated by the Defendants were to be sold to

the franchisees at lower prices than the franchisees could obtain for

the same products in the marketplace in accordance with

reasonable commercial standards due to the Defendants’ volume

buying power.

[277]

Paragraph 34 of the pleading contains the allegation with respect to an implied term:

In forcing the Plaintiffs and Class A-1 Members to convert to the

Always Fresh system and in requiring the Class A-1 and Class A-2

Members to purchase the AF Baked Goods thereafter at inflated

and/or commercially unreasonable prices, the Defendants breached

the license agreements, including the implied term in accordance

with reasonable commercial standards that the ingredients and

commodities the Plaintiffs and Class A-1 and Class A-2 Members

Page: 64

were required to purchase from the TDL Distribution System

would be sold to franchisees at lower prices than they could obtain

for the same products in the marketplace, and therefore are liable

for damages.

[278]

The words “in accordance with reasonable commercial standards” have been inserted

into the pleading, in the course of a previous amendment. It is not clear to me what they are

intended to modify. It strikes me that the plaintiffs are attempting to bootstrap section 3(3) of the

Arthur Wishart Act, discussed below, into the common issue. That provision imposes a duty of

good faith and fair dealing on parties to a franchise agreement, including a “duty to act in good

faith and in accordance with reasonable commercial standards” in the performance or

enforcement of the franchise agreement.

[279]

The third, and more substantive objection, made by the defendants to this common

issue, which applies equally to the other common issues dealing with implied terms (Questions 5

and 11), is that the implication of a term requires a close examination, not only of the terms of

the contract, but also of the circumstances in which it was made and of the underlying factual

matrix. As a general proposition, terms implied based on the presumed intention of the parties

have not been regarded as appropriate for certification, because they can only be implied where

there is no evidence of a contrary intention, the ascertainment of which must be done on an

individual basis.

[280]

I will discuss the law of implied terms at some length when I come to the defendants’

motion for summary judgment. In Machtinger v. HOJ Industries Ltd., [1992] 1 S.C.R. 986, 91

D.L.R. (4th) 491, McLachlan J., as she then was, concurring in the result, described implied

terms as falling within one of three categories – terms implied as a matter of custom or usage,

terms implied in law, and terms implied in fact: see also G.H. Treitel, The Law of Contract, 7th

ed. (London: Sweet & Maxwell,. 1987), at pp. 158-165. McLachlan J. noted that terms implied

as a matter of fact are based on the presumed intention of the parties.

[281]

Nadolny v. Peel (Region) (2009), 78 C.P.C. (6th) 4006, [2009] O.J. No. 4006 (S.C.J.) is

an example of a case, in which a term based on the presumed intention of the parties was not

found appropriate for certification. The plaintiff, a retired employee of the defendant Region,

claimed that her former employer had breached an implied term of its contract with retirees by

increasing the premium that they were required to pay for post-retirement health benefits. In

finding that this claim was inappropriate for certification, Quigley J. observed at paras. 70-71,

that the factual circumstances pertaining to each class member would have to be examined to

determine whether it would be appropriate to imply a term:

In order to determine the content of the contract that was allegedly

breached, all of the sources of information related to the terms of

the contract will have to be considered, including written and oral

communications, particularly where the alleged breach is of an

implied, as opposed to an express term of the contract as it is in

Page: 65

this case. However, the jurisprudence shows that these types of

cases are not amenable to certification. The Courts have repeatedly

found, as Greer J. of our Divisional Court did in Arabi v. The

Toronto Dominion Bank (2007), 233 O.A.C. 275 (Ont. Div. Ct.) at

paras. 85-86, and at para. 91 in reliance on the Court of Appeal's

decision in G. Ford Home Ltd. v. Draft Masonry (1983), 43 O.R.

(2d) 401, that it is inappropriate to certify an action based on the

existence of an implied term because "... the circumstances and

background of the contract, together with its precise terms, should

all be carefully regarded before a term is implied. As a result it is

clear that every case must be determined on its own particular

facts."

In cases like this one, where the proposed common issues are

dependant upon findings of fact that would have to be made with

respect to each member of the class, success for one does not

necessarily mean success for all absent the making of unfounded

common assumptions. In these circumstances, the issues are not

common. As in MacLeod v. Viacom Entertainment Canada Inc. et

al. (2003), 28 C.P.C. (5th) 160 (Ont. S.C.J.) at para. 24, the

Statement of Claim here does not identify express terms of the

retirement benefits contracts that were allegedly breached. In

addition, it would be inappropriate to determine "common" issues

involving the breach of an implied term based solely on evidence

of general practices adopted by the Region without regard to the

knowledge and understanding of the individual retirees relative to

their contractual relationship with it: MacLeod, at para. 24.

[282]

There may be cases, however, in which the existence of an implied term does not

depend on the individual knowledge, understanding or circumstances of the class member. An

example is Glover v. Toronto (City) (2009), 70 C.P.C. (6th) 303, [2009] O.J. No. 1523 (S.C.J.).

That case involved the outbreak of Legionnaire’s Disease at a home for the elderly operated by

the City of Toronto. It was determined that the source of the outbreak was in an air conditioning

cooling tower. It was alleged, among other things, that the City had breached a contractual and

statutory duty to provide a safe facility for the residents. There was a standard form contract

signed by residents, including a Bill of Rights that provided that every resident had the right to

live in a safe and clean environment. The plaintiff contended that this gave rise to an implied

contractual term to provide clean, uncontaminated air. Lax J. found, at para. 52, that the

existence of a common issue concerning such an implied term was appropriate, because it could

be determined without reference to the circumstances of each class member.

[283]

The plaintiffs suggest that although the “early class action cases” (including Arabi v.

The Toronto Dominion Bank (2007), 233 O.A.C. 275 (Div. Ct.) and MacLeod v. Viacom

Entertainment Canada Inc. et al. (2003), 28 C.P.C. (5th) 160 (Ont. S.C.J.)) did not certify

Page: 66

common issues dealing with implied terms, the courts have taken a “more nuanced approach” in

recent cases. They say that where an implied term is based on custom or usage, or where it arises

as a legal incident of a particular class of contract, there is no need to examine the individual

circumstances of the contracting party and it is appropriate to certify a common issue.

[284]

The plaintiffs refer, in particular, to Matoni v. C.B.S. Interactive Multimedia Inc.

(2008), 163 A.C.W.S. (3d) 701, [2008] O.J. No. 197 (S.C.J.), in which Hoy J., as she then was,

certified a common issue asking whether the contract contained a term implied by custom or

usage or as a legal incident of the particular class of contract. The plaintiff brought a proposed

class action against a career college, claiming that it was an implied term of the contract that

students who graduated from the dental hygiene program would be entitled to write the

provincial accreditation exam. Justice Hoy held that it would not be appropriate to certify a

common issue relating to an implied term based the “presumed intention” of the parties. She

held, however, that it would be appropriate to pose a common issue concerning the existence of

implied terms based on custom or usage, or terms that are incidents of particular classes of

contracts, because the existence of such implied terms does not depend on the parties’ intentions.

She stated, at paras. 113-116:

As noted above, the plaintiffs argue that class members' contracts

with CBC included, in addition to the written registration

agreement, certain implied terms. The heart of the plaintiffs' claim

for breach of contract is the alleged breach of implied terms. They

argue that the determination of the implied terms is a common

issue.

Terms may be implied (1) based on usage or custom, (2) as the

legal incidents of a particular class or kind of contract, or (3) based

on the presumed intention of the parties where the implied term

must be necessary to give business efficacy to a contract or as

otherwise meeting the "officious bystander" test as a term which

the parties would say that they had obviously assumed. When

determining "presumed intention", the court must focus on the

actual intentions of the parties, and not the intentions of reasonable

parties. M.J.B. Enterprises Ltd. v. Defence Construction (1951)

Ltd., [1999] 1 S.C.R. 619.

Generally, it seems a term might be implied on either of the first

two bases on a class-wide basis, depending on the nature of the

term. The third basis, namely presumed intention, which focuses

on the actual intentions of the parties, does not, however, appear in

any event susceptible to determination on a class-wide basis.

My impression is that the plaintiffs' claim for breach of implied

term is essentially founded on the second basis, and that they seek,

Page: 67

primarily, to argue that the implication of the term is required by

the nature of the contract.

[285]

A similar approach was taken by Veale J. in Anderson v. Bell Mobility Inc., 2010

NWTSC 65, [2010] N.W.T.J. No. 60, certifying a common issue asking whether there was an

“implied term, based on custom or usage or as the legal incident of a particular class or kind of

contract” to provide a the services of a live operator in the case of “911” calls made through Bell

Mobility. Veale J. declined to certify a common issue based on the presumed intention of the

parties because, on the authority of M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd.,

[1999] 1 S.C.R. 619, it would require evidence not just from the plaintiffs but from every

individual class member.

[286]

The plaintiffs also refer to Fulawka v. Bank of Nova Scotia, 2010 ONSC 1148, [2010]

O.J. No. 716, in which I certified a common issue relating to an implied term, relying in part of

the decision of Lax J. in Glover v. Toronto (City), above. In Fulawka, it was alleged that the

contracts of employment of members of the class included an implied term that they would be

paid for overtime that they were “permitted or required” to work. The existence of the implied

term was not based on circumstances unique to the class member but rather on the existence of a

common overtime policy, a common contract and common statutory and legal duties that were

owed to the class members.

[287]

The plaintiffs attempt to squeeze the facts of this case into one or other theory of

implied terms. On the one hand, they say that there is evidence, to which I will refer in the

summary judgment motion, that it was the practice of Tim Hortons to source the best available

price when purchasing ingredients and that such conduct is typically how franchisors operate.

They say that this evidence, which focuses on the conduct of the defendant, could establish an

implied term based on custom or as the legal incident to the particular contract. Alternatively,

they say that this may be a case, like Glover and Fulawka, where the presumed intention or

“business efficacy” test can be satisfied without reference to the evidence or circumstances of

every contracting party.

[288]

There is no basis in fact for the existence of a custom in the franchise business or the

QSR business that franchisors invariably supply goods to franchisees at commercially reasonable

prices or at prices lower than those available in the marketplace. Nor is such a term a legal

incident of franchise agreements. At best, the evidence establishes that franchisors, including

Tim Hortons, are generally able to acquire products at competitive prices due to their purchasing

power, but there is no evidence at all that franchisors invariably pass on the benefit of such prices

to their franchisees in the case of every product they sell to franchisees. Nor is there any

evidence that franchisors customarily sell inputs to their franchisees at prices lower than the

market price. Indeed, the regulation under the Arthur Wishart Act requires the franchisor to

disclose that this will not be the case. For that reason, a common issue asking whether a term

could be implied based on custom would not be appropriate.

Page: 68

[289]

Nor would it be appropriate to ask whether a term could be implied based on “business

efficacy” or the “officious bystander test”. Even if such a term might be implied based only on

the terms of the contract, it would still be necessary to determine, as a factual matter, whether the

presumed intention was consistent with the parties’ actual intention. This would require an

examination of the entire factual matrix applicable to each franchisee.

[290]

Put another way, the “officious bystander” might ask, “Surely it was your intention that

the franchisee would be entitled to acquire inputs at commercially reasonable prices?” The

parties might respond, “No, as a matter of fact we did not say that in the contract because we did

not intend that result. If you look at our contract, the other documents we signed and exchanged

over the years, as well as our entire course of dealing, you will see that we did not have that

intent.”

[291]

For these reasons, I would not certify the proposed common issue asking whether Tim

Hortons breached an implied term of the franchise agreement.

Breach of Statutory and Common Law Duty of Good Faith and Fair Dealing

[292]

Common issue 4 asks whether the conduct referred to in Question 2 constituted a

breach of the common law and statutory duties of good faith and fair dealing:

4. As a result of any of the conduct described in 2.a. to g. above, did one or both Defendants

breach their duties to the Class A-1 Members:

a. under the Arthur Wishart Act (Franchise Disclosure), 2000 or similar statute, to

act fairly, in good faith and in a commercially reasonable manner; or

b. under the common law, to act fairly, in good faith and in a commercially

reasonable manner?

[293]

As a starting point, I note that these issues distort, slightly, the duty of a franchisor

under the Arthur Wishart Act. The duty imposed under section 3(1) is one of “fair dealing” in the

“performance and enforcement” of the franchise agreement and includes “the duty to act in good

faith and in accordance with reasonable commercial standards” in that regard. The statute does

not require that every interaction between the franchisor and the franchisee be subjected, in

isolation, to a standard of “commercial reasonableness”. Still less does it require that the price of

every commodity sold by a franchisor to the franchisee must be commercially reasonable. What

the statute requires is that the franchisor must act in good faith and in accordance with reasonable

commercial standards in the performance of the contract.

[294]

The issue cannot possibly be addressed by looking at only one product supplied by the

franchisor (the par baked donut) or even one category of products (the Lunch Menu) without

considering the performance of the entire contract, including, for example, the profits made by

the franchisee on other products, including products bearing the franchisor’s trade marks, sold

Page: 69

under the franchise agreement. I will discuss the issue in more detail when I come to the

summary judgment motion.

[295]

My comments with respect to Common Issues 2(a) to (g) apply equally to this common

issue. There is no question that issues relating to the breach of the duty of good faith, whether

statutory or at common law, could be appropriate common issues. As I have noted earlier, there

have been a number of cases in this court in which those causes of action have been certified and

appropriate common issues have been approved.

Post Conversion Franchisees – Breach of Implied Term

[296]

The next group of issues, Common Issues 5 and 6, deals with the Class A-2 members,

the so-called “Post-conversion Franchisees”, and asks similar questions with respect to breach of

the alleged implied term (Question 5) and breach of the duty of good faith and fair dealing

(Question 6).

5. With respect to the Agreement entered into by each Class A-2 Member:

a. did the Agreement contain an implied term that the ingredients and commodities

franchisees were required to purchase from the Defendants and/or manufacturers

and distributors designated by the Defendants would be sold to the franchisees at

commercially reasonable prices?

b. if so, did one or both Defendants breach that implied term by requiring the

franchisees to purchase the AF Baked Goods at commercially unreasonable

prices;

[297]

My comments with respect to Common Issue 3 apply equally to common issue 5.

Post Conversion Franchisees – Breach of Duty of Good Faith and Fair Dealing

6. As a result of the conduct described in 5.b. above, did one or both Defendants:

a. breach their statutory duties to the Class A-2 Members to act fairly, in good faith

and in a commercially reasonable manner; or

b. breach their common law duties to the Class A-2 Members to act fairly, in good

faith and in a commercially reasonable manner?

[298]

Class A-1 and A-2 – Breach of Competition Act

[299] The Competition Act common issues apply to both Class A-1 and Class A-2 members:

My comments with respect to Common issue 4 apply to this Common Issue.

Page: 70

7. In requiring the franchisees to purchase the AF Baked Goods, did one or both

Defendants breach the Competition Act in one or more of the following ways:

a. by agreement or other like means with other parties to the chain of supply of AF

frozen donuts and timbits, influencing upward or discouraging the reduction of

prices for those products charged by those other parties in the supply chain, in

contravention of s.61(1) until March 11, 2009;

b. by agreement with other parties to the AF frozen donut and Timbit supply chain,

enhancing unreasonably the price charged for those products by those other

parties, in contravention of s.45(1)(b) until March 11, 2010; or

c. by agreeing with IAWS to fix, maintain, increase or control the price for the

supply of AF frozen donuts and timbits, in contravention of s.45(1)(a) from and

after March 12, 2010; and

d. if so, are the Class A-1 and/or Class A-2 Members entitled to recover from one or

both Defendants the full costs of their investigations and the full costs of this

proceeding on a complete indemnity basis under s.36(1) of the Competition Act?

[300]

I accept that the plaintiffs have pleaded tenable causes of action under the Competition

Act and that they have established a basis in fact for the existence of the above common issues. I

agree that, as in Quizno’s, the proposed Competition Act common issues would be appropriate.

They focus primarily on the conduct of the defendants, which is common to the class. There is a

common contract, a common product and distribution structure, and common behaviour in

relation to the establishment of prices. While there is evidence of Dr. Baziliauskas that suggests

that a reasonable methodology could be developed for the calculation of damages, it is not

necessary to resolve that question for the purposes of this motion. The resolution of the other

elements of the Competition Act claim would, as in Quizno’s, advance the claim of every class

member.

[301]

Had I not concluded that the plaintiffs’ claims under the Competition Act have no

prospect of success, I would have approved these common issues.

Class A-1 and A-2 – Waiver of Tort

[302]

Question 8 deals with Waiver of Tort:

8. By virtue of waiver of tort, are the Defendants liable on a restitutionary basis:

a. to account to the Class A-1 Members for any part of the Defendants’ financial

benefit from the AF conversion as a result of the conduct described in issues 1 to

4 and 7 above?

Page: 71

i. If so, in what amount and for whose benefit is such accounting to

be made?

ii. Or, in the alternative, such that a constructive trust is to be

imposed on all or any part of the Defendants’ financial benefit

from the AF conversion for the benefit of the Class A-1 Members?

If so, in what amount and by whom are such profits held?

b. to account to the Class A-1 and Class A-2 Members for any part of the

Defendants’ financial benefit from the sale of some or all the AF Baked Goods as

a result of the conduct described in issues 2.d., 4 (referable to 2.d.) and 5 to 7

above?

i. If so, in what amount and for whose benefit is such accounting to

be made?

ii. Or, in the alternative, such that a constructive trust is to be

imposed on all or any part of the Defendants’ financial benefit

from the sale of some or all the AF Baked Goods for the benefit of

the Class A-1 and Class A-2 Members? If so, in what amount and

by whom are such profits held?

[303]

The plaintiffs plead that in the alternative to their claim for damages, they and class

members are entitled to “waive the tort” claims for breach of contract, breach of the duty of good

faith and breach of the Competition Act and to claim payment of the revenues or profits realized

by Tim Hortons as a result of the Always Fresh Conversion. Alternatively, they claim a

constructive trust on such revenues. As similar claim is made with respect to the Lunch Menu,

limited to the breach of contract and good faith claims.

[304]

In Schick v. Boehringer Ingelheim (Canada) Ltd., 2011 ONSC 1942, [2011] O.J. No.

1381, I pointed out at para. 67 that class actions certified in Ontario have included claims based

on waiver of tort, beginning with the seminal decision of Cullity J. in Serhan v. Johnson and

Johnson (2004), 72 O.R. (3d) 296, [2004] O.J. No. 2904 (S.C.J.) aff'd (2006), 85 O.R. (3d) 665,

[2006] O.J. No. 2421, leave to appeal to the Court of Appeal refused on October 16, 2006 and

leave to appeal to the Supreme Court of Canada refused on April 12, 2007, [2006] S.C.C.A. No.

494. These have included: Heward v. Eli Lilly & Co., above; Peter v Medtronic Inc. (2007), 50

C.P.C. (6th) 133, [2007] O.J. No. 4828 (S.C.J.) leave to appeal to Div. Ct. refused (2008), 55

C.P.C. (6th) 242, [2008] O.J. No. 1916 (Div. Ct.); Tiboni v Merck Frosst Canada Ltd. (2008),

295 D.L.R. (4th) 32, [2008] O.J. No. 2996 (S.C.J.), Mignacc v. Merck Frosst Canada Ltd.,

[2009] O.J. No. 5233 (S.C.J.), leave to appeal to Div. Ct. refused (2008), 304 D.L.R. (4th) 220,

[2008] O.J. No. 4731.

[305]

As Lax J. observed in Anderson v. St. Jude Medical Inc., 2010 ONSC 77, [2010] O.J.

No. 8, at para. 27, it is “well established that commonality exists in questions relating to waiver

Page: 72

of tort and that it is preferable that waiver of tort questions proceed as common issues to be

determined on a full factual record.”

[306]

On the other hand, Perell J. cautioned in Carom v. Bre-X Minerals Ltd., 2010 ONSC

6311, [2010] O.J. No. 5289 at para. 32, “[I]t does not follow, however, that waiver of tort or

constructive trusts or restitutionary claims are the O-positive or common donor issue for class

proceedings. Each case turns on its own facts, and each case must be assessed based on its own

circumstances and exigencies.”

[307]

The defendants submit that a waiver of tort common issue could be appropriate,

provided that it focused on the question of whether wrongful conduct could be determined on a

class-wide basis. They suggest that the plaintiffs have not proposed common issues that would

determine the wrongful conduct of the defendants on a class-wide basis. I do not accept this

submission. The common issues proposed under the heading waiver of tort specifically ask

whether, as a result of specified conduct of the defendants set out in the other common issues,

the defendants are liable to account to the class members. To the extent that I have approved

earlier common issues, the conduct in question is common to all class members and, if found to

be wrongful, could support a claim for waiver of tort. Accordingly, I will approve the common

issue.

[308]

I do not propose to determine, at this time, whether the quantum of the waiver of tort

claim should be bifurcated. If the parties were unable to agree on this issue, I would invite

further submissions.

Class A-1 and A-2 – Unjust Enrichment

[309]

Question 9 deals with Unjust Enrichment:

9. Have the Defendants been unjustly enriched to the detriment of the Class A-1 or Class A-

2 Members as a result of any of the conduct referred to in issues 1 to 7 above?

[310]

I have discussed the requirements of a claim for unjust enrichment in my reasons on the

summary judgment motion. The plaintiffs must establish an enrichment of the defendants, a

corresponding deprivation of the plaintiffs, and the absence of any juristic reason for the

enrichment: Garland v. Consumers’ Gas Co., [2004] 1 S.C.R. 629, [2004] S.C.J. No. 21.

[311]

The difficulty with an unjust enrichment common issue in this case is twofold. First,

“deprivation” of class members may not be readily quantifiable in economic terms, because any

financial costs may be offset by less tangible benefits, such as the convenience and other

advantages of Always Fresh baking. Similarly, a franchisee who experiences lower margins on

the sale of Lunch Menu items may gain both financial and intangible benefits, through incidental

sales of more profitable items, increased traffic in the store at slower periods, and customer

loyalty and goodwill. These observations are supported by the evidence of the Affiant

Franchisees.

Page: 73

[312]

Second, in the case of the Always Fresh claim, there is no direct nexus between the

alleged deprivation of franchisees and the enrichment of Tim Hortons. In Landsbridge v. Midas

Canada Inc. (2009), 73 C.P.C. (6th) 10, [2009] O.J. No. 1279 (S.C.J.), Cullity J. found that such

a deficiency was fatal to the unjust enrichment claim of the franchisees, at paras. 66 – 67:

The claim in respect of the increased revenue the defendants have

received from alleged unlawful and unjustified receipts of rebates

and allowances from product suppliers stands on a different

footing. Counsel for the defendants were, I believe, correct in their

submission that the alleged deprivation consisting of higher prices

that the Franchisees have been forced to pay under the new

distribution system, and a loss of benefits under the Midas system,

do not constitute a corresponding deprivation. Assuming as I must,

that the new system produces advantages for Midas and

disadvantages to the Franchisees, and that in implementing it,

Midas breached its contractual obligations to the Franchisees, it

does not follow that there is the necessary correspondence between

the advantages and disadvantages to justify the grant of a

restitutionary remedy that would attach a constructive trust to the

amounts received by Midas. In this connection, counsel referred to,

and relied on, Boulanger v. Johnson & Johnson, [2003] O.J. No.

2218 (C.A.), at para. 20, where Goudge J.A. referred to, and

applied, a passage in the reasons of McLachlin J. in Peel (Regional

Municipality) v. Canada, [1992] 3 S.C.R. 762 in which it had been

argued that the remedy could extend to benefits that the plaintiffs

indirectly conferred on the defendants. The learned judge stated, at

para. 58:

This the courts have declined to do. The cases in which

claims for unjust enrichment have been made out generally

deal with benefits conferred directly and specifically on the

defendant, such as the services rendered for the defendant

or money paid to the defendant.

Similarly, there is, in my judgment, an insufficiently direct and

clear correlation between the numerous disadvantages allegedly

suffered by the Franchisees, and the benefits obtained by Midas,

under the Uni-Select agreement.

[313]

For these reasons, I do not propose to certify the common issue pertaining to unjust

enrichment.

The Lunch Menu

Page: 74

[314]

The questions relating to the Lunch Menu apply to Class B members. The basic

framework of the common issues is similar to the issues dealing with the Always Fresh

Conversion – it asks whether there was a breach of express contractual terms, implied terms, and

the duty of good faith and fair dealing. There are also common issues with respect to waiver of

tort and unjust enrichment.

Lunch Menu – Breach of Express Term

[315]

The first question deals with the alleged breach of certain express terms of the franchise

agreement:

10. Did one or both Defendants breach one or more of s.7.03(a), s.3.00(f) and s.3.00(i) by:

a. requiring franchisees to purchase the ingredients and commodities for the Lunch

Menu at commercially unreasonably high prices from the Defendants and/or

manufacturers and distributors designated by the Defendants and/or setting the

maximum prices for Lunch Menu items at commercially unreasonably low prices,

such that the Lunch Menu as a category generates revenue for the Defendants

while franchisees lose money because the costs associated with selling the Lunch

Menu exceed the revenue generated by those sales;

b. failing to perform any form of product category or menu analysis on the Lunch

Menu, contrary to reasonable commercial practices.

[316]

The plaintiffs have abandoned their complaint that the “imposition” of the Lunch Menu

was a breach of s. 7.03 of the franchise agreement, recognizing that the Lunch Menu has been a

part of the Tim Hortons System for many years.

[317]

The proposed common issue violates proposition (l) for common issues, above, because

it is not clear, fair to both parties, and neutrally-worded. Leaving aside the problems associated

with the definition of what goes into the “Lunch Menu” and the embedded assumptions about the

terms “commercially unreasonable prices” and “reasonable commercial practices”, all of which

may be capable of resolution, this common issue bundles together a number of questions and

assumptions, including the assumption that franchisees “lose money” because the costs of selling

the Lunch Menu exceed the revenues.

[318]

This common issue also violates the basic rule, expressed as proposition (h) above, that

“[A] common issue cannot be dependent upon individual findings of fact that have to be made

with respect to each individual claimant”: Williams v. The Mutual Life Assurance Company of

Canada (2000), 51 O.R. (3d) 54, [2000] O.J. No. 3821 at para. 39 (S.C.J.), aff'd (2001), 17

C.P.C. (5th) 103, [2001] O.J. No. 4952 (Div. Ct.), aff'd (2003), 226 D.L.R. (4th) 112 and 131,

[2003] O.J. No. 1160 and 1161 (C.A.).

[319]

Answering the question, as currently phrased, would require an examination of whether

a particular class member “lost money” from the sale of the Lunch Menu. In turn, this would

Page: 75

likely require an analysis not only of Lunch Menu items per se, but the sale of “combo” items (in

which, for example, a Lunch Menu item was sold at a discounted price along with a coffee and a

cookie, muffin or donut) and the sale of other items (such as a soft drink, tea or coffee) that were

sold to a customer who came in for lunch. For that reason, the question as phrased is unsuitable

for certification. Had I not dismissed the action on summary judgment, it might be appropriate to

consider, as the defendant in fact suggests, whether the parties could agree on an acceptable joint

list of common issues. In the circumstances, I do not propose to attempt to redraft this issue.

[320]

Common issue 10(b) contains the same unacceptable assumption about reasonable

commercial practice.

Page: 76

Lunch Menu – Breach of Implied Term

[321]

Question 11 is identical to Question 3, above. It asks whether it was an implied term

that ingredients would be sold at commercially reasonable prices and, if so, whether Tim Hortons

breached that term.

11. With respect to the Class B Members:

a. did the Agreement contain an implied term that the ingredients and commodities

franchisees were required to purchase from the Defendants and/or manufacturers

and distributors designated by the Defendants would be sold to the franchisees at

commercially reasonable prices?

b. if so, did one or both Defendants breach that implied term by requiring the

franchisees to purchase the ingredients and commodities for the Lunch Menu at

commercially unreasonable prices?

[322]

This issue is similar to Common Issue 3, which deals with implied terms in the context

of Always Fresh. In my discussion of that issue, I have set out the case law addressing the

circumstances in which it is appropriate to consider the implication of a term on a common basis.

I have concluded that there may be cases falling under the “business efficacy” or “officious

bystander” test, where a term could be implied based solely on the nature of the contract and the

contractual terms. In such cases, it would not be necessary to examine the factual matrix or the

individual circumstances of the contracting parties – simply by examining the contract, one could

say “of course” that term would have been contemplated by the parties as a necessary part of

their bargain. A franchise agreement, which is a standard form contract designed to treat an

entire class of franchisees in a uniform manner, regardless of their individual circumstances,

could be exactly such a contract. A term would be implied regardless of the circumstances of a

particular franchisee, to give the contract business efficacy.

[323]

In my view, the proposed common issue states an acceptable common issue.

Lunch Menu – Breach of Duty of Good Faith and Fair Dealing

[324]

Question 12 asks whether there was a breach of the duty of good faith and fair dealing

under the Arthur Wishart Act or at common law in connection with the Lunch Menu:

12. As a result of any of the conduct described in 10 above [requiring franchisees to

purchase Lunch Menu ingredients at commercially unreasonable high prices, setting

maximum Lunch Menu prices at commercially unreasonable low prices, such that

franchisees lose money because the costs of selling the Lunch Menu exceed the

revenues], did one or both Defendants breach their duties to the Class B Members:

Page: 77

a. under the Arthur Wishart Act (Franchise Disclosure), 2000 or similar statute, to

act fairly, in good faith and in a commercially reasonable manner; or

b. under the common law, to act fairly, in good faith and in a commercially

reasonable manner?

[325]

The words I have placed in square brackets, taken substantially from question 10, are

objectionable for the reason previously identified. They contain embedded assumptions about the

commercial unreasonableness of the prices paid by franchisees and about the consequence of

those prices – that the franchisees “lose money”.

[326]

The question also contains an assumption that in considering whether the franchisees

“lose money” from the sale of the Lunch Menu, one can simply isolate revenue from Lunch

Menu items, ignoring the sale of more profitable items to customers buying the Lunch Menu.

The Lunch Menu is available throughout the day and night. It seems quite obvious that a

customer who comes into the store to buy a sandwich is likely to buy a drink, a dessert, a cookie

or other menu item that would not otherwise have been sold without the attraction of the Lunch

Menu. It is also quite obvious that the sale of Lunch Menu items helps to build customer loyalty.

A customer who comes to the store for a reasonably-priced sandwich and has a good experience

is more likely to return for breakfast and for coffee breaks.

[327]

In my view, a common issue could be framed, as I suggested earlier, to simply ask

whether, having regard to the rights and obligations of both parties under the franchise

agreement, it was a requirement of the duty of good faith at common law or under the Arthur

Wishart Act, that Tim Hortons would supply Lunch Menu ingredients to its franchisees at lower

prices than they could obtain for the same ingredients in the marketplace and, if so, whether Tim

Hortons breached that duty.

[328]

Expressed in this manner, the question focuses not on the Lunch Menu in isolation, but

rather on the price of Lunch Menu items in relation to the overall benefits and burdens of the

franchise agreement.

Lunch Menu – Waiver of Tort and Unjust Enrichment

[329]

Questions 13 and 14 address waiver of tort and unjust enrichment:

13 By virtue of waiver of tort, are the Defendants liable on a restitutionary basis as a result

of any of the conduct referred to in issues 10 to 12 above:

a. to account to the Class B Members for any part of the Defendants’ financial

benefit from the Lunch Menu? If so, in what amount and for whose benefit is such

accounting to be made? Or, in the alternative,

Page: 78

b. such that a constructive trust is to be imposed on all or any part of the

Defendants’ financial benefit from the Lunch Menu for the benefit of the Class B

Members? If so, in what amount and by whom are such profits held?

14. Have the Defendants been unjustly enriched to the detriment of the Class B Members as a

result of any of the conduct referred to in issues 10 to 12 above?

[330]

My comments about unjust enrichment in relation to Always Fresh apply equally to this

common issue.

All Class Members

[331]

The remaining common issues apply to all class members.

Liability of THI

[332]

The first issue deals with the liability of THI to class members:

15 If one or more of the common issues 1 to 7 or 10 to 12 are answered in the affirmative, is

the Defendant Tim Hortons Inc. liable to the Class Members:

a. as a direct participant in the wrongful conduct;

b. on the basis of agency by estoppel and/or

c. on the basis that it is the alter ego of the Defendant The TDL Group Corp. or one

or more of its corporate predecessors?

[333]

The plaintiffs plead that THI is liable for the acts of Tim Hortons because:

(a)

(b)

(c)

TDL was created by THI to shield it from liability;

TDL’s profits were treated as the profits of THI;

directors, senior management and other personnel conducting business for TDL

were appointed by THI;

(d)

(e)

THI was the directing mind of TDL, controlled the activities of TDL and made

the decisions concerning the matters in issue; and

revenues and profits received by TDL were earned by the skill and direction of

THI.

[334]

The plaintiffs say that THI could be liable for wrongs committed by TDL in at least

three ways: (a) as TDL’s agent; (b) as its alter ego; (c) on the basis of holding itself out as

Page: 79

carrying on the business of Tim Hortons. None of these has been specifically pleaded, although

the pleading that THI was the “directing mind” of TDL could be regarded as an alter ego claim.

[335]

With respect to the alter ego claim, the plaintiffs rely upon Buanderie central de

Montréal Inc. v. Montréal (City), [1994] 3 S.C.R. 29, [1994] S.C.J. No. 80, at para. 34:

... a corporation may be regarded as the alter ego of another

corporation when there is such a close relationship between them

that what apparently concerns one actually pertains to the activities

of the other. Undoubtedly a large number of factors can be

identified to determine the existence of such a relationship: in my

opinion, however, the one that is most explicit and most likely to

cover all aspects of the concept is control.

[336]

With respect to the holding out claim, the plaintiff invoke the principle of agency by

estoppel expressed in Fridman, The Law of Agency, 7^thed. (Toronto: Butterworths, 1996) at pp.

111-112, as follows:

Estoppel means that a person who has allowed another to believe

that a certain state of affairs exists, with the result that there is

reliance upon such belief, cannot afterwards be heard to say that

the true state of affairs was far different, if to do so would involve

the other person in suffering some kind of detriment. Applied to

agency this means that a person who by words or conduct has

allowed another to appear to the outside world to be his agent, with

the result that third parties deal with him as his agent, cannot

afterwards repudiate this apparent agency if to do so would cause

injury to third parties; he is treated as being in the same position as

if he had in fact authorized the agent to act in the way he has done.

Even in the absence of prior agreement as to authority or

subsequent ratification of unauthorized acts, a person can become a

principal by placing another in a situation in which...according to

the ordinary usage of mankind that other is understood to represent

an act for the person who placed him so. Everything depends upon

the way the principal makes the situation appear to the outside

world, in the light of what is usual and reasonable to infer, and

upon the reliance which is placed by third parties upon the

apparent authority of the person with whom they are dealing. The

'principal' is said to 'hold out' as his agent the person represented as

having authority to act on his behalf. The 'agent' is said to have

'ostensible' or 'apparent' authority. [Emphasis added]

Page: 80

[337]

The plaintiffs say that THI and TDL have held themselves out to the world as one

corporation.

[338]

The defendants say that agency by estoppel has not been pleaded and that in any event

reliance would be a necessary ingredient of an estoppel claim and would have to be determined

on an individual basis. The plaintiffs contend that there are statements in Tim Hortons’ annual

reports that group the various corporate entities as one business and that Tim Hortons’ statement

of defence acknowledges that THI carries on the franchising business through TDL. They say

that the need to prove reliance is no barrier to the existence of a common issue where there are,

in substance, a limited number of representations with a common import made to all class

members: see McKenna v. Gammon Gold Inc., (S.C.J.), above, at paras. 136-137.

[339]

A determination that the common issues are appropriate is not in any way an

assessment of their merits. It is simply a determination that there are common issues of fact and

law that meet the criteria set out earlier.

[340]

Bearing in mind the low bar applicable to the common issues and the “some basis in

fact” requirement, I am satisfied that the proposed common issues, which focus on the conduct

of THI and TDL, are appropriate for certification.

Calculation and Allocation of Damages

[341]

The plaintiffs propose:

16. If one or more of the common issues 1 to 7 or 10 to 12 are answered in the affirmative,

how are damages to be computed as payable between the Defendants and allocated for

distribution to the Class Members?

[342]

This is a question that can be left to the common issues judge and does not require

definition at this time.

Prejudgment and Post-Judgment Interest

[343] The plaintiffs propose:

17. Should one or both Defendants pay prejudgment and post-judgment interest, at what

annual rate, and should the interest be compound interest?

[344]

It is not clear to me, at least at this stage, that the issue of pre-judgment and post-

judgment interest can be determined on a common basis.

Costs of Administration and Distribution of Judgment

[345]

The plaintiffs propose:

Page: 81

18. Should one or both Defendants pay the cost of administering and distributing any

monetary judgment and/or the cost of determining eligibility and/or the individual

issues? If so, who should pay what cost, why, in what amount and to what extent?

[346]

This is a matter within the jurisdiction of the common issues judge and does not require

that a common issue be stated.

(d)

Preferable Procedure

[347]

Section 5(1)(d) of the C.P.A. requires that a class proceeding be “the preferable

procedure for the resolution of the common issues.” This inquiry asks whether a class proceeding

would be a fair, efficient and workable procedure for the resolution of the issues, keeping in

mind not only the common issues, but also the individual issues that will remain after the

resolution of the common issues.

[348]

It has frequently been observed that the fact that individual issues will remain after the

resolution of the common issues – even substantial individual issues – is not a bar to

certification: see Cloud v. Canada (Attorney General), at para. 53. This is expressly

contemplated by s. 6 of the C.P.A.

[349]

In addressing the preferable procedure requirement, judges in this province frequently

begin with the observations of Rosenberg J.A. in Markson v. MBNA Canada Bank, 2007 ONCA

334, 85 O.R. (3d) 321 at paras. 69-70, leave to appeal to S.C.C. refused, [2007] S.C.C.A. No.

346:

(1) The preferability inquiry should be conducted through the lens

of the three principal advantages of a class proceeding: judicial

economy, access to justice and behaviour modification;

(2) "Preferable" is to be construed broadly and is meant to capture

the two ideas of whether the class proceeding would be a fair,

efficient and manageable method of advancing the claim and

whether a class proceeding would be preferable to other

procedures such as joinder, test cases, consolidation and any other

means of resolving the dispute; and

(3) The preferability determination must be made by looking at

the common issues in context, meaning, the importance of the

common issues must be taken into account in relation to the claims

as a whole.

As I read the cases from the Supreme Court of Canada and

appellate and trial courts, these principles do not result in separate

inquiries. Rather, the inquiry into the questions of judicial

economy, access to justice and behaviour modification can only be

Page: 82

answered by considering the context, the other available

procedures and, in short, whether a class proceeding is a fair,

efficient and manageable method of advancing the claim.

[350]

My experience with the preferable procedure inquiry has generally been that plaintiffs’

counsel are in a state of denial about the existence of any individual issues that might undermine

certification of the class action and defendants’ counsel can find whole chorus lines of individual

issues dancing on the heads of pins.

[351]

That said, a number of franchise disputes have been found suitable for certification: see,

for example, Quizno’s; 1176560 Ontario Ltd. v. Great Atlantic & Pacific Company of Canada

Ltd. (2002), 62 O.R. (3d) 535, [2002] O.J. No, 4781 (S.C.J.), aff'd. (2004), 70 O.R. (3d) 182,

[2004] O.J. No. 865 (Div. Ct.); 578115 Ontario Inc. (cob McKee's Carpet Zone) v. Sears Canada

Inc., 2010 ONSC 4571, [2010] O.J. No. 3921; Rosedale Motors Inc. v. Petro-Canada Inc.

(1998), 42 O.R. (3d) 776, [1998] O.J. No. 5461 (Gen. Div.), rev'd. [2001] O.J. No. 5368 (Div.

Ct.); Mont-Bleu Ford Inc. v. Ford Motor Co. of Canada (2000), 48 O.R. (3d) 753, [2000] O.J.

No. 1815 (Div. Ct.), rev'g [2000] O.J. No. 533 (S.C.J.); 1250264 Ontario Inc. v. Pet Valu

Canada Inc., above. I reviewed many of these, and others, in Trillium Motor World Ltd. v.

General Motors of Canada Ltd., 2011 ONSC 1300, [2011] O.J. No. 889. The existence of a

clearly identifiable class, a common standard form contract and a common business system,

coupled with conduct of the franchisor that treats every franchisee in the same way, frequently

makes it possible to identify common issues of fact and law that are suitable for class-wide

resolution.

[352]

This is not to say that a class action will be the preferable procedure for the resolution

of every franchise case.

[353]

In considering whether a class action would be the preferable procedure in this case, I

must ask, among other things, having regard to the importance of the common issues in relation

to the overall claim, (a) whether a class proceeding would be a fair, efficient and manageable

method of advancing the claims of the class; (b) whether it would be preferable to other methods,

such as individual actions, joinder or a test case; and (c) whether, in the context of this particular

proceeding, it would promote the goals of the C.P.A., namely access to justice, judicial economy,

and behaviour modification.

[354]

As I have noted, many of the contractual common issues and even the Arthur Wishart

Act issues can be condensed to two questions, namely whether, in all the circumstances, Tim

Hortons had a contractual or statutory duty to supply ingredients to franchisees at prices that

were lower than the market price and, if so, whether Tim Hortons breached that duty. Those

questions, which are at the core of the plaintiffs’ claims, can largely be answered without the

need to examine the conduct of individual class members and will focus on the defendants’

conduct. The same is true of the Competition Act common issues.

Page: 83

[355]

The defendants acknowledge that there may be some contractual issues for which a

class action would be the preferable procedure. They say, supported by their expert evidence that

the plaintiffs’ complaints concerning the “economic harm” caused to franchisees by the Always

Fresh Conversion and the Lunch Menu would require individual inquiry into each franchisee’s

circumstances.

[356]

I do not agree. Most of the proposed common issues will focus on the conduct of the

defendants. If the defendants have over-charged the class members for ingredients, every

member of the class is at risk. The determination of the defendants’ liability will substantially

advance the litigation and will promote judicial economy. Access to justice will be promoted

because individual franchisees would be reluctant to sue the franchisor on whom they are so

dependent. Any individual issues that remain, assuming the common issues are decided in the

plaintiffs’ favour, can be dealt with efficiently and fairly under the direction of the common

issues judge.

(e)

Representative Plaintiffs

[357]

Section (5)(1)(e), as noted above, requires that there be a suitable representative

plaintiff who will fairly represent the class, who is free of conflicts with other members of the

class and who has developed a workable litigation plan to move the action forward. The courts

have repeatedly stressed the concern that the plaintiff be an engaged and active representative of

the class and not a mere pawn or puppet of counsel.

[358]

There is no question that the plaintiffs are substantial, motivated and competent

representatives of the class. The defendants’ sole objection to the suitability of the plaintiffs is

their refusal to answer, on the grounds of relevancy, questions on cross-examination about

whether they have any arrangements with any third party for the funding of the litigation. On

Mr. Jollymore’s cross-examination, he was asked questions about whether he had any funding

arrangement with his cousin, Ron Joyce.

[359]

In response, the plaintiffs say that they were prepared to answer questions about

whether or not they had control of the litigation, but they were not prepared to answer questions

about funding arrangements, which they say are privileged.

[360]

The plaintiffs rely on Descôteaux v. Mierzwinski, [1982] 1 S.C.R. 860, [1982] S.C.J.

No. 43, which deals with the confidentiality of solicitor and client communications and Stevens

v. Canada (Prime Minister), [1998] 4 F.C. 89, [1998] F.C.J. No. 794 (F.C.A.), which dealt with

the question of whether a lawyer’s billing records are protected by solicitor-client privilege. The

issue in this case is not about communications between the plaintiffs and their counsel – it is

about who is paying for the lawsuit and whether a third party is providing an indemnity for fees.

The answer to that question does not require the disclosure of solicitor-client communications.

[361]

In my view, a Court being asked to certify a class proceeding and to appoint a

representative of the class is entitled to know whether some other party is funding the litigation

Page: 84

and, if so, who is doing so and on what terms. The answers go to the independence and

motivations of the representative plaintiff as well as the ability of the representative plaintiff to

see the action through to completion. It will be relevant for the Court to know whether the third

party has an interest in the litigation that is or could be divergent from the interests of the

representative plaintiff or the class. In the context of third party funding arrangements, the Court

has been particularly concerned to know the details of the arrangements with the third party to

ensure that the representative plaintiff, and not the third party, is actually calling the shots: Dugal

v. Manulife Financial Corp., 2011 ONSC 1785, 105 O.R. (3d) 364 (S.C.J.); Metzler Investment

GMBH v. Gildan Activewear Inc. (2009), 81 C.P.C. (6th) 384, [2009] O.J. No. 3315 (S.C.J.).

[362]

Answering the question “who has control of the litigation” or “who is instructing

counsel” may not elicit a full answer to the real question, which is whether some behind-the-

scenes party is financing or promoting the litigation, and if so, whether there are any strings

attached.

[363]

If it was established that the third party was not a member of the class and was

supporting the litigation financially for collateral reasons, that alone might be reason to question

the independence and suitability of the representative plaintiff.

[364]

For that reason, assuming all other issues were resolved in the plaintiffs’ favour, I

would order that the questions asked by defendants’ counsel and any proper and necessary

follow-up questions be answered, before I would approve certification of this action.

C.

Conclusion on Certification

[365]

For these reasons, had I not concluded that the plaintiffs’ individual claims should be

dismissed on summary judgment, I would have found that:

(a)

(b)

the plaintiffs’ claim discloses causes of action, as set out above;

there is an identifiable class, with the description of that class to be resolved by

further submissions;

(c)

the claims of class members raise common issues, with the wording of those

issues to be discussed by counsel and submitted to the court for further

consideration;

(d)

(e)

a class proceeding is the preferable procedure for the resolution of the common

issues; and

the determination of whether the plaintiffs meet the requirements of s. 5(1)(e) of

the C.P.A. should be adjourned pending further submissions after the plaintiffs

answer the questions refused on their cross-examination.

Page: 85

V.

SUMMARY JUDGMENT

[366]

Tim Hortons moves for summary judgment dismissing the plaintiffs’ claims. To

reiterate, these claims are for (a) breach of contract; (b) breach of the duty of good faith and fair

dealing at common law and under the Arthur Wishart Act; (c) unjust enrichment, including

disgorgement and waiver of tort remedies; and (d) statutory causes of action under s. 36 of the

Competition Act, claiming breach of the price maintenance and conspiracy provisions.

[367]

While it has not generally been the practice to permit summary judgment motions to be

brought by defendants before or at the time of the certification motion, this case was an

exception.

[368]

Prior to my appointment as case management judge in this matter, the parties had

agreed that the defendants would be permitted to bring a motion for summary judgment at the

same time as the plaintiffs’ motion for certification. This agreement was approved by Lax J., the

case management judge at the time, and a schedule was established leading up to the two

motions, which were to be heard commencing late November, 2010. In May 2010, the plaintiffs

moved to change the schedule and to defer the summary judgment motion until after

certification. I held that, given the agreement between the parties, and the substantial efforts

undertaken by the defendants in reliance on that agreement, efficiency would be achieved by

hearing the motions together, as previously scheduled: Fairview Donut Inc. v. TDL Group Corp.,

2010 ONSC 2845, [2010] O.J. No. 2094.

[369]

This procedure was driven by the unique circumstances of this case, particularly the

agreement between the parties as approved by the previous case management judge. I

acknowledge that this course of action has resulted in a very substantial record. It has also led to

a situation, in the result, in which there is a potentially certifiable class action with no

representative plaintiffs and where questions may well arise about whether my conclusions on

the summary judgment motion are binding in relation to putative representative plaintiffs who

may come forward in the future. These concerns were identified by Nordheimer J. in Moyes v.

Fortune Financial Corp. (2001), 13 C.P.C. (5^th) 147, [2001] O.J. No. 4455 at paras. 9 and 10.

[370]

When these issues were raised at the hearing of these motions, defendants’ counsel

suggested that if I decided the summary judgment motion in favour of his clients, I should

simply decline to decide the certification motion. For the reasons set out earlier, I have decided

to express my conclusions on both motions.

[371]

I will begin by considering the test applicable to motions for summary judgment under

Rule 20 of the Rules of Civil Procedure, as recently stated by the Court of Appeal. I will then

consider the issues, the evidence and the submissions of the parties with respect to each cause of

action. In the course of so doing, and applying the test stated by the Court of Appeal, I will

consider whether a trial is required in order to achieve a full appreciation of the evidence and

issues in order to make dispositive findings of fact on the motion and whether the interest of

justice requires a trial in this case.

Page: 86

A.

The Test for Summary Judgment

On December 5, 2011, the Court of Appeal released its decision in Combined Air

[372]

Mechanical Services Inc. v. Flesch, 2011 ONCA 764 (“Combined Air”). It is a unanimous

decision of a five member panel of the Court, stating a test for determining when summary

judgment should be granted and describing the types of cases that are suitable for summary

judgment. The Court of Appeal disposed of five jointly-heard appeals of summary judgment

decisions through the application of the new principles.

[373]

The Court of Appeal chose not to comment on the conflicting jurisprudence concerning

summary judgment and described its decision, as a “new departure and a fresh approach to the

interpretation and application of the amended Rule 20” (para. 35).

[374]

In articulating the new test, which it labeled the “full appreciation test”, the Court of

Appeal emphasized the importance of both procedural fairness and substantive fairness in

arriving at a fair and just disposition of the parties’ dispute. It also emphasized the need for a full

appreciation of the evidence and the issues in the proceeding which, in some cases, can only be

acquired through the trial process. It said that a motion judge must ask, before embarking on the

summary judgment analysis and using the enhanced powers afforded under Rule 20.04(2.1),

whether that full appreciation required to make dispositive factual or legal findings can be

achieved by way of summary judgment or whether it must be acquired at trial. The Court of

Appeal pointed out that some cases, by their very nature, will be more suitable for determination

on summary judgment than other cases and the analysis of whether a just result can be obtained

must be conducted on a case-by-case basis.

[375]

The Court of Appeal identified three types of cases, not necessarily exclusive, that are

amenable to summary judgment.

[376]

The first case is one where the parties agree, and the court is satisfied, that it is

appropriate to determine the action by way of a summary judgment motion. This is not such a

case.

[377]

The second case is where, using the tools provided by the new Rule 20, the claim or

defence is shown to be without merit and has no chance of success.

[378]

The third case is one that can be disposed of on the merits because the trial process is

not required in the “interest of justice”. This requirement guides the determination of whether the

motion judge should exercise the powers under Rule 20.04(2.1) to weigh evidence, evaluate

credibility and draw reasonable inferences from the evidence.

[379]

The Court of Appeal emphasized, at paras. 46-51, the importance of the trial process, or

the “trial narrative”, in informing a judge’s appreciation of the evidence and the issues as they

unfold during the trial. It noted, at para. 47, the perspective and intimate knowledge of the facts

and issues acquired by the trial judge by participating in the trial, hour after hour, day after day,

witness after witness, exhibit after exhibit. This dynamic, and frequently interactive, process not

Page: 87

only ensures that the trial judge fully apprehends the evidence and appreciates how the pieces of

the evidentiary puzzle fit together – or do not fit together – it also provides an assurance to the

parties and the public that nothing has been overlooked. The Court of Appeal noted that the “trial

narrative”, as it develops in the course of a live trial, will often be very different from the sterile

document-based and transcript-based record that is before a judge on a motion for summary

judgment.

[380]

The Court stated that, before a judge should use the enhanced powers under Rule

20.04(2.1), to weed out a claim as having no chance of success or to resolve all or part of an

action, he or she should apply the full appreciation test: “Can the full appreciation of the

evidence and issues that is required to make dispositive findings be achieved by way of summary

judgment, or can this full appreciation only be achieved by way of a trial?”

[381]

The Court of Appeal described, at paras. 51 and 52, the circumstances in which,

applying that test, summary judgment might or might not be appropriate. It cautioned against

summary judgment in cases where it is necessary to make numerous findings of fact based on an

extensive testimonial record. In contrast, it said, document cases, or cases in which there are few

contentious factual issues, may be more amenble to summary judgment:

We think this “full appreciation test” provides a useful benchmark

for deciding whether or not a trial is required in the interest of

justice. In cases that call for multiple findings of fact on the basis

of conflicting evidence emanating from a number of witnesses and

found in a voluminous record, a summary judgment motion cannot

serve as an adequate substitute for the trial process. Generally

speaking, in those cases, the motion judge simply cannot achieve

the full appreciation of the evidence and issues that is required to

make dispositive findings. Accordingly, the full appreciation test is

not met and the “interest of justice” requires a trial.

In contrast, in document-driven cases with limited testimonial

evidence, a motion judge would be able to achieve the full

appreciation of the evidence and issues that is required to make

dispositive findings. Similarly, the full appreciation test may be

met in cases with limited contentious factual issues. The full

appreciation test may also be met in cases where the record can be

supplemented to the requisite degree at the motion judge’s

direction by hearing oral evidence on discrete issues.

[382]

The Court of Appeal emphasized that “full appreciation” means more than simply

being aware of, familiar with and capable of interpreting the written record. The judge must ask

whether he or she can fairly weigh the evidence, draw inferences from the evidence, or evaluate

the credibility of witnesses without the “opportunity to hear and observe witnesses, to have the

Page: 88

evidence presented by way of a trial narrative, and to experience the fact-finding process first

hand” (at para. 55).

[383]

The Court of Appeal summarized its opinion at paras. 72-75:

We have described three types of cases where summary judgment

may be granted. The first is where the parties agree to submit their

dispute to resolution by way of summary judgment.

As will be illustrated below, at paras. 101-111, a judge may use the

powers provided by rules 20.04(2.1) and (2.2) to be satisfied that a

claim or defence has no chance of success. The second class of

case is where the claim or defence has no chance of success. The

availability of these enhanced powers to determine if a claim or

defence has no chance of success will permit more actions to be

weeded out through the mechanism of summary judgment.

However, before the motion judge decides to weigh evidence,

evaluate credibility, or draw reasonable inferences from the

evidence, the motion judge must apply the full appreciation test.

The amended rule also now permits the summary disposition of a

third type of case, namely, those where the motion judge is

satisfied that the issues can be fairly and justly resolved by

exercising the powers in rule 20.04(2.1). In deciding whether to

exercise these powers, the judge is to assess whether he or she can

achieve the full appreciation of the evidence and issues that is

required to make dispositive findings on the basis of the motion

record – as may be supplemented by oral evidence under rule

20.04(2.2) – or if the attributes and advantages of the trial process

require that these powers only be exercised at a trial.

Finally, we observe that it is not necessary for a motion judge to

try to categorize the type of case in question. In particular, the

latter two classes of cases we described are not to be viewed as

discrete compartments. For example, a statement of claim may

include a cause of action that the motion judge finds has no chance

of success with or without using the powers in rule 20.04(2.1). And

the same claim may assert another cause of action that the motion

judge is satisfied raises issues that can safely be decided using the

rule 20.04(2.1) powers because the full appreciation test is met.

The important element of the analysis under the amended Rule 20

is that, before using the powers in rule 20.04(2.1) to weigh

evidence, evaluate credibility, and draw reasonable inferences, the

motion judge must apply the full appreciation test in order to be

Page: 89

satisfied that the interest of justice does not require that these

powers be exercised only at a trial.

[384]

The last paragraph of this quotation contemplates that a single proceeding may involve

different causes of action, some of which simply have no chance of success and do not require

the weighing of evidence, the evaluation of credibility and the drawing of inferences for their

resolution.

[385]

Having set out the principles applicable to summary judgment motions, the Court of

Appeal proceeded to apply those principles to each of the five appeals before it. I do not propose

to review each of the five cases, because some address aspects of the test that are not particularly

germane to the case before me. However, there are two cases that provide additional useful

guidance concerning the approach to be taken in this case.

[386]

One of the cases involved appeals to the Court of Appeal in two related actions,

reported at first instance as Bruno Appliance and Furniture Inc. v. Cassels Brock & Blackwell

LLP, 2010 ONSC 5490, [2010] O.J. No. 4661, (S.C.J.). The plaintiffs in both actions were

investors who claimed that they had been defrauded by the defendant, Hryniak. They sued

Hryniak for fraud and his lawyers and one of the partners in the law firm for fraud, conspiracy,

negligence and breach of contract. The motion judge had granted judgment against Hryniak,

disbelieving his evidence and concluding that he had defrauded the plaintiffs. The motion judge

concluded that a trial was necessary to determine whether Hryniak’s lawyer was guilty of fraud

or whether he was an innocent dupe and had liability apart from the claim for fraud.

[387]

The summary judgment motion had been lengthy and complex. The hearing lasted four

days and there was affidavit evidence from eighteen witnesses. The motion record consisted of

twenty-eight volumes and the cross examinations had taken three weeks. The amounts at issue

were approximately $1 million and $1.2 million.

[388]

The Court of Appeal concluded that cases such as Bruno Appliance require a trial and

should not be decided on summary judgment. It noted its earlier observations, at paras. 50 and 51

of its reasons, that cases should not be decided summarily “where the full appreciation of the

evidence and issues that is required to make dispositive findings can only be achieved by way of

a trial” and that a case that calls for “multiple findings of fact on the basis of conflicting evidence

emanating from a number of witnesses and found in a voluminous record” will not generally be

appropriate for summary judgment.

[389]

The Court of Appeal found, at para. 148, that the actions had all the hallmarks of the

kind of case in which, generally speaking, the full appreciation of the evidence and issues could

only be achieved at trial. These hallmarks included:

• a voluminous motion record;

• numerous witnesses, affidavits and extensive cross-

examinations;

Page: 90

• different theories of liability against each of the defendants;

• the need to make numerous findings of fact;

• conflicting evidence of the main witnesses and the need for

credibility determinations; and

• the absence of reliable documentary yardsticks to assess the

credibility of the witnesses.

[390]

The Court of Appeal noted that the motion for summary judgment in that case had not

provided access to justice, proportionality and costs savings – on the contrary, it had taken

considerable time and generated enormous costs. Any efficiency achieved by the motion, insofar

as Hryniak’s liability was concerned, was attenuated by the decision that a trial was required to

determine the liability of the lawyer.

[391]

In spite of the Court of Appeal’s conclusion that the case was not appropriate for

summary judgment, and as a unique exception to the principles it had stated, it decided that it

would be appropriate to determine whether the motion judge was correct in granting partial

summary judgment. It concluded that the motion judge was correct, in one of the two actions,

because Hryniak’s defence had no credibility. In the other action, it concluded that the decision

could not stand, because the motion judge had failed to address one of the elements of civil fraud

and because it was not clear from the evidence whether Hryniak had obtained the benefit of the

plaintiff’s funds.

[392]

The second case determined by the Court of Appeal, to which I will refer, was 394

Lakeshore Oakville Holdings Inc. v. Misek (C53035), on appeal from [2010] O.J. No. 4659, 2010

ONSC 6007 (S.C.J.). The action involved a claim for a prescriptive easement over the property

of the respondent. The motion judge, after reviewing the evidence, had concluded that the

appellants simply had a personal licence to pass over the respondent’s lands and not an easement

that ran with the lands.

[393]

In dismissing the appeal, the Court of Appeal described the case as a good example of

the kind of case that would be appropriate for summary judgment based on the application of the

“full appreciation” test:

• the documentary evidence was limited and not contentious;

• there were a limited number of relevant witnesses; and

• the governing legal principles were not in dispute.

[394]

This case bears some of the hallmarks identified by the Court of Appeal in Combined

Air of one in which a full appreciation of the evidence and issues can only be achieved at trial.

The record before me is massive and fills 15 banker’s boxes. It includes:

Page: 91

• multiple motion records in both the certification and summary

judgment motions, including multi-volume records and

supplementary records – there are at least 40 volumes;

• affidavit evidence of some 26 witnesses, including reports of six

experts;

• Rule 30.03 evidence of two witnesses;

• transcripts of cross-examinations of 18 witnesses;

• various compendia of evidence filed by the parties for the

purpose of the hearing; and

• multiple factums and books of authorities.

[395]

The hearing itself lasted eleven days in total. Having examined the mountain of

evidence and material in the confines of my chambers, the words of the Court of Appeal

concerning the importance of the trial narrative in informing the judge’s full appreciation of the

evidence, begin to resonate. The Court of Appeal noted this at para. 47 of its reasons:

… the trial judge is a trier of fact who participates in the dynamic

of a trial, sees witnesses testify, follows the trial narrative, asks

questions when in doubt as to the substance of the evidence,

monitors the cut and thrust of the adversaries, and hears the

evidence in the words of the witnesses. As expressed by the

majority in Housen, at para. 25, the trial judge is in a “privileged

position”. The trial judge’s role as a participant in the unfolding of

the evidence at trial provides a greater assurance of fairness in the

process for resolving the dispute. The nature of the process is such

that it is unlikely that the judge will overlook evidence as it is

adduced into the record in his or her presence.

[396]

These observations having been made, a massive evidentiary record does not preclude

the moving party on summary judgment from making a focused attack on key elements of the

claim or defence of the other party to show that it simply cannot succeed. As the Court of

Appeal noted, there may be claims that do not require extensive resort to evidence or fact-finding

in order to make dispositive findings of fact or law. It may be appropriate, in such cases, to

“weed out” claims that have no chance of success.

[397]

In Combined Air, the Court of Appeal at para. 42 referred to the decision of the

Supreme Court in Canada (A.G.) v. Lameman, 2008 SCC 14, [2008] 1 S.C.R. 372 at para. 10:

The summary judgment rule serves an important purpose in the

civil litigation system. It prevents claims or defences that have no

Page: 92

chance of success from proceeding to trial. Trying unmeritorious

claims imposes a heavy price in terms of time and cost on the

parties to the litigation and on the justice system. It is essential to

the proper operation of the justice system and beneficial to the

parties that claims that have no chance of success be weeded out at

an early stage. Conversely, it is essential to justice that claims

disclosing real issues that may be successful proceed to trial.

[398]

In that case, a proposed representative action, the Supreme Court of Canada restored

the decision of the motions judge, who had dismissed most of the plaintiffs’ claims based on

their lack of standing and limitations period issues. The Supreme Court of Canada acknowledged

that there was one remaining claim – a claim for an accounting – that might properly continue,

should an appropriate plaintiff be found, because it was not barred by the limitation period.

[399]

This is the approach the defendants take here. They focus on specific aspects of each

cause of action advanced by the plaintiffs. They say that those aspects are deficient, and so, the

cause of action is not made out. Tim Hortons says that, by and large, the issues are matters of

contract interpretation and statutory interpretation and that it is not necessary to engage in

extensive fact-finding for the purpose of making dispositive findings on those issues.

[400]

I now turn to an examination of each cause of action advanced by the plaintiffs and will

examine the evidence, submissions and authorities applicable to each. I will consider whether

they have no chance of success or can be fairly and justly resolved by exercising the powers in

Rule 20.04(2.1). In so doing, to the extent the resolution of the issues requires the weighing of

evidence, evaluation of credibility, or drawing reasonable inferences from the facts, I am

required to apply the full appreciation test.

B.

The Breach of Contract Claim

1.

Introduction and Overview

[401]

The plaintiffs’ breach of contract claim can be summarized as follows: Tim Hortons

breached the express or implied terms of the franchise agreement, by requiring franchisees to

purchase Always Fresh ingredients and Lunch Menu ingredients, either at prices that were

greater than the market price or at commercially unreasonable prices.

[402]

To elaborate, the plaintiffs say that Tim Hortons:

(a) breached sections 7.03(a), 3.00(f) and 3.00(i) of the franchise

agreement by requiring franchisees to undertake the Always Fresh

Conversion;

Page: 93

(b) breached an express or implied term of the franchise agreement

by failing to supply Always Fresh baked goods at either (i) lower

prices than market price; or (ii) at commercially reasonable prices;

(c) breached the franchise agreement by requiring franchisees to

purchase Always Fresh baked goods, after the conversion, at prices

that were not offset by savings in labour, waste or operating

expenses;

(d) breached section 7.03(a) by requiring franchisees to purchase

ingredients for Lunch Menu items at prices that were unreasonably

high or by setting the maximum price for such items at prices that

were commercially unreasonable;

(e) breached s. 3.00(f), by failing to “maintain a continuing

advisory relationship with the Licensee, including consultation in

the areas of marketing, merchandising and general business

operations”; and

(f) breached s. 3.00 (i), which requires the franchisor to “develop

new products compatible with the Tim Hortons System.”

[403]

For the purposes of context, I will repeat s. 7.03(a), which is entitled “Changes in

Confidential Operating Manual”:

In order that the Licensee may benefit from new knowledge gained

by the Licensor as to improved methods, procedures and

techniques in the preparation, merchandising and sale of donuts

and other food items, and in the operation of the Tim Hortons

Shop, the Licensor may from time to time revise the contents of

the Confidential Operating Manual and such other manuals and

materials, if any, as it may develop and the Licensee covenants to

forthwith comply with all changes to the contents of the

Confidential Operating Manual and such other manuals and

materials, if any, as the Licensor may develop, made by the

Licensor from time to time during the term of this License

Agreement provided that such changes shall not unreasonably alter

the Licensee's rights or obligations under this Agreement.

[404]

The plaintiffs acknowledge that Tim Hortons was entitled to introduce changes to the

Confidential Operating Manual to require franchisees to change the method of production from

the scratch baking method to the Always Fresh method. They submit, however, that s. 7.03(a) of

the franchise agreement requires that any change in methods, procedures and techniques in the

Page: 94

production of baked goods must be both a “benefit” and an “improvement” and that “benefit”

means a financial benefit to the franchisee. They say that:

(a) this section trumps the recital in the franchise agreement,

which speaks of the products, procedures and equipment of the

franchisor being “improved, further developed or otherwise

modified from time to time”;

(b) the contra proferentem rule applies to the interpretation of s.

7.03(a), which must be construed in the manner most favourable to

franchisees;

(c) s. 15 of the franchise agreement expressly provides that

franchisees are independent contractors, which means that they are

“entitled to conduct their operations as efficiently as possible to

maximize their return on investment”; and

(d) good commercial sense dictates that franchisees should not be

subjected to any change the franchisor chooses to make, regardless

of its effect on them.

[405]

The plaintiffs also rely on the concluding language of s. 7.03(a) in some versions of the

franchise agreement, which qualifies the franchisor’s ability to make changes: “… provided that

such changes shall not unreasonably alter the Licensee’s rights or obligations under this

Agreement.”

[406]

The plaintiffs submit that “benefit” or “improvement” must have a financial component

and not only have the defendants failed to show that the Always Fresh Conversion was a

financial benefit to franchisees, there is evidence of financial harm to franchisees.

[407]

The plaintiffs say that Tim Hortons also breached an implied term of the franchise

agreements that the ingredients and commodities they were required to purchase would be sold

to franchisees at lower prices than they could obtain for the same products in the marketplace.

They dispute that section 5.04 (above, acknowledging that the franchisor is entitled to make a

profit or obtain a rebate on the sale of goods to franchisees) or sections 16.02 (the “entire

agreement” term) and 16.13 (the disclaimer of any implied warranty or representation) have any

application.

[408]

The plaintiffs say that this implied term is necessary, reasonable and consistent with

custom and usage. It is necessary, they say, because they are captive purchasers of the franchisor

and depend upon lower ingredient prices in order to make a profit. It is reasonable, they say,

because their expert, Mr. Fisher, opines that prices obtained by a franchisor are “generally

lower” than the prices that any individual franchisee could obtain on its own. It is consistent with

custom and usage, they say, because Tim Hortons has admitted that it has historically used its

buying power to negotiate the most competitive prices from suppliers.

Page: 95

[409]

Turning to the Lunch Menu, the plaintiffs acknowledge that the Lunch Menu has been

part of the Tim Hortons System for some time and that Tim Hortons is entitled to make changes

in the Lunch Menu. They say, however, that Tim Hortons has breached s. 7.03(a) and ss. 3.00(f)

and (i) of the franchise agreement, because, through its control of the Lunch Menu, Tim Hortons

is causing franchisees economic loss by increasing its profits at their expense.

[410]

Tim Hortons’ submission on the breach of contract issue can be summed up as follows:

(a) the Always Fresh Conversion was permitted by the franchise

agreement, which allowed Tim Hortons to make changes to the

Tim Horton System and to the Confidential Operating Manual;

(b) there is no requirement that such changes are limited to ones

that are financially beneficial to franchisees;

(c) even if the Always Fresh Conversion and the Lunch Menu

resulted in lower profits to franchisees (which the defendants do

not admit), the franchise agreement does not guarantee the

plaintiffs a right to make a profit or a particular rate of return; and

(d) there is no basis for the implication of a term that prices of any

particular ingredients would be either lower than could be obtained

in the market or commercially reasonable.

[411]

The defendants submit that the issue is essentially one of contract interpretation and,

even assuming the truth of the plaintiffs’ version of the key facts necessary to resolve the issue,

there is no genuine issue requiring a trial.

[412]

Before examining the contract provisions and the evidence and arguments submitted by

the parties, I will set out some general principles of contractual interpretation.

2.

Principles of Interpretation

[413]

Both parties accept the principles of contract interpretation expressed in Ventas, Inc. v.

Sunrise Senior Living Real Estate Investment Trust, 2007 ONCA 205, [2007] O.J. No. 1083

(C.A.), in which the Court of Appeal, at para. 24, confirmed that a commercial contract is to be

interpreted:

(a) as a whole, in a manner that gives meaning to all of its terms

and avoids an interpretation that would render one or more of its

terms ineffective;

(b) by determining the intention of the parties in accordance with

the language they have used in the written document and based

Page: 96

upon the "cardinal presumption" that they have intended what

they have said;

(c) with regard to objective evidence of the factual matrix

underlying the negotiation of the contract, but without reference

to the subjective intention of the parties; and

(d) in a fashion that accords with sound commercial principles

and good business sense, and that avoids a commercial absurdity.

[414]

While the contract in that case was not a franchise agreement, these principles are

generally applicable to such agreements: see Landsbridge Auto Corp. v. Midas Canada Inc.

(“Landsbridge”), above.

[415]

That being said, I note and accept the observations made by Cullity J. at para. 14 of

Landsbridge, that franchise agreements are contracts of adhesion, invariably drafted by the

franchisor. Where there is ambiguity, they should be interpreted contra proferentem.

Exclusionary clauses should be subjected to particular scrutiny: see Shelanu Inc. v. Print Three

Franchising Corporation (2003), 64 O.R. (3d) 533, [2003] O.J. No. 1919 (C.A.) at para. 58.

[416]

I also accept the principle that the starting point in the interpretation of any contract is

to determine the intention of the parties, with reference to the words they have chosen. Those

words should be given their plain meaning and should be considered in the context of the

contract as a whole and in a manner that accords with sound commercial principles and good

business sense: see Drosophilinks Consulting Inc. v. Canadian National Railway Co., [2010]

O.J. No. 2654 (S.C.J.) at para. 15. As part of the interpretive process, the court should have

regard to the commercial context in which the agreement was made and the circumstances that

existed at the time: Dumbrell v. The Regional Group of Companies Inc., et al. (2007), 85 O.R.

(3d) 616, [2007] O.J. No. 298 at paras. 53 - 57; Laurel Oak Marketing Ltd. v. Royal Canadian

Golf Assn., 2010 ONCA 62, [2010] O.J. No. 286 (C.A.).

[417]

3.

I turn now to the express terms of the contracts.

Express Terms

[418]

As noted earlier, the plaintiffs contend that the Always Fresh Conversion was a breach

of the express terms of the franchise agreement. They argue that Tim Hortons also breached the

franchise agreement by failing to sell par baked donuts, timbits, muffins and cookies at either

commercially reasonable prices or at prices that were lower than the market price. The

alternative complaint is that these items were not sold at prices that were offset by savings in

labour, waste or operating costs. A similar complaint is made regarding the Lunch Menu: the

ingredients for Lunch Menu items were sold at a price that was too high or, alternatively, the

price at which Lunch Menu items were sold in the stores was not high enough to offset the

excessive ingredient costs.

Page: 97

[419]

Taken to its logical conclusion, the plaintiffs’ submission is that every ingredient

supplied by Tim Hortons, or by a distributor from whom franchisees were required to purchase,

must be supplied at a commercially reasonable price or at a price that is lower than the market

price. The plaintiffs appear to acknowledge that the price at which “loss leaders” might be sold

need not be commercially reasonable when taken in isolation, but, subject to this exception, their

argument must apply to every input they purchase.

Section 7.03

[420]

The plaintiffs contend that the plain meaning of the introductory words of section

7.03(a) of the franchise agreement, namely,

In order that the Licensee may benefit from new knowledge

gained by the Licensor as to improved methods, procedures and

techniques, in the preparation, merchandising and sale of donuts

and other food items, and in the operation of the Tim Hortons

Shop …[emphasis added] the Licensor may from time to time

revise the contents of the Confidential Operating Manual …,

limits Tim Hortons to making changes in its methods, procedures and techniques that are an

“improvement” and a “benefit” to franchisees. In some respects, the plaintiffs have gone farther

in their submissions, to assert that any such benefit must be a financial benefit, because the

plaintiffs’ real complaint is not that Always Fresh baked goods or the Lunch Menu were not

“improvements”, but rather than they were unprofitable.

Page: 98

Sections 3.00(f) and (i)

[421]

The plaintiffs also allege that Tim Hortons breached:

• s. 3.00(f) of the Franchise Agreement, which requires the

Franchisor, during the term of the franchise agreement, to

provide certain services to the franchisee, including “to maintain

a continuing advisory relationship with the Licensee, including

consultation in the areas of marketing, merchandising and

general business operations”; and

•s. 3.00(i), which requires that the franchisor to “use reasonable

efforts to develop new products compatible with the “Tim

Hortons System”.

[422]

I pause here to ask whether the resolution of the contractual interpretation issues

requires the weighing of evidence, evaluation of credibility or the drawing of inferences and, if

so, whether a full appreciation of the evidence and issues can only be achieved by a trial. In my

view, the resolution of the issue does not require this kind of fact-finding or the exercise of the

court’s powers under Rule 20.04(2.1). The plaintiffs’ arguments turn almost entirely on the

interpretation of the franchise agreements and the evidence concerning the factual matrix

underlying the contracts – the contractual history between the parties – is not contentious and is

primarily documentary.

[423]

The plaintiffs’ interpretation of s. 7.03(a) of the Franchise Agreement is, in my view,

plainly wrong and has no possibility of success at trial. The words “[I]n order that the Licensee

may benefit from new knowledge gained by the Licensor as to improved methods, procedures

and techniques …” are not a positive covenant or promise – they are simply introductory or

explanatory. They are not reasonably capable of bearing the interpretation that the Tim Hortons

System or the Confidential Operating Manual cannot be changed unless the change is an

improvement that benefits the franchisee.

[424]

Even if the plaintiffs’ distorted interpretation was accepted, there is nothing in the

contractual language, and no logical reason, to interpret a “benefit” derived from the “improved”

method, procedure or technique, as having a financial component. The change might be to

address safety issues, to simplify production, or to ensure franchise-wide consistency of

products. It might be for any number of reasons that could be considered an “improvement”

without necessarily resulting in a financial benefit to the franchisee.

[425]

In my view, it would be unreasonable to interpret section 7.03 as meaning that every

new method or new product introduced into the Tim Hortons System and the Confidential

Operating Manual must be profitable in its own right. The franchisor is entitled to consider the

profitability and prosperity of the system as a whole.

Page: 99

[426]

In executing the franchise agreement and becoming a Tim Hortons franchisee, the

franchisee obtains the benefit of, and agrees to be bound by, the Tim Horton System. The

expression “Tim Horton System” is used some twenty-five times in the course of the franchise

agreement. As I have observed, it is defined in the first recital of the agreement as including a

body of knowledge, trademarks, procedures and products, “all of which may be improved,

further developed or otherwise modified from time to time”. As part of that agreement, the

franchisee agrees to follow the procedures specified by that system and to sell the products that

are part of the system. These obligations are spelled out in, among others, section 5.06 under the

heading “Operation of Tim Horton Shop”, above.

[427]

It is quite obvious that new franchisees are brought into the system on a continuing

basis. The franchise agreements are typically for ten year terms and they expire at different

times. Some franchise agreements are renewed and some are not. Franchisees come and go. In

order to keep the system healthy and competitive, the franchisor must be permitted to introduce

new products, new methods of production or sale, and new techniques or systems during the life

of a franchise agreement. The franchisees have an expectation that this will be done. The

franchise agreement contemplates this and allows this. It is done for the benefit of both the

franchisor and the franchisee. It would not be commercially reasonable to require that the

franchisor can only implement system-wide changes over the life of a particular franchise

agreement if the proposed change is demonstrated to be an improvement that benefits that

particular franchisee. Nor would it be commercially reasonable to require the franchisor to

demonstrate that every such change will be a financial benefit for every franchisee.

[428]

The evidence is uncontroverted that the Always Fresh Conversion was beneficial to

franchisees in a general sense, because it outsourced a process that was time-consuming,

aggravating and wasteful. As time has passed, rising labour and ingredient costs have revealed

the wisdom of this decision. There can be no doubt, as the plaintiffs’ own witness Mr. Gilson

acknowledged, that a return to scratch baking would be an entirely retrograde step. The

plaintiffs’ real issue with the Always Fresh Conversion is not that it was not an improvement for

franchisees, but that the product was priced too high.

[429]

The Lunch Menu was not a change in the Tim Hortons System or in the Confidential

Operating Manual. Lunch items, sandwiches, chili and soup, had been part of the Tim Hortons

menu since the early years. Again, even if there was a need to demonstrate that Lunch Menu

items must be shown to be a “benefit” to franchisees, there is no question on the evidence that

the Lunch Menu is beneficial because it brings customers in the stores in off-peak hours,

contributes to the cross-selling of more profitable items and creates customer loyalty and

goodwill in the face of aggressive competition for business in the fast food industry. It makes

sense that people who are hungry at any time of the day or night will only come to the Tim

Hortons shop if they can be assured of buying a reasonably-priced, nutritious and tasty meal. If

they buy that meal, they are likely to purchase other items, such as beverages (coffee, tea, soft

drinks) with high margins attached to them. If they like the meal, they are more likely to return in

the morning to buy a coffee and donut. If they cannot find the meal, or if it is too expensive, or it

Page: 100

doesn’t taste good, they will go somewhere else, like McDonald’s or Mr. Sub. If they find the

coffee in those stores is just as good, they may be lost forever as customers of Tim Hortons.

[430]

Each party has referred to the recitals of the agreement as support for its position. As a

general rule, the recitals in a contract are not legally binding promises. They help to introduce the

contract, to put it in context, and to explain the spirit of the agreement and the motivations of the

parties: Canadian Faces Inc. v. Cosmetic Manufacturing Inc., 2011 ONSC 6171, [2011] O.J. No.

4766 (S.C.J.); Sherbrooke Community Centre v. Service Employees International Union, 2002

SKQB 101. Reference may be made to the recitals where the operative parts of the agreement are

ambiguous: Elliott Estate (Re.), [1962] O.J. 164 (C.A.).

[431]

I accept that where the language of a contract is clear and unambiguous, it is not proper

to refer to the recitals to alter the plain meaning of the contract: Elliott Estate (Re), above, at

para. 11; 1124980 Ontario Inc. v. Liberty Mutual Insurance Co., [2003] O.J. No. 1468 at para.

71 (S.C.J.); Lanston Monotype Machine Co. v. Northern Publishing Co. (1992), 63 S.C.R. 482. I

also agree that in the event of an inconsistency between a recital and an operative provision in a

contract, the operative provision prevails: On-Line Finance & Leasing Corp. v. Canada, [2010]

T.C.J. No. 380 at paras. 50-51 (T.C.C.).

[432]

In this case, it is not necessary to refer to the recitals, except insofar as they define the

“Tim Horton System”, which, as discussed above, is stated to be a collection of products,

trademarks and systems, developed by the franchisor, all of which “may be improved, further

developed or otherwise modified from time to time”. It seems to me that this definition simply

reflects the expectations of both parties to a typical franchise agreement that the franchisor’s

system will continue to evolve and improve for the benefit of both parties.

[433]

I do not accept the plaintiffs’ submission that allowing the franchisor to make changes

to the Tim Horton System that are not to the franchisee’s financial benefit is inconsistent with

section 15 of the Licence Agreement, which provides that the franchisee is an “independent

contractor”. The plaintiffs argue that this provision means that they are entitled to conduct their

operations as efficiently as possible and to maximize their returns. In my view, the provision is a

standard piece of contractual boilerplate, inserted for the purpose of negating any suggestion that

one party is the partner, agent or employee of the other and it is not reasonably capable of the

interpretation advanced by the plaintiffs. That interpretation ignores the other benefits flowing to

the franchisee as a result of the agreement.

[434]

As I have noted, the following words appear at the conclusion of some, but not all,

versions of s. 7.03:

... provided that such changes shall not unreasonably alter the

Licensee’s right or obligations under this Agreement.

[435]

These words are intended to refer to the franchisee’s legal rights and obligations under

the franchise agreement. They confirm that changes to the operating manual are not permitted to

amend the franchise agreement by taking away the franchisee’s legal rights or imposing new

Page: 101

legal obligations. Neither the Always Fresh Conversion nor the Lunch Menu imposed such

changes. These words cannot reasonably be construed as limiting changes in the operating

manual to changes that result in a financial benefit to franchisees.

[436]

The plaintiffs make the submission, in their factum and oral argument, that they have

adduced evidence to show that the Always Fresh Conversion resulted in financial harm to

franchisees due to reduced margins and the failure to achieve the savings that Tim Hortons

promised would result. They also submit that the defendants have failed to adduce any evidence

that there has been a financial benefit to the franchisees. I have rejected the submission that Tim

Hortons is required to demonstrate a financial benefit for every change in its method or

procedures or that every such change must be for the franchisees’ financial benefit. On the

evidence, the change to “Always Fresh” was a rational business decision on the part of the

franchisor that addressed legitimate problems experienced by franchisees with scratch baking

and legitimate concerns by Tim Hortons concerning the long-term viability of the scratch baking

method. The result was an improved method of producing donuts. The fact that the donuts may

have cost more, and that this adversely affected the franchisees’ bottom line, even if proven, was

not a breach of any express contractual term.

[437]

In sum, the evidence establishes that the Always Fresh Conversion and the Lunch

Menu were reasonable commercial decisions that Tim Hortons was entitled to make, having

regard to its own interests and to the interest of its franchisees. There is no evidence that these

decisions were motivated by improper or extraneous considerations. The plaintiffs and their

experts do not really disagree with the decisions themselves; they take issue with the price at

which products were supplied to franchisees.

[438]

Nor is there any evidence that the price of Always Fresh baked goods and Lunch Menu

ingredients have been set at a level that prevents the plaintiffs and other franchisees from making

a reasonable overall profit or rate of return on their investment. Unlike Quizno’s, where the

plaintiffs’ complaints related to mark-ups on every single item supplied by the franchisor and

where there were allegations that a substantial number of franchisees were operating in the red,

the complaints in this case relate to a relatively small proportion of the franchisees’ inputs. The

evidence establishes that, in general, the plaintiffs and Tim Hortons franchisees make a

reasonable return on their investments. This is driven to a considerable extent by coffee and other

beverage sales, where the margins are very substantial.

[439]

In light of my conclusion that there has been no breach of s. 7.03(a), it is not necessary

to consider Tim Hortons’ arguments to the effect that the interpretation put forward by the

plaintiffs is inconsistent with other express provisions of the franchise agreement, namely s.

5.04(a) (acknowledging that the franchisor may make a profit, commission or rebate on the sale

of goods to franchisees) and s. 16.13(d) (no implied warranties or representations) and

inconsistent with the disclosure documentation executed by the plaintiffs, in which they

acknowledged that the cost of goods and services acquired under the franchise agreement may

not correspond to the lowest cost of the goods and services available in the marketplace. That

documentation makes it quite clear, however, as the plaintiffs themselves acknowledged on

Page: 102

cross-examination, that there was no provision in their franchise agreements that guaranteed

them a particular return or profit, either on individual products they sold or on any particular

product line in the store. To that, I would add that there was no express term of the franchise

agreement that required the franchisor to supply ingredients or other inputs at prices that were

lower than what they could obtain on the market or that were “commercially reasonable”.

[440]

The obligations to consult with franchisees and to develop new products, described

respectively by s. 3.00(f) and s. 3.00(i) of the franchise agreement are general obligations. There

is absolutely no question that, on a general level, Tim Hortons maintained a continuing advisory

relationship with the plaintiffs and with all franchisees and consulted with them in marketing,

merchandising and general business operations. The record is replete with evidence that Tim

Hortons fulfilled these obligations, in conferences and regional meetings, at the Advisory Board

and in one-on-one discussions with franchisees, including the plaintiffs and Mr. Garland. Tim

Hortons may not have agreed with everything the plaintiffs or Mr. Garland said, or complained

about, but it was not required to agree. It was required to advise and consult, and it did so. The

failure to price donuts and Lunch Menu items at the prices suggested by Mr. Garland or by the

plaintiffs cannot reasonably be regarded as a breach of s. 3.00(f). Nor is there any evidence that

Tim Hortons failed to consider the impact of the Always Fresh Conversion on franchisees. The

unchallenged evidence of Mr. Madden, as well as the evidence of Mr. Clanachan, makes it clear

that this was a matter of concern to Tim Hortons and that it was addressed in the pricing of the

par baked donut.

[441]

The evidence of the plaintiffs, set out earlier, concerning what was or was not said by

Tim Hortons about the cost of the Always Fresh donut does not amount to a breach of the duty of

consultation. As I noted earlier, neither of the plaintiffs was the direct recipient of any

representation by Tim Hortons and the evidence does not establish that any general

representation was made to franchisees.

[442]

The record is also replete with evidence that Tim Hortons fulfilled its obligation under

s. 3.00(i) to use reasonable efforts to develop new products compatible with the Tim Hortons

System. This was a matter of constant concern to Tim Hortons' marketing department and was a

regular topic of discussion at the Advisory Board. The Always Fresh donut was a manifestation

of the fulfillment of this obligation, as was the creation of new Lunch Menu items from time to

time. There is no basis for the assertion that new products, whether par baked donuts or specific

Lunch Menu items, had to be capable of being sold at a profit or that the failure to permit a

franchisee to do so was a breach of contract.

[443]

I turn now to the question of whether Tim Hortons breached an implied term of the

franchise agreements in connection with the Always Fresh Conversion and the Lunch Menu.

4.

Implied Terms

[444]

As noted earlier, the plaintiffs allege that Tim Hortons breached an implied term of

their franchise agreements. They say that a term should be implied in the agreement that:

Page: 103

... the ingredients and commodities the Plaintiffs and Class A

Members were required to purchase from the TDL Distribution

System would be sold to franchisees at lower prices than they

could obtain for the same products in the marketplace ...

[445]

At various times, the plaintiffs have described this as an implied term that the prices for

such ingredients and commodities would be “commercially reasonable”.

[446]

As with the analysis of the allegations with respect to express contractual terms, I will

begin with an outline of the legal principles applicable to the issue, followed by a discussion of

the submissions of the parties, the determination of whether it is appropriate to grant summary

judgment, and my conclusions.

(a) Principles Applicable to Implied Terms

[447]

Once again, the parties agree on the principles applicable to the implication of terms in

a contract. I will summarize those principles, borrowing liberally from statements and authorities

referred to in the defendants’ factum, the content of which is accepted by the plaintiffs.

[448]

Terms may be implied in a contract:

(a) based on custom or usage;

(b) as the legal incidents of a particular class or kind of contract; or

(c) based on the presumed intention of the parties:

• where the implied term is necessary to give “business efficacy” to the

contract; or

• where the implied term otherwise meets the “officious bystander” test -

that is, a term that the parties would say, if questioned, “of course” that

would be understood to be a term of the contract.

See: M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd., [1999], 1 S.C.R. 619, [1999]

S.C.J. No. 17 at para. 27; Canadian Pacific Hotels Ltd. v. Bank of Montreal, [1987] 1 S.C.R. 711

at 774; The “Moorcock” (1889), 14 P.D. 64.

[449]

This does not mean that the court is entitled to use the implication of a term to

reconstruct the parties’ contract based on its opinion of what would be equitable or of what the

parties ought to have intended. The implication of the term must be used to give effect to the

intention of the parties: Brixham Investments Ltd. v. Hansink (1971), 2 O.R. 589, [1971] O.J. No.

1556 (C.A.) at paras. 10-12, referring to Luxor (Eastbourne), Ltd. et al. v. Cooper, [1941] A.C.

108, per Lord Wright at 137.

Page: 104

[450]

The parties agree that this case does not fall within the second category of implied

terms – i.e., the legal incidents of a particular class or kind of contract. The real question is

whether a term can be implied under category (i) custom or usage, or category (iii) the “business

efficacy” or “officious bystander” test.

[451]

The “custom or usage” category applies to a term that is implied in contracts in a

particular trade or business. These are terms that everyone doing business in the particular trade

or business can reasonably be assumed to know. Such a term, even though not expressed in

writing, will apply because it is so notorious and so generally followed that it can be presumed to

be part of the contract. The concept was expressed by the Supreme Court of Canada in Georgia

Construction Co. v. Pacific Great Eastern Railway Company, [1929] S.C.R. 630 at 634 as

follows:

In substance, the question for the learned trial judge was whether

there was evidence to satisfy him judicially that the alleged usage

is, to quote the language of Banks L.J., in Laurie & Morewood v.

Dudlin & Sons (1926), 95 L.J.K.B. 191, at p. 193, “so all-

pervading, and so reasonable and so well known that everybody

doing business” in railway construction “must be assumed to

know” it, and to contract subject to it.

[452]

The concept is further described in C.P. Hotels Ltd. v. Bank of Montreal, [1987] 1

S.C.R. 711 at 774:

There is no doubt that the implication of terms in a contract on the

basis of custom or usage is a well recognized category of

implication that has been particularly important with respect to

commercial contracts. It was noted in Hutton v. Warren (1836), 1

M. & W. 446, 150 E.R. 517, where Parke B. said at p. 475 M. &

W. and at p. 521 E.R: "It has long been settled, that, in commercial

transactions, extrinsic evidence of custom and usage is admissible

to annex incidents to written contracts, in matters with respect to

which they are silent. The same rule has also been applied to

contracts in other transactions of life, in which known usages have

been established and prevailed; and this has been done upon the

principle of presumption that, in such transactions, the parties did

not mean to express in writing the whole of the contract by which

they intended to be bound, but a contract with reference to those

known usages." Implication on the basis of custom or usage was

referred to by Lord Wilberforce in Liverpool City Council, where

in his discussion of the various kinds of implication, he said at p.

253: "Where there is, on the face of it, a complete, bilateral

contract, the courts are sometimes willing to add terms to it, as

implied terms: this is very common in mercantile contracts where

Page: 105

there is an established usage: in that case the courts are spelling out

what both parties know and would, if asked, unhesitatingly agree

to be part of the bargain." As the statements of Parke B. and Lord

Wilberforce indicate, however, implication on the basis of custom

or usage is implication on the basis of presumed intention. (Of

course custom is being used here as more or less synonymous with

usage and not in the sense of custom that has become a rule of law.

Cf. The "Freiya" v. The "R.S.", [1922] 1 W.W.R. 409, for a

discussion of the distinction between custom and usage.)

[453]

Terms based on custom or usage can be implied where the usage is notorious, certain

and reasonable, such that the parties would have understood that the custom was applicable to

their contract – see Machtinger v. HOJ Industries Ltd., above; Knoch Estate v. Jon Picken Ltd.

(1991), 40 O.R. (3d) 385, [1991] O.J. No. 1394 (C.A.).

[454]

A person will not be taken to have acquiesced in a custom or usage that is

unreasonable: Charles P. Rowen & Associates Inc. v. Ciba-Geigy Canada Inc., [1994] O.J. No.

1233 (C.A.), leave to appeal refused [1994] S.C.C.A. No. 400, referring to The “Freiya” v. The

“R.S.”, [1922] 65 D.L.R. 218 (Ex. Ct.) at paras. 20 and 25.

[455]

An implied term in the third category, the business efficacy or officious bystander

category is, like the term based on custom and usage, based on the presumed intention of the

actual parties. The court does not substitute its views or discretion for what the parties should

have intended.

[456]

In a recent decision in Wright v. United Parcel Service Canada Ltd., 2011 ONSC 5044,

[2011] O.J. No. 3936, Horkins J. referred to the following explanation of the business

efficacy/officious bystander test given by Professor Fridman in The Law of Contract in Canada,

4th ed. (Toronto: Carswell, 1999) at p. 502:

The theory behind this doctrine is that had the "officious

bystander" drawn the attention of the parties to the matter in issue,

they would have agreed that the contract should provide for its

resolution in the manner which is subsequently suggested in later

litigation, as the implied term

And at p. 503:

In determining the intention of the parties, attention must be paid

to the express terms of the contract in order to see whether the

suggested implication is necessary and fits in with what has clearly

been agreed upon, and the precise nature of what, if anything,

should be implied.

Page: 106

[457]

Horkins J. also referred to the following passage in the judgment of Scrutton L.J. in

Reigate v. Union Manufacturing Co. (Ramsbottom) Ltd. et al., [1918] 1 K.B. 592 at 605 (C.A.):

The first thing is to see what the parties have expressed in the

contract; and then an implied term is not to be added because the

Court thinks it would have been reasonable to have inserted it in

the contract. A term can only be implied if it is necessary in the

business sense to give efficacy to the contract; that is, if it is such a

term that it can confidently be said that if at the time the contract

was being negotiated someone had said to the parties, "What will

happen in such a case", they would both have replied, "Of course,

so and so will happen; we did not trouble to say that, it is too

clear." Unless the Court comes to some such conclusion as that, it

ought not to imply a term which the parties themselves have not

expressed.

[458]

In that case, Horkins J. declined to imply a term because she found that the proposed

term was inconsistent with an express term, was not necessary for business efficacy and did not

meet the “officious bystander” test.

[459]

The court is required to determine what the actual parties intended and to give effect to

that intention through the implication of a term, where appropriate: see Venture Capital USA Inc.

v. Yorkton Securities Inc. (2005), 75 O.R. (3d) 325 [2005] O.J. No. 1885 (C.A.) at para. 31:

In M.J.B Enterprises Ltd. v. Defence Construction (1951) Ltd.,

[1999] 1 S.C.R. 619 at para. 27, Iacobucci J. made clear that a

contractual term may be implied "based on the presumed intention

of the parties where the implied term must be necessary 'to give

business efficacy to a contract or as otherwise meeting the

"officious bystander" test as a term which the parties would say, if

questioned, that they had obviously assumed'" (citing Canadian

Pacific Hotels Ltd. v. Bank of Montreal, [1987] 1 S.C.R. 711 at

775, LeDain J.); see also Martel Building Ltd. v. Canada, [2000] 2

S.C.R. 860 at para. 81; Marinangeli v. Marinangeli (2003), 66

O.R. (3d) 40 at para. 55 (C.A.). When implying a term, however,

courts must be careful to do so based on actual evidence and not

mere judicial discretion. As Iacobucci J. stated in M.J.B.

Enterprises at para. 29:

What is important in both formulations is a focus on the

intentions of the actual parties. A court, when dealing with

terms implied in fact, must be careful not to slide into

determining the intentions of reasonable parties. This is

why the implication of the term must have a certain degree

Page: 107

of obviousness to it, and why, if there is evidence of a

contrary intention, on the part of either party, an implied

term may not be found on this basis. [Original emphasis.]

[460]

As the foregoing extract points out, a term will not be implied where there is evidence

of a contrary intention on the part of either party.

[461]

Nor will a term be implied where it conflicts with an express term of the contract. It is

well-settled that there is no room for the implication of a term “where the parties have made an

express contract covering the very facts in litigation”: Peter Kiewit Sons’ Co. v. Eikins

Construction Ltd., [1960] S.C.R. 361 at 369. As the Court of Appeal stated in G. Ford Homes

Ltd. v. Draft Masonry (York) Co. Ltd., [1983] O.J. No. 3181 (C.A.) at para. 9:

When may a term be implied in a contract? A court faced with that

question must first take cognizance of some important and time-

honoured cautions. For example, the courts will be cautious in their

approach to implying terms to contracts. Certainly a court will not

rewrite a contract for the parties. As well, no term will be implied

that is inconsistent with the contract. Implied terms are as a rule

based upon the presumed intention of the parties and should be

founded upon reason. The circumstances and background of the

contract, together with its precise terms, should all be carefully

regarded before a term is implied. As a result, it is clear that every

case must be determined on its own particular facts… [emphasis

added]

[462]

The implication of a term based on business efficacy may require the court to examine

the factual matrix in which the parties operated in order to determine whether the implied term is

consistent with their dealings. The circumstances, when examined, may indicate a contrary

intention. The need to examine the factual matrix is demonstrated by the decision of the Court of

Appeal in Marinangeli v. Marinangeli (2003). 66 O.R. (3d) 40, [2003] O.J. No. 2819. In that

case, a matrimonial dispute, the parties signed minutes of settlement providing that the husband

would pay child support and spousal support. The minutes of settlement included a term

allowing for a variation of the arrangements in the event of a material change in circumstances.

A short while later, the husband cashed some substantial stock options. The issue was whether

there was an implied term in the minutes of settlement that the husband would disclose any

material change in circumstances.

[463]

The Court of Appeal referred to C.P. Hotels Ltd. v. Bank of Montreal and MJB

Enterprises Ltd v. Defence Construction (1951) Ltd., above, in support of the proposition that a

“contractual term may be implied based on the presumed intention of the parties where it is

necessary to give business efficacy to the contract or where it meets the officious bystander test.”

It noted that the Supreme Court had not made it clear whether this was one test or two, but had

held that what is important in both formulations is a focus on the intentions of the actual parties.

Page: 108

It noted that in Martel Building Ltd. v. Canada, [2000] 2 S.C.R. 860, the Supreme Court had

found that the term at issue had “a certain degree of obviousness to it to the extent that the

parties, if questioned, would clearly agree that this obligation had been assumed.”

[464]

The Court of Appeal went on to examine the minutes of settlement and the surrounding

documentation executed by the parties and found that reading these together and as a whole, they

were indicative of an intention that there would be a disclosure of a change in the husband’s

financial circumstances that would affect the physical comfort of his child. The Court of

Appeal’s reasons indicate, however, that this was not the end of the inquiry. The Court of Appeal

went on to examine all the surrounding circumstances – at para. 64:

The underlying rationale for implying a term of business efficacy

is that it is necessary to make the transaction effective. In other

words, if such a term was not implied, the very rationale for

entering into the Minutes would be undermined. In the case of

tendering contracts, bidders would not go to the expense and time

of preparing a tender if the tender calling authority did not have an

implied obligation to treat bidders fairly and equally. Here, it was

obvious to the trial judge that the policy of encouraging negotiation

and settlement of family law matters both under the Divorce Act

and the Guidelines would be undermined if the Court were to

approve the appellant's non-disclosure of his changes of

circumstances within such a short time after signing the Minutes.

The lengthy protracted negotiations over four years, the appellant's

representation as to his financial situation, the disclosure

respecting the options combined with the very short time frame

after signing the Minutes within which the options were exercised,

the fact that the appellant controlled the timing of the realization of

his income from the options that had vested, and the fact the

respondent had no means of accessing this information, are all

factors supporting the trial judge's conclusion that the appellant

had an implicit obligation to disclose his change in circumstances

in order to give business efficacy to the agreement.

[465]

Even this was not sufficient. The Court of Appeal continued, at para. 65, that

additional factors must be considered before a term would be implied based on “business

efficacy” and the “presumed intention of the parties”:

Before a court will imply a term based on the doctrine of "business

efficacy" and the presumed intention of the parties, there are

additional factors that must be met, as set forth by Professor

G.H.L. Fridman, in his book The Law of Contract in Canada, 3rd

ed. (Scarborough: Carswell, 1994) at 475. To be implied a term

must be (a) reasonable and equitable; (b) capable of clear

Page: 109

expression; and (c) not contradictory of an express term in the

contract.

[466]

After examining all these factors in the circumstances of the case, the Court of Appeal

concluded that the implication of a term was appropriate.

[467]

Against this background, I turn to the implied terms advanced by the plaintiffs, the

defendants’ submissions on the point, and my analysis.

(b)

Discussion of Implied Terms

[468]

The plaintiffs claim that it was an implied term of their agreements that ingredients

would be sold to franchisees at commercially reasonable prices. The defendants say that such an

implied term is inconsistent with the terms of the franchise agreements, is neither reasonable nor

necessary, and does not meet any of the tests for the implication of a term.

[469]

The plaintiffs say that the implied term that they propose is necessary, reasonable and

consistent with custom and usage. The plaintiffs rely, in particular, on the evidence of Tim

Hortons, that in sourcing products, it negotiated with suppliers, taking advantage of its buying

power, to obtain the best commercial price available. There was also evidence that Tim Hortons

generally obtained at least two competitive quotations for commodities and ingredients in order

to obtain the best possible price. The plaintiffs rely on this as evidence of the “custom” or

practice of Tim Hortons.

[470]

The plaintiffs also rely on the evidence of Mr. Fisher, to the effect that the franchisor’s

purchasing power enables it to obtain prices that are generally lower than the prices that the

franchisee can obtain on its own. His evidence, given in Quizno’s, speaking generally with

respect to the practice in the QSR business:

The franchisor negotiates the food and paper prices for the entire

chain. Through the purchasing power that the franchisor has,

prices are generally lower than those that any individual

franchisee could obtain on their own.

[471]

As was the case with the express terms, the evidence required to address the implied

terms issue is limited and largely uncontroversial. The contractual matrix is, as I have noted,

largely based on historical documentation. As well, as I will explain, there is either no evidence

to support the alleged “custom” that the plaintiffs rely upon or the evidence the plaintiffs do rely

upon does not support the custom they allege. In addition, the implied terms the plaintiffs assert

are not only inconsistent with the other terms of their contracts, they are not supported by the

contractual matrix. For these reasons, I have concluded that a trial of the implied terms issue is

not required for the full appreciation of the evidence necessary to resolve the issue.

[472]

The plaintiffs were unable to point to any evidence that it is customary in the franchise

business in general, or in the QSR business in particular, that the franchisor supplies all

Page: 110

ingredients or other inputs to franchisees at prices that are lower than can be generally obtained

in the marketplace. Nor did the plaintiffs point to any evidence that the practice of Tim Hortons

has been to supply ingredients to franchisees at less than market price or at a “commercially

reasonable” price. Put at its highest, the plaintiffs’ evidence, through Mr. Fisher, is that, as a

matter of practice, a franchisor’s volume purchasing power permits it to obtain prices that are

generally lower than its franchisees would be able to purchase on their own and that Tim

Hortons’ experience reflects this. The evidence does not establish that it is the practice of

franchisors generally, or of franchisors in the QSR business in particular, or of Tim Hortons, to

pass on to their franchisees the benefit of their purchasing power in the case of every input they

supply to franchisees.

[473]

The plaintiffs, however, say the implication of such a term is both necessary and

reasonable to restrain the franchisor from using the “captive supply provisions” of the franchise

agreement to “insulate” itself from the “usual competitive forces of the marketplace”, allowing it

to thereby “compel the franchisees to buy products at a monopoly premium that serves to

generate extraordinary profits for the franchisor.” They say that without the implication of such a

term, they would be at the mercy of the franchisor.

[474]

The authorities suggest the implication of terms based on custom or usage is

appropriate where the usage is so notorious and certain and invariably followed that everyone

contracting in that particular trade or locale can be taken to have agreed to be bound by it. As I

have noted, there is no such evidence in this case.

[475]

Moreover, the existence of such a custom would be inconsistent with the regulatory

scheme in Ontario, which contemplates that the price of goods supplied under a franchise

agreement will not necessarily be lower than the market price. Under Ontario Regulation 581/00

made pursuant to the Arthur Wishart Act, the franchisor is required to provide a disclosure

document to a prospective franchisee that stipulates that “the cost of goods and services acquired

under the franchise agreement may not correspond to the lowest cost of the goods and services

available in the marketplace.” Thus, not only is there no evidence of any custom in the QSR

business (or any other franchise business) that the franchisee invariably obtains lower prices than

it could obtain in the market, the statutory regime intended for the protection of franchisees

implicitly recognizes that the cost of goods supplied under franchise agreements is frequently not

the lowest cost available in the marketplace.

[476]

Indeed, section 5.04 of the franchise agreement, referred to above, expressly

contemplates that Tim Hortons will make a profit, commission or rebate on the price of goods

sold to franchisees and the franchisee disclaims any interest or right in such profits. As in Chung

v. Lite-Way Subs and Deli Inc., [2001] O.J. No. 3746 (S.C.J.), there is no basis on which to imply

a term that is contrary to an express term.

[477]

I recognize that, as in Marinangeli v. Marinangeli, above, it may be necessary to

examine the factual matrix underlying the parties’ contract to determine whether the implication

of a term is required to give business efficacy to the contract or to make it effective. In this case,

Page: 111

the plaintiffs do not rely on any aspect of the factual matrix underpinning their contracts and the

evidence submitted by Tim Hortons, which is not in dispute, runs contrary to the implication of a

term.

[478]

The plaintiffs were no strangers to the operation of the Tim Hortons system. Mr.

Jollymore had been a member of Tim Hortons' senior management for 17 years and had been a

franchisee since 1994. Mrs. Jollymore had owned a franchise since 1988. They both understood

how the system worked. They must have known that they were not necessarily acquiring

ingredients at the lowest price available in the marketplace and that they had no right to do so.

[479]

In July 2006, after the renewal of the franchise agreement for store #750, Mr. Jollymore

on behalf of Brule signed an acknowledgment of receipt of an Ontario disclosure document that

confirmed, as required by the Regulation, that “[t]he costs of goods and services acquired under

the franchise agreement may not correspond to the lowest cost of the goods and services

available in the marketplace.” The disclosure document also confirmed that Tim Hortons

“receives rebates and other benefits from various suppliers as a result of the purchase of goods

and services by the Licensor for its Licensees or for direct purchase by the Licensees from

designated manufacturers. Most rebates and other commissions or other benefits received by the

Licensor are retained by it for its own benefit.”

[480]

At the time that Mrs. Jollymore, on behalf of Fairview, signed a licence agreement for

her new store #593, she acknowledged receipt of the disclosure document.

[481]

Finally, the “Entire Agreement” provision in the franchise agreement, section 16.02,

referred to above, confirms that the agreement contains the entire agreement between the parties

and that no representations, warranties or promises have been made that are not contained in the

agreement.

[482]

In summary, there is no evidence of a custom in the QSR business that the franchisor

supplies “inputs” at prices that are lower than market prices and it would not be reasonable to

imply such a term into the contract between the parties.

[483]

There is no basis on which to imply a term of the third kind, based on the “business

efficacy” or “officious bystander” test. Such a term is not required in order to make the contract

commercially effective. Nor would it be consistent with the express terms of the contract or the

regulatory framework, both of which I have discussed.

[484]

I will address below, under the subject of good faith and fair dealing, the implication of

a term that the parties will “not act in a way that eviscerates or defeats the objectives of the

agreement that they have entered into”: Transamerica Life Canada Inc. v. ING Canada Inc.

(2003), 68 O.R. (3d) 457, [2003] O.J. No. 4656 (C.A.) at para. 53; Nareerux Imports Co .Ltd. v.

Canadian Imperial Bank of Commerce (2009), 97 O.R. (3d) 481, [2008] O.J. No. 4553 (C.A.) at

para. 69. I will note that there is no evidence that the defendants have engaged in such conduct

and in fact the evidence supports the conclusion that, on the whole, most franchisees, including

the plaintiffs, are making a reasonable rate of return on their investments. Thus, although such a

Page: 112

term would be implied in this contract, there is no evidence of conduct by Tim Hortons that has

eviscerated or defeated the objectives of the franchise agreement.

[485]

I therefore conclude that the plaintiffs’ breach of contract claim has no possibility of

success and should be dismissed.

[486]

I now turn to the plaintiffs’ allegations that Tim Hortons has breached its common law

and statutory duties of good faith and fair dealing in the performance of the franchise

agreements.

C.

Breach of Duty of Good Faith and Fair Dealing

[487]

The plaintiffs plead that if Tim Hortons had the contractual right to require franchisees

to convert to the “Always Fresh” baking method, as I have found it did, doing so was a breach of

its duty of good faith and fair dealing, because it led to commercially unreasonable prices and

reduced profits for the franchisees. There is a similar pleading in relation to the Lunch Menu,

which alleges that franchisees are required to sell Lunch Menu items at prices that are too low to

make a profit.

[488]

The plaintiffs say that Tim Hortons breached its common law duty of good faith and

breached its statutory duties under s. 3 of the Arthur Wishart Act and comparable provisions in

other jurisdictions. The alleged breaches of the duty of good faith and fair dealing include the

following:

•

misrepresenting the cost of the Always Fresh donut as being 11

to 12 cents when Tim Hortons knew it would be 16 cents and that

distribution costs would bring it to 18 cents;

•

exploiting the “captive supply” provisions of the franchise

agreement by imposing mark-ups that generated “extraordinary gains”

without corresponding value to franchisees;

•

failing to analyze the effect of Always Fresh Conversion on

franchisee profitability and disregarding the interests of franchisees;

misrepresenting that increased food costs would be offset by

labour and other savings;

imposing unreasonably high food costs for Always Fresh baked

products;

refusing to take reasonable steps to address franchisees’

concerns; and

Page: 113

•

requiring franchisees to sell Lunch Menu items at a cost that

prevented them from earning a profit.

[489]

The plaintiffs rely on the evidence of Mr. Garland and Mr. Jollymore, as well as the

evidence of their experts, Mr. Fisher and Mr. Rosen, in support of their argument that franchisees

suffered financial injury as a result of the Always Fresh Conversion and the Lunch Menu. They

say that the price of par baked donuts was unreasonable and in excess of their fair value and the

Lunch Menu was not profitable. They also rely on the evidence of Mr. and Mrs. Jollymore, Mr.

Gilson, Mr. Loiello and Mr. Fisher, to the effect that the increased costs of the Always Fresh

products were not offset by savings in labour, wastage and other savings. The plaintiffs say that

the analysis of this evidence requires assessments of credibility and the weighing of evidence

that would make the issue unsuitable for resolution on a summary judgment motion.

[490]

I will begin the analysis by examining the nature and scope of the duty of good faith

and fair dealing at common law and under the franchise statutes. I will then consider whether it is

appropriate to grant summary judgment on the Arthur Wishart Act claims and, if so, whether I

should do so.

1.

Arthur Wishart Act

[491]

The Arthur Wishart Act (Franchise Disclosure) 2000 is, as its full name indicates,

primarily directed to ensuring that there is sufficient disclosure of information to a prospective

franchisee, before he or she enters the franchise agreement, to enable him or her to make an

informed business decision. The statute contains other important provisions governing the

relationship between the franchisor and the franchisee, including a duty of good faith and fair

dealing (s. 3), and a right of franchisees to associate and to form or join a franchisees’

organization (s. 4).

[492]

Section 3(1) of the Arthur Wishart Act expresses the duty of fair dealing:

Every franchise agreement imposes on each party a duty of fair

dealing in its performance and enforcement.

[493]

Subsection 3(2) gives a party a right to damages against the other party for the breach

of the duty of fair dealing in the performance and enforcement of the agreement.

[494]

Sub-section 3(3) provides that the duty of fair dealing includes “the duty to act in good

faith and in accordance with reasonable commercial standards.”

[495]

It is generally accepted that section 3(1) is a codification of the common law:

Landsbridge Auto Corp. v. Midas Canada Inc., at paras. 24, 59; Machias v. Mr. Submarine Ltd.

(2002), 24 B.L.R. (3d) 228 at para. 114 (Ont. S.C.J.); 1117304 Ontario Inc. v. Cara Operations

Ltd., [2008] O.J. No. 4370 at para. 66 (S.C.J.).

Page: 114

[496]

The Arthur Wishart Act is unquestionably remedial legislation, designed to address the

power imbalance between franchisor and franchisee. As such, it is entitled to a generous

interpretation to give effect to its purpose: Trillium Motor World Ltd. v. General Motors of

Canada Ltd., above, at paras. 31, 74, and TA & K Enterprises Inc. v. Suncor Energy Products

Inc., [2010] O.J. No. 5532 at para. 41, both citing Salah v. Timothy’s Coffees of the World Inc.,

[2010] O.J. No. 4336 at para. 26 (S.C.J.).

[497]

In the leading case of Shelanu Inc. v. Print Three Franchising Corporation

(“Shelanu”), above, the Court of Appeal referred to the decision of the Supreme Court of Canada

in Wallace v. United Grain Growers Ltd. (c.o.b. Public Press), [1997] 3 S.C.R. 701, 152 D.L.R.

(4th) 1, which recognized a duty of good faith in employment contracts. Such contracts were

described as unique and having characteristics that set them apart from ordinary commercial

contracts. The Court of Appeal found, at para. 66, that franchise contracts also have

characteristics that give rise to a duty of good faith. These characteristics include unequal

bargaining power, the imposition of a standard form contract of adhesion, and a power imbalance

during the performance of the agreement:

The relative position of the parties as outlined by Iacobucci J. in

Wallace also exists in the typical franchisor-franchisee

relationship. First, it is unusual for a franchisee to be in the

position of being equal in bargaining power to the franchisor: See

Kentucky Fried Chicken Canada, a Division of Pepsi-Cola Canada

Ltd. v. Scott's Food Services Inc. (1998), 41 B.L.R. (2d) 42, 114

O.A.C. 357 (C.A.), per Goudge J.A. at para. 16; Machias v. Mr.

Submarine Ltd., [2002] O.J. No. 1261 (QL), 24 B.L.R. (3d) 228

(S.C.J.) at para. 109. The second characteristic, inability to

negotiate more favourable terms, is met by the fact that a franchise

agreement is a contract of adhesion. As I have indicated, a contract

of adhesion is a contract in which the essential clauses were not

freely negotiated but were drawn up by one of the parties on its

behalf and imposed on the other. Further, insofar as access to

information is concerned, the franchisee is dependent on the

franchisor for information about the franchise, its location and

projected cash flow, and is typically required to take a training

program devised by the franchisor. The third characteristic, namely

that the relationship continues to be affected by the power

imbalance, is also met by the fact the franchisee is required to

submit to inspections of its premises and audits of its books on

demand, to comply with operation bulletins, and, often is

dependent on, or required to buy, equipment or product from the

franchisor. It is hardly surprising, therefore, that a number of

courts, including the Manitoba Court of Appeal in Imasco Retail

Inc. (c.o.b. Shoppers Drug Mart) v. Blanaru, [1995] 9 W.W.R. 44,

104 Man. R. (2d) 286 (Q.B.), affd (1996), [1997] 2 W.W.R. 295,

Page: 115

113 Man. R. (2d) 269 (C.A.) have recognized that a duty of good

faith exists at common law in the context of a franchisor-franchisee

relationship.

[498]

The Court of Appeal noted, at para. 74 that the determination of whether a party has

breached the duty of good faith will require an examination of all the circumstances of the case:

Whether or not a party under a duty of good faith has breached that

duty will depend on all the circumstances of the case, including

whether the party subject to a duty of good faith conducted itself

fairly throughout the process. See by analogy: 702535 Ontario Inc.

v. Lloyd's London, Non-Marine Underwriters (2000), 184 D.L.R.

(4th) 687, [2000] I.L.R. 1-3826 (Ont. C.A.), per O'Connor J.A., at

paras. 28-37, leave to appeal to [the] Supreme Court of Canada

dismissed, [2000] S.C.C.A. No. 258. See also the decision of

Laskin J.A. in the Court of Appeal in Whiten v. Pilot Insurance Co.

(1999), 42 O.R. (3d) 641, 170 D.L.R. (4th) 280, in dissent, affd

[2002] 1 S.C.R. 595, [2002] S.C.J. No. 19 (QL).

[499]

In 117304 Ontario Inc. (c.o.b. Harvey’s Restaurant) v. Cara Operations Ltd.,

Kershman J. summarized the content of the duty of good faith in the franchise context as follows,

at paras. 68-72:

•

a party may act self-interestedly, however in doing so that party

must also have regard to the legitimate interests of the other party;

if A owes a duty of good faith to B, so long as A deals honestly

and reasonably with B, B's interests are not necessarily paramount;

good faith is a minimal standard, in the sense that the duty to act

in good faith is only breached when a party acts in bad faith. Bad faith

is conduct that is contrary to community standards of honesty,

reasonableness or fairness (e.g. serious misrepresentations of material

facts); and

•

good faith is a two way street. Whether a party under a duty of

good faith has breached that duty will depend, in part, on whether the

other party conducted itself fairly.

[500]

The duty of good faith and fair dealing and the duty to act in accordance with

reasonable commercial standards, as expressed in the Arthur Wishart Act, relate to the

performance and enforcement of the franchise agreement. The duty is imposed in order to secure

the performance of the contract the parties have made. It is not intended to replace that contract

with another contract or to amend the contract by altering the express terms of the franchise

Page: 116

contract: Pointts Advisory Ltd. v. 754974 Ontario Inc., [2006] O.J. No. 3504 at para. 55 (S.C.J.);

Agribrands Purina Canada Inc. v. Kasamekas, [2011] O.J. No. 2786 at para. 51 (C.A.);

Transamerica Life Canada Inc. v. ING Canada Inc., [2003] O.J. No. 4656, 68 O.R. (3d) 457

(C.A.).

[501]

It follows from this that in assessing whether a party has demonstrated good faith and

fair dealing in the performance and enforcement of the agreement, the party’s conduct must be

considered in the context of and in conjunction with the contract that the parties have made. It is

not a stand-alone duty that trumps all other contractual provisions. The Court of Appeal made

this point in IT/NET Inc. v. Cameron (2006), 207 OAC 26, [2006] O.J. No. 156, an employment

case. In allowing the employee’s appeal, and rejecting the employer’s argument that the

employee had breached his duty of good faith, the Court of Appeal noted that the employee had

complied with both a non-solicitation/non-competition clause in his contract and with a

confidentiality provision. Goudge J.A., giving the judgment of the Court of Appeal, stated at

para. 30:

I cannot agree that such a duty [of good faith] arises here. In

Transamerica Life Inc. et al. v. ING Canada Inc. (2003), 68 O.R.

(3d) 457 (Ont. C.A.) this court made clear that Canadian courts

have not recognized a stand-alone duty of good faith that is

independent from the terms expressed in a contract or from the

objectives that emerge from those provisions. Unlike TSP-Intl Ltd.

v. Mills, [2005] O.J. No. 616 (Ont. Sup. Ct.), in this case the

appellant was bound by the two clauses of his written contract

considered above. There is no room to import a separate duty of

good faith where both express clauses have been complied with.

[502]

The content of the duty of good faith and fair dealing has been expressed to include the

following:

•

to require the franchisor to exercise its powers under the

franchise agreement in good faith and with due regard to the interests

of the franchisee: Shelanu, at paras. 66 and 69;

•

to require the franchisor to observe standards of honesty,

fairness and reasonableness and to give consideration to the interests

of the franchisees: Landsbridge at para. 15; Shelanu at paras. 5, 68-71;

to ensure that the parties do not act in such a way that

“eviscerates or defeats the objectives of the agreement that they have

entered into”: Transamerica Life Inc. v. ING Canada Inc. (2003), 68

O.R. (3d) 457 at para. 53 (C.A.); or “destroy the rights of the

franchisees to enjoy the fruits of the contract.”: Landsbridge, at para.

17;

Page: 117

•

to ensure that neither party substantially nullifies the bargained

objective or benefit contracted for by the other, or causes significant

harm to the other, contrary to the original purpose and expectation of

the parties: Katotikidis v. Mr. Submarine Ltd., [2002] O.J. No. 1959 at

para. 72 (S.C.J.); TDL Group Ltd. v. Zabco Holdings Inc., [2008] M.J.

No. 316 at para. 272 (Q.B.); and

where the franchisor is given a discretion under the franchise

agreement, the discretion must be exercised “reasonably and with

proper motive, and may not do so arbitrarily, capriciously, or in a

manner inconsistent with the reasonable expectations of the parties.”:

Landsbridge, at para. 17, citing Carvel Corporation v. Baker, 79 F.

Supp. 2d 53 (D. Conn 1997) at para. 69; CivicLife.com Inc. v. Canada

(Attorney General) [2006] O.J. No. 2474, 215 O.A.C. 43 (C.A.), at

para. 50; Shelanu at para. 96.

[503]

The duty of the franchisor to give consideration to the interests of the franchisee does

not require the franchisor to prefer the franchisee’s interests to its own, and the franchisor is not a

fiduciary in that sense: Shelanu at paras. 5, 68-71. As Kershman J. observed in 117304 Ontario

Inc. (c.o.b. Harvey’s Restaurant) v. Cara Operations Ltd., above, at paras. 68-72, a party may act

self-interestedly, however in doing so that party must also have regard to the legitimate interests

of the other party.

[504]

Tim Hortons has referred to two decisions of United States Courts that discuss the duty

of good faith in factual circumstances similar to this. Both cases involved complaints by

franchisees of the Burger King chain that the franchisor had wrongfully imposed a “Value

Menu” on franchisees, requiring them to sell certain menu items at a fixed maximum price of

$1.00. One of the requirements was that a “double cheeseburger” had to be sold for no more than

$1.00 as part of the “Value Meal”. This was later changed to a “Buck Double” said to be a

double cheeseburger with one less slice of cheese.

[505]

As in this case, there was a breach of contract claim and a bad faith claim. The U.S.

District Court for the Southern District of Florida addressed the contract claim in National

Franchisee Association v. Burger King Corporation, 715 F. Supp. 2d 1232, 2010 US Dist.

LEXIS 50721 (S.D. Fla. 2010). The Court followed the decision of the United State Court of

Appeals for the 11^thCircuit in Burger King Corp. v. E-Z Eating, 572 F. 3d 1306, 2009 US App.

LEXIS 14120 which had stated, at p. 1314:

Section 5(A) of the Franchise Agreement provided that the

franchisee ‘agrees that changes in the standards, specifications and

procedures may become necessary and desirable from time to time

and agrees to accept and comply with such modifications, revisions

and additions to the [operating manual] which [Burger King

Corporation] in the good faith exercise of its judgment believes to

Page: 118

be desirable and reasonably necessary.’ There is simply no

question that [Burger King Corporation] had the power and

authority under the Franchise Agreements to impose the Value

Menu on its franchisees.

[506]

The Court dismissed the complaint that the imposition of the “Value Menu” was a

breach of contract. It held that the franchise agreement unambiguously gave Burger King the

right to offer specified menu items as part of the Value Meal and to unilaterally set maximum

prices for those items.

[507]

In a subsequent decision, the court dealt with the allegation that Burger King had acted

in bad faith in setting the maximum price of the double cheeseburger at $1.00, allegedly

threatening the financial viability of the franchisees. The decision is reported as National

Franchisee Association v. Burger King Corporation, 2010 WL 4811912, 2010 U.S. Dist. LEXIS

123065 (S.D. Fla.). The Court granted Burger King’s motion to dismiss the claim for bad faith

and related claims.

[508]

Burger King asserted that the plaintiffs had not adequately pleaded that it had breached

a duty of good faith in setting prices. The plaintiffs had pleaded facts that bear some similarity to

the facts the plaintiffs claim to have established in this case. They pleaded that the price set by

Burger King caused franchisees to sell the Value Menu items at a loss, that the prices had been

set despite the franchisees’ objections, that the information provided by Burger King to justify its

decision was inaccurate and deceptive and that the prices were imposed in spite of information

showing that the prices would cause franchisees to suffer a loss.

[509]

The Court held that Burger King was entitled to set the price at which franchisees sold

particular items, even if this resulted in a loss on franchisees’ sales of these items, unless it did so

for an improper motive or unless it was established that the decision was so irrational and

capricious that no reasonable person could have made the decision:

The purpose of Section 5 is to give [Burger King Corporation]

broad discretion in framing business and marketing strategy by

adopting those measures it judges are needed to help the business

successfully compete. As explained above, to adequately raise a

claim of bad faith, Plaintiffs must allege some facts suggesting that

[Burger King Corporation] did not believe that the prices would be

helpful to the businesses competitive position, but, for some other

reason, deliberately adopted prices that would injure Plaintiffs'

operations. As currently pled, none of the allegations support such

an inference of bad faith. Plaintiffs rely principally on their

allegation that franchisees could not produce and sell [Double

Cheeseburgers] or Buck Doubles at a cost less than $1.00, and

therefore that franchisees suffer "a loss" on each of these items

sold. Even taken as true, there is nothing inherently suspect about a

Page: 119

such a pricing strategy for a firm selling multiple products. There

are a variety of legitimate reasons why a firm selling multiple

products may choose to set the price of a single product below

cost. Among other things, such a strategy might help build

goodwill and customer loyalty, hold or shift customer traffic away

from competitors, or serve as "loss leaders" to generate increased

sales on other higher margin products. See, e.g., Parish Oil Co..

Inc. v. Dillon Cos., 523 F.3d 1244, 1254 (10th Cir. 2008) (stating

that "loss leaders can have legitimate economic purposes and

effects" including building goodwill and customer loyalty or

attracting consumers to buy other items at regular or inflated

prices). The issue is not whether such a strategy was wise or

ultimately successful or mistaken. In the absence of some other

evidence of improper motive, the question is whether it was so

irrational and capricious that no reasonable person would have

made such a decision. There is nothing about the pricing decision

that suggests [Burger King Corporation] was doing anything other

than seeking to promote the performance of its franchisees.

Nothing about this action suggests bad faith.

Plaintiffs argue that Section 5 does not give [Burger King

Corporation] the discretion to set a "below cost" price for any

single product. The premise seems to be that requiring a franchisee

to sell anything at below cost is per se bad faith. As the foregoing

discussion makes clear, that is clearly not the case. Section 5 gives

[Burger King Corporation] the right to set prices for products sold

by franchisees. This includes the discretion to set prices for a

single product below cost provided that the pricing decision is one

"which [Burger King Corporation] in the good faith exercise of its

judgment believes to be desirable and necessary." A decision to

price a single product below cost is not automatically a bad faith

exercise.

[510]

The court found that the plaintiffs’ claim based on loss of profits on two specific

products could not support a claim for bad faith, in the absence of allegations of serious

detriment to their overall business:

A further flaw with Plaintiffs' bad faith claim is that they do not

allege the kind of serious injury that would support an inference of

bad faith. Rather than claim a substantial impact on their overall

business, plaintiffs focus on the losses allegedly incurred on the

single product sold below cost-the [Double Cheeseburger] and the

Buck Double. The terms used by Plaintiffs in paragraph 63 to

describe their economic injury relate to the "loss," the absence of

Page: 120

"appropriate profit margin," and the "lost profits" on the [Double

Cheeseburger] and Buck Double products standing alone. Almost

any standard or specification set by [Burger King Corporation] -

whether it relates to pricing, labor, advertising, or safety-could be

characterized as resulting in "losses" or less margin or profit when

viewed on one item alone. Further, even if Plaintiffs are alleging

that the cumulative losses on the single product deprived them of

"appropriate profits" in the overall business, the claim is so vague

as to be meaningless. Again, any discretionary measure adopted by

[Burger King Corporation] which imposed costs or reduced

revenues on any single product could be characterized in some

sense as depriving franchisees of profits.

[511]

The Court continued:

As explained above, to the extent plaintiffs seek to raise a claim of

bad faith by pointing to the injuries allegedly caused them by

[Burger King Corporation’s] decision, plaintiffs must allege that

the damage to their overall business was so severe as to deprive

them of their reasonable expectations under the contract. The basic

question is whether the impact has been so injurious that the

measure could not reasonably have been considered within

contemplation of the parties. Plaintiffs come nowhere close to

alleging such an impact. Significantly, nowhere do plaintiffs claim

that their overall business has been appreciably impaired. Nor do

they allege that their overall businesses are no longer profitable or

that their competitive positions or economic viability going

forward are threatened.

[512]

I accept immediately that the statement of the law of bad faith expressed in these

extracts is not necessarily reflective of our principle of good faith and fair dealing under the

Arthur Wishart Act or at common law. That being acknowledged, the logic in the Burger King

case is compelling – a determination of whether a franchisor has conducted itself in good faith

cannot be based on isolated pricing decisions of particular menu items or groups of items.

Regard must be had to the conduct of the franchisor taken as a whole and the benefits – or

disadvantages – obtained by franchisees as a whole.

[513]

2.

With this background, I will turn to the plaintiffs’ allegations.

Plaintiffs’ Allegations: Breach of Duty of Good Faith and Fair Dealing

[514]

The plaintiffs argue that Tim Hortons breached its duty of good faith and fair dealing

by implementing the Always Fresh Conversion. Their allegations have been set out earlier. Their

submissions are replete with pejorative language, such as “misrepresentation” of the costs of

Page: 121

donuts, “exploitation” of the “captive supply” provisions of the franchise agreement, and making

“extraordinary gains” through the “diversion of profits” from the “inflated prices” at which

frozen donuts were sold by the joint venture. They claim that they were misled about the cost of

the Always Fresh Conversion, that Tim Hortons failed to analyze the effect of the conversion on

the franchisees, that the price of the products was unreasonably high and that Tim Hortons failed

to respond to their concerns about profitability.

[515]

In connection with the Lunch Menu, the plaintiffs submit that Tim Hortons’ ability to

set prices in relation to the Lunch Menu is not absolute and is subject to the duty of good faith

and fair dealing. They say that Tim Hortons has breached its duty of good faith and fair dealing

by setting prices on Lunch Menu items so that they cannot earn a profit on those items. They say

that Tim Hortons failed to make the necessary investigations prior to fixing the prices and

disregarded their interests after it set the prices.

Page: 122

3.

Discussion of Arthur Wishart Act Claims

I have concluded that this is a case in which it is appropriate to grant summary

[516]

judgment because the underlying premise of the Arthur Wishart Act claims is flawed. The duty

of good faith and fair dealing is in relation to the performance of the contract that the parties

have made. The court’s responsibility is to give effect to that contract and to require the parties to

discharge their contractual obligations fairly, in good faith and in a commercially reasonable

manner. Under the guise of their Arthur Wishart Act claims, the plaintiffs are really asking the

court to re-write their contracts and to require Tim Hortons to perform those re-written contracts

in a manner that the plaintiffs or their expert would find commercially reasonable. This is not the

court’s function.

[517]

It is not necessary to make findings of fact about whether the prices of donuts, timbits

or Lunch Menu ingredients were commercially reasonable, because that is not the issue.

[518]

As I have said earlier, the core of the plaintiffs’ Arthur Wishart Act claim is that they

should have made more money on the sale of donuts and Lunch Menu items. Most of their other

complaints are window-dressing which have the effect of obscuring the core allegation.

[519]

There is nothing in the plaintiffs’ franchise agreements that entitles them to make a

profit on their franchises generally or on any particular product or product line. The evidence

establishes that the plaintiffs’ franchises have been generally profitable and that they have made

reasonable returns on their investments. Moreover, by the plaintiffs’ own admission, they were

fully aware that they had no right to make a profit on any menu item or menu category. Mrs.

Jollymore confirmed this on cross-examination:

Q. And do you agree with me that there’s no term in the contract,

written term whereby Tim’s covenants or guarantees to you a

return, an investment, or a return, or a profit on either our overall

store or any product or any product line in the store?

A. Yes.

[520]

Mr. Jollymore admitted to the same understanding:

Q. And we can look at the license agreements if you want, sir, but

am I correct that in terms of your understanding, there wasn’t a

guarantee in terms of financial return for you either overall or for

any product group or product in those license agreements?

A. No.

Q. That’s a fault of the question. You agree with me that’s your

understanding, correct?

Page: 123

A. That’s my understanding.

The plaintiffs’ franchise agreements permitted Tim Hortons to undertake the Always

[521]

Fresh Conversion and to modify the Lunch Menu from time to time. It also permitted Tim

Hortons to set the prices for all ingredients and supplies that franchisees are required to purchase

from designated suppliers and to profit from the sale of any such items. Finally, it permitted Tim

Hortons to specify the maximum price at which all menu items are sold, but did not restrict the

ability of franchisees to sell at lower prices.

[522]

The pricing of the Always Fresh donut and timbit was within the reasonable discretion

of Tim Hortons. There is no evidence that this discretion was exercised arbitrarily or capriciously

or for an improper motive – the decision of the franchisor to price the product at a level that

generates a profitable return on its investment is not, on its own, an improper motive.

[523]

There is no evidence that the price of the Always Fresh donut has been set at a level

that deprives franchisees of the benefits of their agreements, defeats the purpose of the franchise

agreement, or makes the operation of a Tim Hortons franchise unprofitable. On the contrary, the

evidence supports the conclusion that most franchisees, including the plaintiffs, make a

reasonable level of profit and a reasonable return on their investments.

[524]

The evidence does not establish that Tim Hortons intentionally misrepresented the cost

of the Always Fresh donut to its franchisees in general or to the plaintiffs in particular. Tim

Hortons acknowledges that it informed franchisees that there would be an increase in their food

cost and that it would be offset by labour and other savings; this statement has proven to be true

over time. As well, as I have noted, there have been increases in the retail price of donuts over

time, from 70 cents to 90 cents.

[525]

When considered in the context of the franchisees’ overall menu offerings, including

the profitable items such as coffee, the pricing of less profitable items, such as donuts and timbits

and Lunch Menu items, cannot be regarded as making the agreement as a whole commercially

unreasonable or as characterizing the franchisor’s performance of the agreement as commercially

unreasonable.

[526]

During the period 2003 to 2007, the cost of an unfinished par baked donut to

franchisees was approximately 18 cents. It has increased to approximately 20 cents to date. In the

same period, the retail price of a single donut has increased from 70 cents to 90 cents. An

Always Fresh donut that now costs franchisees about 22 cents to make (when the franchisees’

finishing costs are taken into account) sells in their stores for 90 cents on an individual basis and

56-57 cents on average. The evidence establishes that, were the scratch baking system still in

place today, it would cost the franchisee about 30 cents to produce a donut.

[527]

In summary, I find that the decision to move to Always Fresh was made honestly and

reasonably, with due consideration for the interests of the franchisees as confirmed by the

evidence of Mr. Clanachan and the unchallenged evidence of Mr. Madden. As well, Tim

Hortons took reasonable measures to discuss the Always Fresh Conversion with franchisees in

Page: 124

advance, to obtain their support and to prepare and train them for the conversion. Far from being

a decision that eviscerated the objectives of the franchise agreement or nullified the bargain

made by the parties, the Always Fresh Conversion was part of the reasonable evolution of the

Tim Hortons System and had benefits for both parties. Even if I were to find that the immediate

financial benefit to Tim Hortons was greater than the financial benefit to the plaintiffs, this

would not constitute a breach of the duty of good faith and fair dealing. Having regard to the

franchise agreement as a whole and the benefits of the agreement that are received by the

plaintiffs, the Always Fresh Conversion and the pricing of donuts and timbits was not a breach of

the franchisor’s duty of good faith and fair dealing.

[528]

[529]

I turn to the Lunch Menu.

The franchise agreement permitted Tim Hortons to require franchisees to sell the Lunch

Menu, including such new Lunch Menu items as might be developed from time to time. It

permitted Tim Hortons to set the prices at which Lunch Menu ingredients are sold to franchisees

and to make a profit from the sale of such ingredients. It permitted Tim Hortons to specify the

maximum price at which all menu items are sold.

[530]

The development and expansion of the Lunch Menu was a reasonable commercial

decision motivated by appropriate corporate concerns and having regard to the interests of the

franchisor and the franchisees, including keeping the store busy at off-peak hours, cross-selling

more profitable items, generating goodwill, and resisting competition from other QSR chains.

[531]

As with the Always Fresh donut, the price of Lunch Menu ingredients was within the

reasonable discretion of Tim Hortons and there is no evidence that the price of such menu items

was set arbitrarily or capriciously or that the franchisor performed the agreement in a

commercially unreasonable manner. The pricing of Lunch Menu items was done with due regard

for and consideration of franchisees’ interests and after consultation with them and their

representatives on the Advisory Board.

[532]

While the plaintiffs and their experts may disagree with Tim Hortons’ requirement that

every franchisee must sell the Lunch Menu, the franchisor is entitled to insist on uniformity

across the system. There is no obligation on the franchisor to ensure that the franchisee makes a

profit on every product it sells and there is no evidence that the pricing of Lunch Menu items

makes the operation of the plaintiffs’ stores unprofitable or unsustainable. Indeed, the overall

performance of the plaintiffs’ stores belies this proposition.

[533]

D.

For these reasons, I dismiss the plaintiffs’ claims for breach of the Arthur Wishart Act.

Unjust Enrichment

[534]

Tim Hortons says that the plaintiffs’ claims for unjust enrichment have no prospect of

success because, among other reasons, there is a “juristic reason” for any enrichment of Tim

Hortons, namely the existence of a valid contract that permits Tim Hortons to make a profit on

the sale of ingredients to franchisees.

Page: 125

1.

Requirements of Unjust Enrichment

There is no dispute between the parties about the law governing the plaintiffs’ claim

[535]

based on unjust enrichment. Three elements must be established: (1) enrichment of the

defendant; (2) a corresponding deprivation of the plaintiff; and (3) the absence of a juristic

reason for the enrichment: Garland v. Consumers’ Gas Co., [2004] 1 S.C.R. 629, [2004] S.C.J.

No. 21 at para. 30; Landsbridge Auto Corp. v. Midas Canada Inc., [2009] O.J. No. 1279 at para.

62.

[536]

The first two elements are subject to a simple economic analysis: Kerr v. Baranow,

[2011] 1 S.C.R. 269, [2011] S.C.J. No. 10 at para. 37. The plaintiffs acknowledge that the

defendants’ factum accurately describes the enrichment and corresponding deprivation

requirements as follows:

Enrichment

The jurisprudence has recognized two types of benefit or

“enrichment”: a “positive” conferral of a benefit such as the

payment of money and a “negative” benefit in the sense that the

defendant was spared an expense which it would otherwise have

been required to undertake. This has been characterized as an

“incontrovertible benefit” which is either a demonstrable financial

benefit not subject to debate and conjecture, or the saving of an

“inevitable expense.”

Corresponding Deprivation

It is not material that the plaintiff has suffered a loss if the

defendant has gained no benefit.

Unjust enrichment is a

restitutionary remedy and the word “restitution” implies that

something has been given to someone which must be returned or

the value must be restored to the recipient. Accordingly, the

plaintiff is obligated to establish not simply that the defendant has

been enriched, but also that the enrichment corresponds to a

deprivation which the plaintiff has suffered.

[537]

The requirement that there be a corresponding deprivation means that there must be a

direct nexus between the enrichment of the defendants and the deprivation suffered by the

plaintiffs: Singer v. Schering-Plough Canada Inc., [2010] O.J. No. 113 (S.C.J.) at para. 111; VGI

General Partner Inc. v. Ensis Management Inc., 2010 ONSC 3766, [2010] O.J. No. 2837 (S.C.J.)

at para. 20.

Page: 126

[538]

In Peel (Regional Municipality) v. Canada, [1992] 3 S.C.R. 762, [1992] S.C.J. No. 101,

McLachlin J., as she then was, giving the judgment of the Supreme Court (Lamer, C.J.

concurring), stated at para. 58:

While not much discussed by common law authorities to date, it

appears that a further feature which the benefit must possess if it is

to support a claim for unjust enrichment, is that it be more than an

incidental blow-by. A secondary collateral benefit will not suffice.

To permit recovery for incidental collateral benefits would be to

admit of the possibility that a plaintiff could recover twice -- once

from the person who is the immediate beneficiary of the payment

or benefit (the parents of the juveniles placed in group homes in

this case), and again from the person who reaped an incidental

benefit. See, for example, Fridman and McLeod, supra, at p. 361;

Maddaugh and McCamus, supra, at p. 717; and, Gautreau, supra, at

pp. 265 et seq. It would also open the doors to claims against an

undefined class of persons who, while not the recipients of the

payment or work conferred by the plaintiff, indirectly benefit from

it. This the courts have declined to do. The cases in which claims

for unjust enrichment have been made out generally deal with

benefits conferred directly and specifically on the defendant, such

as the services rendered for the defendant or money paid to the

defendant. This limit is also recognized in other jurisdictions. For

example, German restitutionary law confines recovery to cases of

direct benefits: Zwiegert and Kotz, Introduction to Comparative

Law, vol. II (2nd ed. 1987), at pp. 234-35.

[539]

The plaintiffs contend that there may be circumstances where a broader interpretation

of “corresponding deprivation” may be appropriate. They point to cases in which the defendant,

in breach of a duty to the plaintiff, has exploited a profitable opportunity and has received a

benefit from a third party at the expense of the plaintiff. They refer to Peter D. Maddaugh and

John D. McCamus, The Law of Restitution, Loose-leaf (Aurora, Ont.: Canada Law Book, 2010)

at 3-21 – 3-22:

...there are two senses in which it may be said that a benefit has

been conferred at the plaintiff’s expense. First, where the benefit

results from a transfer of wealth from the plaintiff to the defendant,

the conferral is at the plaintiff’s expense in the sense that it

involves a “subtraction” from the plaintiff. Alternatively, the

benefit may have been acquired by the defendant through the

breach of a duty owed to the plaintiff, such as the fiduciary’s duty

of loyalty, in circumstances where the benefit is one that otherwise

would have been obtained by the plaintiff. ...

Page: 127

Although the most typical pattern is an expense or loss of some

kind sustained by the plaintiff resulting in the transfer of wealth to

the defendant, it is also possible to conceive of circumstances in

which wealth has been transferred to the defendant by a third party

in circumstances in which the benefit may be said to be conferred

at the plaintiff’s expense in the subtraction sense. Thus, where a

profitable opportunity is exploited by the defendant in breach of a

fiduciary obligation to the plaintiff and it appears that the plaintiff

would otherwise have exploited the opportunity, it may be

reasonably said that the defendant’s gain is matched by the

plaintiff’s loss.

[540]

Although it is not necessary to my decision on this issue, it seems to me that this theory

is not supported by the authorities, which restrict the “enrichment” and “corresponding

deprivation” to benefits that have been directly and specifically conferred on the defendant at the

expense of the plaintiff: see the observations of Cullity J. in Landsbridge, at paras. 66-67,

discussed below, referring to Boulanger v. Johnson & Johnson Corp., [2003] O.J. No. 2218

(C.A.) at para. 20 and Peel (Regional Municipality) v. Canada, above, at para. 58

[541]

The third element of the claim for unjust enrichment – absence of a juristic reason – is

the most contentious in this case. In Kerr v. Baranow, Cromwell J., giving the judgment of the

Supreme Court of Canada, described this requirement as follows, at para. 40-41:

The third element of an unjust enrichment claim is that the benefit

and corresponding detriment must have occurred without a juristic

reason. To put it simply, this means that there is no reason in law

or justice for the defendant's retention of the benefit conferred by

the plaintiff, making its retention "unjust" in the circumstances of

the case: see Pettkus, at p. 848; Rathwell, at p. 456; Sorochan, at p.

44; Peter, at p. 987; Peel, at pp. 784 and 788; Garland, at para. 30.

Juristic reasons to deny recovery may be the intention to make a

gift (referred to as a "donative intent"), a contract, or a disposition

of law (Peter, at pp.990-91; Garland, at para. 44; Rathwell, at p.

455). The latter category generally includes circumstances where

the enrichment of the defendant at the plaintiff's expense is

required by law, such as where a valid statute denies recovery

(P.D. Maddaugh, and J. D. McCamus, The Law of Restitution

(1990), at p. 46; Reference re Goods and Services Tax, [1992] 2

S.C.R. 445; Mack v. Canada (Attorney General) (2002), 60 O.R.

(3d) 737 (C.A.)). However, just as the Court has resisted a purely

categorical approach to unjust enrichment claims, it has also

refused to limit juristic reasons to a closed list. This third stage of

the unjust enrichment analysis provides for due consideration of

Page: 128

the autonomy of the parties, including factors such as "the

legitimate expectation of the parties, the right of parties to order

their affairs by contract (Peel, at p. 803).

[542]

The juristic reason requirement is considered in stages. First, the plaintiff must establish

a prima facie case that the defendant’s enrichment cannot be justified on the basis of a juristic

reason from an established category. If the plaintiff is successful, then at the second stage of the

analysis, the defendant can show that there is another reason to deny recovery, based on the

reasonable expectations of the parties or public policy considerations. After considering these

factors, the court may conclude that a new category of juristic reason should be established, that

a juristic reason justified the enrichment in the particular circumstances of the case, or that there

was no juristic reason for the enrichment: Garland v. Consumer’s Gas Co., at paras. 44-46.

[543]

The Supreme Court observed in Kerr v. Baranow, at para. 43, that the two stage

analysis for the juristic reason requirement was established in Garland to ensure that juristic

reason did not become a purely subjective requirement, based on a particular judge’s view of

what was just as between the parties on a case by case basis. Only if the plaintiff shows on a

prima facie basis that the case does not fall within an established category of juristic reason is it

appropriate to proceed to the second stage.

[544]

As the Supreme Court has noted in many cases, including Kiss Estate v. Kiss, [1983] 1

S.C.R. 623, Pettkus v. Becker, [1980] 2 S.C.R. 834 and Kerr v. Baranow, a contract may

constitute a valid reason for the defendant’s enrichment: see, for example, Murray v. TDL Group

Ltd., [2002] O.J. No. 5095 (S.C.J.) at paras. 262-5; Pak v. Reliance Resources Group Canada

Inc., [2002] O.J. No. 684, 2002 Carswell Ont. 663 (Ont. S.C.J.); Re Collections Inc. v. Toronto-

Dominion Bank Inc., [2010] O.J. No. 5686 (S.C.J.) at para. 143. I agree with the plaintiffs,

however, that if the enrichment is the result of the breach of the contract, or if the contract is

invalid, the contract cannot be a juristic reason for the enrichment. Put another way, the

enrichment of the defendant as a result of the operation of a valid contract with the plaintiff is a

juristic reason of the enrichment of the defendant.

2.

Unjust Enrichment – Is a Trial Required?

[545]

In my view, a trial of the plaintiffs’ unjust enrichment claims is not required because,

having found that any enrichment of Tim Hortons is the result of a lawful contract, the plaintiffs’

claims fail as a matter of law. I will explain my reasons below.

3.

Always Fresh – Unjust Enrichment

[546]

The plaintiffs plead that by requiring franchisees to undertake the Always Fresh

Conversion, the defendants fundamentally altered their franchise agreements, and by requiring

them to purchase the Always Fresh products at inflated and commercially unreasonable prices,

Tim Hortons made an unwarranted profit at their expense, resulting in losses to them. The

plaintiffs say that there is no juristic reason for the enrichment and that the actions of the

Page: 129

defendants were a breach of their franchise agreements, a breach of the duties of good faith and

fair dealing and a breach of the Competition Act.

[547]

There are two reasons why the plaintiffs’ claim for unjust enrichment fails. First, even

if I were to find that there was a deprivation of the plaintiffs (and there is some question about

this in light of the evidence adduced by Tim Hortons that the plaintiffs’ profits have actually

increased since the Always Fresh Conversion), there has been no corresponding enrichment of

Tim Hortons as a result of the Always Fresh Conversion. I agree with the submission of the

defendants that the revenues earned by Tim Hortons through the joint venture were indirect

benefits that did not “correspond” to the alleged deprivation of the plaintiffs. The circumstances

are similar to Landsbridge: see also Boulanger v. Johnson & Johnson Corp., above.

[548]

In Landsbridge it was alleged that the franchisor, Midas, had breached its franchise

agreement by making fundamental and unilateral changes to the franchise system. This included

ceasing to manufacture the products that it supplied to franchisees and entering into an

agreement whereby a third party became the exclusive supplier of Midas-branded products to the

franchisees. It was alleged by the plaintiff that this resulted in excessive charges for products and

that Midas received unlawful and unjustified rebates from the supplier on purchases made by the

franchisees, which it failed to pass on to the franchisees.

[549]

Justice Cullity concluded that there was not the “necessary correspondence” between

the alleged deprivation of the franchisees and the alleged benefit to Midas that would be required

in order to certify a cause of action for unjust enrichment. He stated, at paras. 66-68:

The claim in respect of the increased revenue the defendants have

received from alleged unlawful and unjustified receipts of rebates

and allowances from product suppliers stands on a different

footing [than the royalty claim]. Counsel for the defendants were, I

believe, correct in their submission that the alleged deprivation

consisting of higher prices that the Franchisees have been forced to

pay under the new distribution system, and a loss of benefits under

the Midas system, do not constitute a corresponding deprivation.

Assuming as I must, that the new system produces advantages for

Midas and disadvantages to the Franchisees, and that in

implementing it, Midas breached its contractual obligations to the

Franchisees, it does not follow that there is the necessary

correspondence between the advantages and disadvantages to

justify the grant of a restitutionary remedy that would attach a

constructive trust to the amounts received by Midas. In this

connection, counsel referred to, and relied on, Boulanger v.

Johnson & Johnson, [2003] O.J. No. 2218 (C.A.), at para. 20,

where Goudge J.A. referred to, and applied, a passage in the

reasons of McLachlin J. in Peel (Regional Municipality) v.

Canada, [1992] 3 S.C.R. 762 in which it had been argued that the

Page: 130

remedy could extend to benefits that the plaintiffs indirectly

conferred on the defendants. The learned judge stated, at para. 58:

This the courts have declined to do. The cases in which

claims for unjust enrichment have been made out generally

deal with benefits conferred directly and specifically on the

defendant, such as the services rendered for the defendant or

money paid to the defendant.

Similarly, there is, in my judgment, an insufficiently direct and

clear correlation between the numerous disadvantages allegedly

suffered by the Franchisees, and the benefits obtained by Midas,

under the Uni-Select agreement.

[550]

[551]

He therefore refused to certify the cause of action in unjust enrichment.

The circumstances in this case are similar. Any “enrichment” of Tim Hortons as a result

of its participation in the joint venture is indirect and does not have the necessary correspondence

to the alleged deprivation of the plaintiffs.

[552]

The second reason why the claim for unjust enrichment fails is that there was a juristic

reason for the enrichment. The franchise agreement provided that the franchisee was required to

purchase ingredients from either the franchisor or from manufacturers designated by the

franchisor from time to time. The franchisee expressly acknowledged that Tim Hortons was

entitled to make a profit or receive a commission on such purchases:

It is hereby acknowledged by the Licensee that in purchasing such

products or supplies from the Licensor or manufacturers

designated by it, the Licensor will make a profit or receive a

commission or rebate on the price of goods sold to the Licensee

and the Licensee agrees that such profits, commissions or rebates

shall be the sole and absolute property of the Licensor and the-

Licensee shall have no claim to them in law or in equity;

[553]

Tim Hortons had the right to stipulate that franchisees must purchase their supplies

from the joint venture. As a participant in the joint venture, it had a right to profit from the sale

of the supplies to franchisees, just as it had a right to profit from the sale of all other ingredients.

Any enrichment of Tim Hortons was the result of the operation of a valid contract and the

plaintiffs have no claim for unjust enrichment.

4.

Lunch Menu – Unjust Enrichment

[554]

The plaintiffs say that they have suffered a deprivation because they have been required

to sell the Lunch Menu at unreasonably low margins, and that Tim Hortons has been enriched by

marking up the price of ingredients sold to the plaintiffs and by royalties on sales of Lunch Menu

Page: 131

items. They say that the broad definition of “corresponding deprivation” advocated by

Maddaugh and McCamus would encompass this case because there has been a transfer of wealth

from the franchisees to Tim Hortons and a breach of duty owed by Tim Horton to the plaintiffs.

They say that the franchise agreements cannot be a juristic reason for Tim Hortons’ enrichment,

because Tim Hortons has not validly exercised its powers under those agreements.

[555]

The plaintiffs’ unjust enrichment claim for Lunch Menu items fails for the same reason

as the Always Fresh claim. The franchise agreement permits Tim Hortons to make a profit from

the sale of Lunch Menu items.

E.

Competition Act

1.

The Maidstone Bakeries Joint Venture and Pricing of the Par baked Donut

[556]

I have described earlier some of the factual background leading to the joint venture

between Tim Hortons and IAWS for the establishment of the facility known as Maidstone

Bakeries, which supplied par baked donuts and timbits to Tim Hortons franchisees. Maidstone

Bakeries was an indirect subsidiary of CillRyan, an entity that was owned by the joint venture

partners until Tim Hortons sold its interest in the joint venture to Arytza AG in 2010.The

corporate structure was complicated. Maidstone Bakeries was owned by #3052877 Nova Scotia

and was indirectly owned by CillRyan. CillRyan was, in turn, 50% owned by an affiliate of

IAWS and 50% owned by three limited partnerships, which were in turn owned by a Delaware

company that was the predecessor of THI. Thus, Maidstone Bakeries was, indirectly, 50%

owned by TDI.

[557]

As described earlier, Mr. Clanachan was directly involved in Tim Hortons’ search for

new baking technology and in the negotiation of the joint venture. His evidence establishes that

the decision to pursue the par baking technology and to joint venture with IAWS, was a prudent

business decision, for the reasons I have outlined earlier. The evidence of Mr. Madden of IAWS

and of Mr. Clanachan, establishes that the negotiations with IAWS were arms length.

[558]

As part of the business plan developed by the joint venture partners, it was necessary to

make certain assumptions in order to justify the $94 million capital expenditure required to

construct the baking facility. One of the most important assumptions was the price at which

donuts would be sold from the plant. Tim Hortons wanted to ensure that all types of donuts

would be sold at the same price, regardless of differences in production costs. A cruller might

cost more to produce than a standard donut, but Tim Hortons wanted its franchisees to be able to

offer a variety of donuts to their customers without being concerned that some donuts were more

expensive than others. Thus, every donut leaving the plant was to be sold at the same price. The

evidence establishes that Tim Hortons and IAWS made their financial projections and decided to

proceed with the investment, based on the assumption that the par baked donut would be priced

at 16 cents leaving the bakery and before distribution charges.

Page: 132

[559]

In arriving at the price of 16 cents per donut, Tim Hortons believed that the price was

approximately equivalent to the food and labour costs involved in producing a donut under the

scratch baking system. In its opinion, if donuts were priced at this amount, the majority of

franchisees would be able to sell the donuts at approximately the same level of profitability as

under the old system.

[560]

The supply agreement, under which CillRyan agreed with Tim Hortons to be the

exclusive supplier of par baked donuts and timbits to franchisees, contained a complex formula

for the pricing of the products. It included a provision requiring the parties to negotiate in good

faith if the formula resulted in a price that was not competitive in the market, to ensure that the

prices paid by franchisees were in fact competitive.

[561]

The evidence of Mr. Peter Madden, who was involved in the negotiation of the joint

venture on behalf of IAWS, is uncontradicted and supports the evidence of Tim Hortons. Mr.

Madden testified that the 16 cent donut price was a matter of intense negotiation and that Tim

Hortons sought to achieve a price that was fair to its franchisees and roughly equivalent to the

production cost of a scratch baked donut.

[562]

Mr. Madden swore as follows:

In the course of negotiating the Joint Venture agreement, I recall

representatives of TDL, including Paul House, Tom Mc’Neely,

and David Clanachan, on more than one occasion, making the

point that one of the things that was critical to the success of the

project was that the joint venture had to be in the best interest of

the franchisees, and that the pricing mechanisms agreed by the

joint venture had to be consistent with this objective.

A price of $0.16 per donut, was finally agreed after 3 months of

analysis and intensive negotiation, and it is my understanding that

this price was acceptable as it represented a price that was roughly

equal to the true cost of on-site scratch baking, while being at a

level that provided the Joint Venture with an acceptable return on

capital.

At all times during the negotiations, as an equal partner in the Joint

Venture, my objective was to achieve the highest price possible of

the product in order to maximize the return for the IAWS Group,

however the final price agreed was a negotiated price and lower

than that expected by me.

Given the size, complexity and novelty of the Joint Venture

undertaking, as well as the uncertainty regarding the various

operating and financial assumptions, there was risk to the partners

in the Joint Venture in pursuing the Joint Venture. The sale price

Page: 133

of the donuts to the TDL franchisees was an important input into

the financial modeling of the Joint Venture. Product mix was also

an important part of the equation because the costs to produce

different types of donuts varied. On the basis of a sale price of

$0.16 per donut, I was prepared to recommend to IAWS Group Plc

to contribute the significant costs required and enter into the Joint

Venture agreement. [emphasis added]

[563]

Mr. Madden’s evidence is inconsistent with the plaintiffs’ contention that the

establishment of Maidstone Bakeries was an attempt by Tim Hortons to “divert profits” from the

franchisees. Mr. Madden was not cross-examined and his evidence concerning the negotiation of

the price is consistent with the evidence of Mr. Clanachan and inconsistent with the plaintiffs’

theory that the joint venture was an attempt to “divert profits” from the franchisees.

2.

Distribution and Supply Agreements

[564]

As has been previously noted, the franchise agreements provide that the franchisee is

required to purchase all commodities and supplies from Tim Hortons or from manufacturers and

suppliers designated by Tim Hortons from time to time. The franchise agreement specifically

acknowledges that Tim Hortons may make a profit or may receive a commission or rebate on

such transactions and that the franchisee has no claim to such profits. The franchisee disclosure

documents provided to the plaintiffs contain similar statements.

[565]

Tim Hortons acts as the distributor of some products directly to franchisees. In 2006, it

built a distribution facility in Guelph, Ontario, which is used to distribute refrigerated and frozen

products to franchisees in approximately 80% of the Province of Ontario.

[566]

Most other products are distributed in Ontario and elsewhere in Canada by third party

distributors. In those cases, Tim Hortons has entered into distribution agreements with third

parties, on an arm’s length basis, to undertake the distribution of commodities and supplies to its

stores. The two principal third parties are GFS Canada Group Limited and Sysco Corporation.

These companies provide warehousing, transportation and distribution services, moving products

from suppliers to franchisees. Under these agreements, the distributor purchases products from a

supplier, which may be either Tim Hortons, Maidstone Bakeries, or a third party supplier. The

distributor is remunerated on what is referred to as a “cost plus mark-up” basis – it is entitled to

charge a mark-up on the cost of the product. The maximum mark-up on any particular product is

a matter of negotiation between Tim Hortons and the distributor. The evidence establishes that

this type of arrangement is common in the franchise business.

[567]

Tim Hortons negotiates the maximum price at which the product is to be sold by the

distributor to the franchisee. The distributor remains free to charge a lower price than it has

negotiated.

Page: 134

3.

The Pleadings

[568]

The plaintiffs plead that “given the intense competition in the Quick service restaurant

industry” and the fact that Tim Hortons sets the maximum retail prices at which they can sell

their products, their ability to receive competitively priced Baked Goods is critical to their

profitability.

[569]

They allege that Tim Hortons has, through the Always Fresh Conversion and its

distribution system, engaged in conduct, and entered into agreement or arrangements for the

purpose of fixing, maintaining or unreasonably enhancing the prices of Always Fresh baked

goods, including the prices charged by the joint venture and the distributors, thereby raising the

prices significantly above market prices and reducing the profits of the franchisees. Although the

Competition Act claim includes muffins and cookies, the plaintiffs now limit their claim to

donuts and timbits. Muffins and cookies are not produced at Maidstone Bakeries.

[570]

[571]

They plead that since the Always Fresh Conversion:

… the Defendants have used agreements, promises and other like

means in conjunction with other persons to, directly or indirectly,

fix, maintain, increase or control the prices (or components of the

prices) or to enhance unreasonably the prices thereof which the

Plaintiffs and Class Members pay for the Always Fresh donuts and

Timbits, and have thereby contravened section 61 of the

Competition Act until its repeal effective March 11, 2009, section

45(1)(b) prior to March 12, 2010 and s. 45(1)(a) after that date.

They then plead:

At all material times, the Defendants engaged in activities for the

purpose of fixing, maintaining, increasing, controlling or

enhancing unreasonably the prices paid by all franchisees for the

AF [Always Fresh] Baked Goods pursuant to, inter alia, one or

more of the following agreements, arrangements or other means:

a.

with respect to AF donuts and Timbits:

i. the Defendants and IAWS/Arytza agreed that the

Brantford plant (“Maidstone Bakeries” or “Maidstone”)

would ship donuts and Timbits to the Distributors;

ii. Maidstone would invoice CillRyan’s Bakery Limited

(“CillRyan”) at marked up or inflated prices to be passed

along by CillRyan to the Distributors;

Page: 135

iii. CillRyan would invoice the Distributors at marked up or

inflated prices to be passed along by the Distributors to the

franchisees; and the Defendants and IAWS/Arytza would

share the corresponding excessive profits between them;

and

iv. the Defendants would receive a rebate or other advantage

from the Distributors corresponding to some or all of the

excessive profits received by the Distributors for

distributing products to the franchisees.

[572]

The plaintiffs also plead that in its capacity as a distributor, Tim Hortons influenced

upward the price at which CillRyan sells Always Fresh donuts to distributors and the price at

which distributors sell to franchisees. They plead that in this capacity, Tim Hortons engaged in

activities, agreements and arrangements for the purposes of fixing or maintaining prices or

enhancing unreasonably the prices of Always Fresh donuts and timbits being charged to

distributors and being charged by distributors to franchisees.

4.

The Plaintiffs’ Claims under the Competition Act

[573]

As a preamble to the discussion of the Competition Act claims, I will make three

observations. First, from a legal perspective, it has long been established that the purpose of the

Competition Act is to promote the public interest by eliminating anti-competitive activities in the

marketplace: R. v. Nova Scotia Pharmaceutical Society, [1992] 2 S.C.R. 606, [1992] S.C.J. No.

67, at paras. 82-88. The interpretation of the legislation must be informed by this purpose. The

purpose of the statute is set out in s. 1.1:

The purpose of this Act is to maintain and encourage competition

in Canada in order to promote the efficiency and adaptability of the

Canadian economy, in order to expand opportunities for Canadian

participation in world markets while at the same time recognizing

the role of foreign competition in Canada, in order to ensure that

small and medium-sized enterprises have an equitable opportunity

to participate in the Canadian economy and in order to provide

consumers with competitive prices and product choices.

[574]

The second observation is that there is nothing civilly or criminally wrong with a

franchisor selling a product to its franchisee at a price that results in a profit – even a substantial

profit – to the franchisor. This reality is recognized by the Arthur Wishart Act disclosure

regulation and is expressly contemplated by Tim Hortons’ franchise agreements. Nor is there any

criminality associated with a franchisor entering into a joint venture agreement with a third party

to supply a product to the franchisees at a price at which both joint venturers make a profit –

even a substantial profit. This is simply normal commercial activity – the balance between the

franchisor’s share of the profits and the franchisee’s share is a matter to be determined in the

market place.

Page: 136

[575]

The third observation is that this case was, at the outset, about the division of profits

between Tim Hortons and the franchisees. When this action was commenced, the plaintiffs

alleged that the Always Fresh Conversion reduced their profits and resulted in windfall profits to

Tim Hortons. There was no claim under the Competition Act. The plaintiffs’ complaints related

simply to the allegedly high prices at which they were required to purchase the Always Fresh

products and the ingredients for the Lunch Menu. The Competition Act claim was added by

amendment after the decision of the Divisional Court in Quizno’s. In Fairview Donut Inc. v. The

TDL Group Corp., 2010 ONSC 5948, I granted the plaintiffs leave to advance this pleading.

Although I found that the pleading was far from elegant, I permitted the claims to proceed,

provided particulars were given. That subsequently occurred.

[576]

Unlike the Quizno’s case, which had been a Competition Act claim from the outset, this

case is essentially a breach of contract and Arthur Wishart Act case, with the Competition Act

causes of action added later. As well, unlike Quizno’s, no claim has been made against the

distributor with whom the defendants have alleged to have conspired.

[577]

[578]

I turn now to the claims under the Competition Act.

Part VI of the Competition Act prohibits a number of “offences in relation to

competition”. These are serious criminal offences, including bid-rigging, price fixing

conspiracies and, until 2009, resale price maintenance. These offences are subject to criminal

prosecution and are punishable by substantial fines or imprisonment. Private parties who suffer

damages as a result of the commission of an offence prohibited under Part VI are entitled to

bring a civil action for recovery of their damages. Section 36 of the Competition Act provides:

36. (1) Any person who has suffered loss or damage as a result of

(a) conduct that is contrary to any provision of Part VI, or

(b) the failure of any person to comply with an order of the

Tribunal or another court under this Act,

may, in any court of competent jurisdiction, sue for and recover

from the person who engaged in the conduct or failed to comply

with the order an amount equal to the loss or damage proved to

have been suffered by him, together with any additional amount

that the court may allow not exceeding the full cost to him of any

investigation in connection with the matter and of proceedings

under this section.

[579]

The plaintiffs assert two types of claims under the Competition Act. The first is for

price maintenance, which was, prior to March 2009, a criminal offence under s. 61 of the

Competition Act. The second claim is for conspiracy under s. 45 of the statute. That provision

was amended effective March 2010 and there are therefore two types of s. 45 claims asserted –

Page: 137

one under the statute as it existed prior to March 2010 and the other under the new statutory

provision.

[580]

I will begin the discussion with the claim for price maintenance under s. 61. I will then

discuss the claim under the “old” section 45 and then the claim under the “new” section 45.

5.

Price Maintenance: Section 61

[581]

Section 61(1) of the Competition Act was in effect between May 1, 1993 and March 11,

2009, until it was repealed by S.C. 2009, c. 2, s. 417. It prohibited both vertical price

maintenance (between a manufacturer and a retailer, for example, referred to as “resale price

maintenance“) and horizontal price maintenance (where a party attempts to influence upward the

price at which a competitor offers its product). The section provided:

61(1) No person who is engaged in the business of producing or

supplying a product, who extends credit by way of credit cards or

is otherwise engaged in a business that relates to credit cards, or

who has the exclusive rights and privileges conferred by a patent,

trade-mark, copyright, registered industrial design or registered

integrated circuit topography, shall, directly or indirectly,

(a) by agreement, threat, promise or any like means, attempt to

influence upward, or to discourage the reduction of, the price at

which any other person engaged in business in Canada supplies or

offers to supply or advertises a product within Canada; or

(b) refuse to supply a product to or otherwise discriminate against

any other person engaged in business in Canada because of the low

pricing policy of that other person. [emphasis added]

[582]

Sub-section 61(2) stated that it was not an offence if the alleged parties to the offence

are affiliated corporations.

[583]

It was not an offence under the Competition Act to impose maximum retail prices; nor

was it an offence for a manufacturer to suggest retail prices. Sub-section 61(3) provided that a

suggested minimum resale price by a supplier did not offend the section, provided the supplier

made it clear to the person to whom the price was suggested that they were under no obligation

to accept the suggestion and that their business relationship with the supplier would not suffer if

they did not accept the suggestion. As I have noted earlier, the plaintiffs’ franchise agreements

contained express provisions in order to comply with this requirement. A similar statement was

contained in the statutory disclosure documents that were provided to the plaintiffs.

[584]

Section 61 was a criminal offence carrying a maximum prison term of five years. It was

also enforceable through the civil remedy under s. 36. On its repeal in 2009, it was replaced with

a provision making it a civilly-reviewable practice and conferring jurisdiction on the

Page: 138

Competition Tribunal to grant a civil remedy. The plaintiffs’ claim in relation to section 61 is

confined to the period prior to the 2009 amendment.

[585]

Section 61 does not prohibit a manufacturer or supplier from increasing the price at

which it sells the product. As I have said earlier, it does not prohibit a supplier from making a

large profit on a product it sells to someone downstream. It prohibits a person who produces or

supplies a product from attempting, by means of agreement, to influence upward or discourage

the reduction of the price at which another person sells the product. The provision is designed to

protect the public by prohibiting an upstream supplier from preventing competition among

retailers, thereby increasing the price paid by the ultimate consumer. It does not prohibit the

upstream supplier from increasing the price at which it supplies the product to a downstream

purchaser.

[586]

The Competition Bureau has described price maintenance in its website in the

following terms:

Price maintenance may occur when a supplier prevents a customer

from selling a product below a minimum price by means of threat,

promise or agreement. It may also occur when a supplier refuses

to supply a customer or otherwise discriminates against them

because of their low pricing policy.

[587]

The typical price maintenance offence occurs where a supplier uses threats, promises

or agreements to prevent a customer from selling a product below a minimum price or refuses to

supply a product to a customer or otherwise discriminates against the customer due to its low

pricing policy.

[588]

Section 61 has been used, for example, to prosecute a beer company for maintaining the

price at which discount beer was sold by convenience stores, resulting in a guilty plea and a fine

of $250,000: R. v. Labatt Brewing Company, Cour du Québec, Court File No. #500-73-02495-

055. Similarly, in R. v. H. D. Lee of Canada (1980), 57 C.P.R. (2d) 186, 1981CarswellQue 264

(Québec Court of Sessions), a manufacturer of jeans induced discount retailers, who had being

supplying products at reduced prices, to increase the prices at which they were selling the

products.

[589]

The Manitoba Court of Appeal described the purpose of the previous section 38, the

predecessor equivalent to the former section 61, in R. v. Kito Canada Ltd. (1976), 30 C.C.C. (2d)

531, [1976] M.J. No. 70, (C.A.), at para. 22:

In my opinion, the mischief aimed at by section 38 of the

Combines Investigation Act was the practice of large corporations,

with monopolistic or near monopolistic powers, artificially keeping

retail prices high by coercing independent retailers into fixing

prices and by refusing to supply such independent retailers if they

Page: 139

did not maintain the suggested list price of products. Before 1951,

for instance, a retail gasoline station which undercut the suggested

list price of gasoline was in danger of having its supply cut off as a

punishment. I believe that Parliament wanted to protect the small

retailer from undue pressure from large wholesalers, distributors

and manufacturers. Parliament wanted to protect the weak against

the strong, though it enacted words which catch the weak as well

as the strong.

[590]

In all these cases, the court was concerned with the protection of the public from

conduct that interfered with the ability of retailers to engage in price competition.

[591]

In Quizno’s, the Divisional Court (Hennessy and Karakatsanis JJ., Swinton J.

dissenting) described the offence of retail price maintenance as follows, at para. 53:

Price maintenance under s. 61(1) of the [Competition Act] occurs

when a supplier of products purports to set a fixed minimum price

at which another supplier in a vertical distribution chain may sell a

product. Price maintenance may also occur horizontally, for

example between competitors who agree to impose resale prices on

vendors of their product. A supplier does not illegally “maintain”

prices if it requires its purchasers to agree not to sell product at

prices greater than a specified amount. Such an agreement is

permissible as long as the purchaser remains entirely free to charge

lower prices at its discretion. Price maintenance is a criminal

offence and therefore intent must be proved. The courts have held

that a specific intent to restrict or maintain prices is not required to

violate the price maintenance provision; it suffices that the supplier

intentionally engaged in proscribed behaviour which had the effect

or would have the effect of maintaining prices … [references

omitted]

[592]

There are three constituent elements of the offence under s. 61:

(1) a person engaged in the business of producing or supplying a

product;

(2) who, directly or indirectly, attempts to influence upward or

discourages the reduction of the price at which another person

supplies or offers to supply a product within Canada;

(3) by agreement, threat, promise or any like means.

See Quizno’s (Div. Ct.) at para. 55.

Page: 140

[593]

In my view, a trial is not required for the determination of the plaintiffs’ claims under s.

61 because Tim Hortons is not a person engaged in the business of producing or supplying a

product. Moreover, in this case, the setting of a wholesale price through a joint venture

agreement that is specifically designed to supply ingredients to franchisees is not criminal price

maintenance because it does not impair or limit the ability of downstream purchasers to sell at

whatever price they choose.

[594]

The facts giving rise to the claim are pleaded in paragraphs 56 and following of the

Statement of Claim and are, in summary:

(a) Tim Hortons and IAWS/Arytza agreed that Maidstone would

ship donuts and timbits to the distributors;

(b) Maidstone would invoice CillRyan at marked-up prices to be

passed along by CillRyan to the distributors;

(c) CillRyan would invoice distributors at marked-up or inflated

prices to be passed along by the distributors to the franchisees and

the defendants and IAWS/Arytza would share the corresponding

excessive profits between them;

(d) Tim Hortons would receive a rebate or other advantage from

the distributors corresponding to some or all of the excessive

profits received by the distributors for distributing goods to the

franchisees;

(e) Tim Hortons promised to designate the manufacturers and/or

distributors as the sole designated suppliers of Always Fresh

products to franchisees, and promised to use its contractual powers

under the license agreements to cause the Plaintiffs to purchase

those products at prices higher than those available from

alternative, lower-priced sources or to prevent them from

demanding price reductions from the manufacturers and/or

distributors;

(f) Tim Hortons has, through its conduct, influenced upward the

price at which Always Fresh donuts and timbits are sold to

distributors and the price at which distributors sell these products

to the franchisees; and

(g) the Defendants have also discouraged the distributors from

reducing their prices through their agreements with third parties,

including IAWS/Arytza and CillRyan, by their control of the

supply and distribution chain and by the imposition of fixed

Page: 141

minimum prices that franchisees pay for Always Fresh donuts and

timbits.

[595]

The plaintiffs say that they have pleaded all the necessary ingredients of the s. 61 price

maintenance offence. They claim that Tim Hortons has unreasonably enhanced the price of

donuts and timbits in excess of a commercially reasonable price by:

•

entering into agreements to produce, distribute and supply the

Always Fresh products to franchisees;

•

u

sing the “captive supply” provisions of the franchise

agreements to force franchisees to buy these products from its

distributors; and

p

rohibiting franchisees from negotiating with distributors for

lower prices.

[596]

The evidence establishes the following:

(a) the franchise agreements require franchisees to purchase

supplies from Tim Hortons or from suppliers and distributors

designated by Tim Hortons and entitle Tim Hortons to obtain a

profit, commission or rebate which is the sole property of Tim

Hortons;

(b) prior to the Always Fresh Conversion, franchisees baked

donuts and timbits using mixes and other ingredients supplied by

Tim Hortons;

(c) the joint venture agreement with IAWS was entered into by

Tim Hortons for legitimate business reasons to address long term

financial and strategic concerns about the viability of scratch

baking; and

(d) the sale price of donuts to franchisees was a matter of intense

negotiation between the joint venture partners and reflected an

intent to obtain the maximum return on their investments

consistent with a price that would reasonably reflect, in Tim

Hortons’ view, the cost of a scratch baked donut.

Page: 142

[597]

Although there is a conflict in the evidence about whether the so-called “CillRyan

mark-up” was commercially reasonable and whether it reflected the costs and risks assumed by

CillRyan, there is no evidence that this price was anything other than the taking of a profit by

Tim Hortons on an improved baking technology developed through its efforts. At its highest, the

plaintiffs’ case is that the price charged by CillRyan to distributors for donuts and timbits was

determined by Tim Hortons and IAWS to ensure that the joint venture achieved its profit targets.

[598]

Nor is there any evidence that Tim Hortons attempted to “influence upward” the price

at which the distributors or franchisees sold Always Fresh products. The alleged “influencing

upward” was simply by the addition of a mark-up by CillRyan, which was jointly owned by Tim

Hortons and IAWS.

[599]

Section 61 does not prohibit a party from “influencing upward” the price of a product it

sells. It prohibits doing so by “agreement, threat, promise or any like means …”. The use of the

words “like means”, indicates that the influencing upward of prices per se is not a contravention

of the section: R. v. Philips Electronics Ltd., 116 D.L.R. (3d) 298 (Ont. C.A.) at page 305:

It is significant that the present section, among other significant

changes, has substituted the words "any like means" for "any other

means whatsoever". This is a clear indication of the intention of

Parliament to substantially restrict the type of attempts which

constitute an offence under section 38(1).

[600]

In my view, to be guilty of the criminal offence of price maintenance, a party must do

something more than “influence upward” the price of its own product by making a profit on a

product that it sells to a second party for sale to a third party. It must be shown that the first party

has taken other measures to influence upward or discourage the reduction of the price at which

the second party sells the product. If an ordinary commercial agreement between the first party

and the second party could be an “agreement, threat, promise or any like means”, the section

would criminalize routine commercial conduct, which could hardly have been the intent.

[601]

It must also be shown that the conduct at issue was an attempt to do so for anti-

competitive purposes: see R. v. Royal LePage Real Estate Services Limited (1993), 50 C.P.R.

(3d) 161 at p. 171, [1993] A.J. No. 654: “Not any attempt to influence prices is prohibited, only

those that eliminate competition or competitive market forces.”

[602]

In this case, the plaintiffs complain that the price maintenance is effectuated because

they are “captive” and have no ability to negotiate with suppliers or to buy from other suppliers.

They say that CillRyan and other distributors in the supply chain have no incentive to engage in

normal competitive behaviour, because they have a captive market. That may be true.

Franchisees may be stuck with one price which is, for practical purposes, non-negotiable. That is

not, however, the result of conduct of Tim Hortons that is directed towards the reduction of

competition. It is the result of a bargain made between Tim Hortons and its franchisees whereby

Page: 143

franchisees give up the autonomy they would have as independent business people and agree to

buy their products from suppliers and at prices specified by Tim Hortons.

[603]

This lack of autonomy is the result of legitimate agreements entered into by the

plaintiffs and Tim Hortons for legitimate purposes. Moreover, there is nothing in the distribution

agreements that prohibits the distributors from charging lesser amounts to the franchisees. They

cannot charge more than the stated prices, but they can charge less. The same applies to the

franchisees. Tim Hortons specifies maximum prices, but the franchisees are free to reduce those

prices. In a nutshell, there is no evidence whatsoever of any agreement or conduct by Tim

Hortons that would interfere with the ability of distributors to sell the par baked products at

prices of their choice, as long as they do not exceed the prices stipulated by Tim Hortons.

[604]

I also accept Tim Hortons’ submission that the s. 61 claim never gets out of the starting

gate, because Tim Hortons is not a person “engaged in the business of producing or supplying a

product” within the meaning of s. 61(1)(a). The “product” in question is par baked donuts and

timbits. Tim Hortons is not directly engaged in the business or producing or supplying par

baked donuts and there is no pleading that Tim Hortons is the “alter ego” of Maidstone Bakeries

– I pointed this out at para. 37 of my decision on the plaintiffs’ motion to amend to add the

Competition Act claims.

[605]

Any claim for price maintenance in relation to the supply of par-baked donuts would

have to be directed against CillRyan, which is the alleged source of the mark-up causing the

price of donuts to be influenced upward. Although Tim Hortons supplies par-baked donuts in its

capacity as a distributor in Ontario, there is no evidence that there has been price maintenance

between competing distributors. On the contrary, Tim Hortons’ agreements with distributors do

not prohibit the distributors from reducing the prices that they charge franchisees for the

products. The fact that they do not do so is a reflection of a legitimate agreement led by market

forces, as opposed to anti-competitive conduct.

[606]

Nor is there evidence that Tim Hortons, in its capacity as a distributor, does anything to

limit the ability of its customers, the franchisees, to sell the par-baked products at any price they

choose, as long as that price does not exceed a maximum price.

[607]

In that regard, it is worth noting that s. 61 of the Competition Act was aimed at the

protection of the public, though proof of the offence did not require proof that there had in fact

been an adverse effect on competition. There is absolutely no evidence that the donut and coffee

business is anything other than intensely competitive, as the plaintiffs themselves acknowledge.

There is no evidence at all of harm to the public as a result of the conduct at issue.

[608]

The plaintiffs rely on both Quizno’s and Axiom Plastics Inc. v. E.I. Dupont Canada Co.

(2007), 87 O.R. (3d) 352 (S.C.J.), [2007] O.J. No. 3327, leave to appeal refused (2008), 90 O.R.

(3d) 782, [2008] O.J. No. 1973 (Div. Ct.). Suffice to say that both authorities involved the

application of the “plain and obvious” test under s. 5(1)(a) of the C.P.A. and were based on the

pleadings. There was no determination of either claim on the merits.

Page: 144

[609]

The plaintiffs also rely upon a Notice of Application to the Competition Tribunal

commenced by the Competition Commissioner against Visa and Mastercard for allegedly

impeding the ability of merchants to encourage customers to use lower cost methods of payment

such as cash, debit cards and cards with lower fees. I agree with the defendants that these are

nothing more than allegations; the commencement of these proceedings (which are, incidentally,

under the new statutory regime, not the old s. 61) is not authority for anything.

[610]

Finally, the plaintiffs also assert that Tim Hortons has threatened Mr. and Mrs.

Jollymore and Mr. Garland with reprisals when they questioned its pricing practices. In his

original affidavit, sworn May 22, 2009 in support of the motion for certification (which was

before the claim was amended to assert the Competition Act breaches), Mr. Jollymore claimed

that he had experienced unspecified threats and reprisals from Tim Hortons executives when he

questioned their decisions and actions. He claimed that he had been told that he and his wife “did

not fit in” with the Tim Hortons chain. He claimed that when Brule’s store #368 received a

notice of default, he met with Don Schroeder, a senior officer of Tim Hortons, and asked why

there had been no prior warning. He claimed that Schroeder had said that Tim Hortons wanted to

deliver a message to him. This evidence was under the heading of “preferable procedure” in his

affidavit, apparently to suggest that franchisees would be reluctant to bring claims on their own,

due to concerns of reprisals by the franchisor. Similar suggestions were made by Mr. Garland in

his initial affidavit.

[611]

Similar statements were made by Mr. Jollymore in an affidavit sworn July 23, 2010,

also prior to the amendment of the statement of claim. Mr. Jollymore’s evidence was that Tim

Hortons had attempted to stifle dissent amongst franchisees concerning the costs of the Always

Fresh Conversion and the Lunch Menu by intimidating franchisees. He also referred to the

evidence of Mr. Gilson that he had been reprimanded when he questioned Mr. House about the

cost of the Always Fresh donut.

[612]

Mrs. Jollymore also gave evidence, in an affidavit also sworn July 23, 2010, concerning

actions taken by Tim Hortons, including the termination of the agreement for store #368. Mr.

Garland made allegations in an affidavit sworn the same date and suggested that by engaging in

retaliatory action towards him, Tim Hortons was attempting to “set an example”, to show

franchisees what would happen if they chose to openly challenge Tim Hortons’ policies and

practices.

[613]

In an affidavit sworn February 4, 2011, in support of the plaintiffs’ claims under the

Competition Act, Mr. Garland deposed that, in response to his concerns about Tim Hortons’

pricing practices, he had been threatened with the loss of his franchises if he did not change his

ways. He claimed that such threats of reprisal had enabled Tim Hortons to maintain the high

prices that were charged for products by suppliers and distributors which in turn allowed the

payment of rebates to Tim Hortons.

[614]

As set out above, I have concluded that section 61 does not apply to Tim Hortons

because it is not “engaged in the business of producing or supplying a product” – the par baked

Page: 145

donuts are supplied by CillRyan, not Tim Hortons. Were it necessary to do so, however, I find

that there is no evidence of any threats or reprisals by Tim Hortons that were directed at the

plaintiffs for the purpose of influencing upward, or preventing the reduction of the prices at

which the plaintiffs sold their products.

6.

Conspiracy – Old Section 45

[615]

Section 45 of the Competition Act, prior to its repeal in 2010 (“Old Section 45”),

prohibited price fixing.³Section 45(1)(b) provided that anyone who conspires, combines, agrees

or arranges with another person to enhance unreasonably the price of a product is guilty of an

offence. Like section 61, a party who suffered loss or damage as a result of the breach of Old

Section 45 was entitled to bring a civil action under s. 36.

[616]

The section provided:

45(1) Every one who conspires, combines, agrees or arranges with

another person

(a) to limit unduly the facilities for transporting,

producing, manufacturing, supplying, storing or dealing in

any product,

(b) to prevent, limit or lessen, unduly, the manufacture or

production of a product or to enhance unreasonably the

price thereof,

(c) to prevent or lessen, unduly, competition in the

production, manufacture, purchase, barter, sale, storage,

rental, transportation or supply of a product, or in the price

of insurance on persons or property, or

(d) to otherwise restrain or injure competition unduly,

is guilty of an indictable offence and liable to imprisonment for a

term not exceeding five years or to a fine not exceeding ten million

dollars or to both. [emphasis added]

(2) For greater certainty, in establishing that a conspiracy,

combination, agreement or arrangement is in contravention of

subsection (1), it shall not be necessary to prove that the

conspiracy, combination, agreement or arrangement, if carried into

effect, would or would be likely to eliminate, completely or

virtually, competition in the market to which it relates or that it

was the object of any or all of the parties thereto to eliminate,

completely or virtually, competition in that market.

³It was repealed by S.C. 2009, c. 2, s. 410 and was in effect from June 2, 1992 to March 11, 2010.

Page: 146

(2.1) In a prosecution under subsection (1), the court may infer the

existence of a conspiracy, combination, agreement or arrangement

from circumstantial evidence, with or without direct evidence of

communication between or among the alleged parties thereto, but,

for greater certainty, the conspiracy, combination, agreement or

arrangement must be proved beyond a reasonable doubt.

(2.2) For greater certainty, in establishing that a conspiracy,

combination, agreement or arrangement is in contravention of

subsection (1), it is necessary to prove that the parties thereto

intended to and did enter into the conspiracy, combination,

agreement or arrangement, but it is not necessary to prove that the

parties intended that the conspiracy, combination, agreement or

arrangement have an effect set out in subsection (1).

[617]

[618]

The actus reus of the offence under Old Section 45 has two elements:

(a) that the defendant conspired, combined, agreed or arranged

with another person;

(b) to enhance unreasonably the price of a product or to otherwise

restrain or injure competition unduly.

As Old Section 45 is a criminal offence, proof requires that there be mens rea or

criminal intent. The Supreme Court of Canada has held that this requires that there be both (a) a

subjective intention on the part of the accused to agree and to put the agreement into effect; and

(b) an objective intention to lessen competition unduly: R. v. Nova Scotia Pharmaceutical

Society, [1992] 2 S.C.R. 606, [1992] S.C.J. No. 67, at paras. 117-119. This objective intention

can be established on the basis of what a reasonable person would have been likely to know. The

Supreme Court observed at para. 119:

Once again, it would be a logical inference to draw that a

reasonable business person who can be presumed to be familiar

with the business in which he or she engages would or should have

known that the likely effect of such an agreement would be to

unduly lessen competition. Thus in proving the actus reus that the

agreement was likely to lessen competition unduly, the Crown

could, in most cases, establish the objective fault element that the

accused as a reasonable business person would or should have

known that this was the likely effect of the agreement.

[619]

The plaintiffs say that they have properly pleaded a cause of action under Old Section

45 because they allege:

Page: 147

(a) the Defendants agreed with IAWS and the distributors to

charge a commercially unreasonable mark-up or inflated price for

donuts and timbits;

(b) the agreement between the Defendants and IAWS and the

distributors produced unreasonably high prices to franchisees for

donuts and timbits and that such prices were higher than the

market prices would have been but for the Defendants’ breach of

section 45; and

(c) this unreasonable enhancement was the Defendants’ purpose in

engaging in the agreement.

[620]

While the pleading survives the “plain and obvious test” applicable to section 5(1)(a) of

the C.P.A., the evidence does not establish a breach of Old Section 45. Even if one were to

accept that the price of the par baked donuts leaving CillRyan exceeded a “commercially

reasonable” price or reflected something more than a reasonable rate of return and the risks

assumed by the joint venture parties, the taking of excessive profits is still not prohibited by Old

Section 45.

[621]

Although it is not necessary to establish that the agreement, if implemented, would be

likely to eliminate competition, it is necessary to show that it would, if implemented, be likely to

unduly lessen competition. This in turn requires an analysis of the relevant geographic market:

see R. v. J.W. Mills and Son Ltd., [1968] 2 Ex. C.R. 275, affd. [1971] S.C.R. 63, [1970] S.C.J.

No. 63. The plaintiffs have adduced no evidence of the relevant market or its characteristics.

[622]

Applying the test in R. v. Nova Scotia Pharmaceutical Society, a reasonable person

would not know that charging 16 cents per donut would lessen competition any more than

charging 12 cents per donut, because the franchisees were bound to buy the donuts produced by

CillRyan and to pay the price stipulated by Tim Hortons, whatever that price might have been.

The franchisees remained free to sell the donuts and timbits at whatever price they chose, up to

the price set by Tim Hortons. There is no evidence at all that the price charged by CillRyan had

an anti-competitive effect. The plaintiffs’ real complaint is that the price cut into their profits and

that they should have been able to reap the profit that CillRyan and Tim Hortons took.

[623]

Moreover, there is no evidence whatsoever that there has been an undue lessening of

competition. On the contrary, the plaintiffs allege that the QSR business is intensely competitive.

[624]

In my view, there is no genuine issue requiring a trial with respect to the breach of Old

Section 45. The agreement with IAWS was made for legitimate business purposes. There is no

evidence at all of an anti-competitive intent on the part of Tim Hortons and no evidence of any

undue lessening of competition.

7.

Conspiracy – New Section 45

Page: 148

[625]

Section 45(1) (“New Section 45”), amended March 12, 2010, provides as follows:

45. (1) Every person commits an offence who, with a competitor of

that person with respect to a product, conspires, agrees or arranges

(a) to fix, maintain, increase or control the price for the supply of

the product;

(b) to allocate sales, territories, customers or markets for the

production or supply of the product; or

(c) to fix, maintain, control, prevent, lessen or eliminate the

production or supply of the product. [emphasis added]

[626]

Section 45(4) provides a defence:

(4) No person shall be convicted of an offence under subsection (1)

in respect of a conspiracy, agreement or arrangement that would

otherwise contravene that subsection if

(a) that person establishes, on a balance of probabilities, that

(i) it is ancillary to a broader or separate agreement or arrangement

that includes the same parties, and

(ii) it is directly related to, and reasonably necessary for giving

effect to, the objective of that broader or separate agreement or

arrangement; and

(b) the broader or separate agreement or arrangement, considered

alone, does not contravene that subsection.

[627]

Section 45(8) defines a “competitor” as follows: “‘competitor’ includes a person who it

is reasonable to believe would be likely to compete with respect to a product in the absence of a

conspiracy, agreement or arrangement to do anything referred to in paragraphs 1(a) to (c).”

[628]

The elements of the offence are:

(a) a conspiracy, agreement or arrangement with a competitor;

(b) to fix, maintain, increase or control the price for the supply of a

product.

[629]

New Section 45 does not require an analysis of whether there is an “undue” restraint on

competition, because the impact of an agreement between competitors is so obvious that the

analysis is not required.

Page: 149

[630]

The plaintiffs’ claim under this section relies on the same allegations as are set out in

respect to the claim under Old Section 45. New Section 45 requires proof that the parties to the

agreement are competitors with respect to the product that is the subject of the conspiracy. The

plaintiffs allege that IAWS was a competitor of Tim Hortons.

[631]

As I have noted, a “competitor” includes a person who it is reasonable to believe would

be likely to compete with respect to the product in the absence of the conspiracy. As the

Competition Collaboration Guidelines issued by the Competition Bureau state, to be considered

competitors for the purpose of s. 45, “the parties must compete or be likely to compete, with

respect to the products that are the subject of the agreement alleged to contravene s. 45.” The

Guidelines provide:

Section 45 describes categories of agreements that are so likely to

harm competition and to have no pro-competitive benefits that they

are deserving of prosecution without a detailed inquiry into their

actual competitive effects.

These are agreements between

competitors to fix prices, allocate markets or restrict output that

constitute “naked restraints” on competition (restraints that are not

implemented in furtherance of a legitimate collaboration, strategic

alliance or joint venture) […] Other forms of competitor

collaboration, such as joint ventures and strategic alliances, may be

subject to review under the civil agreements provision in section

90.1, which prohibits agreements only where they are likely to

substantially lessen or prevent competition.

[632]

In my view, there is no genuine issue requiring a trial with respect to the alleged breach

of New Section 45, because Tim Hortons was not a “competitor” of IAWS with respect to par

baked donuts. It did not compete, nor was it likely to compete, with respect to par baked donuts.

It had, in the past, supplied donut mix to franchisees, but it had never produced or supplied either

finished donuts or par baked donuts. Nor was there any evidence that, in the absence of the

agreement with Tim Hortons, IAWS was likely to produce par baked donuts in Canada. There is

no evidence that TDL is a “competitor” of IAWS.

[633]

In any event, the establishment of the price at which donuts would be sold by the joint

venture was ancillary to the broader agreement for the construction of the Maidstone Bakeries

and the production of par baked donuts. New Section 45(4) confirms that the agreement of two

parties to form a joint venture to produce a product and to sell that product at a particular price is

not a prohibited price-fixing agreement. If that was the case, any price fixed by the agreement,

no matter what the amount, would contravene the section − a manifest absurdity.

[634]

8.

For all the foregoing reasons, the Competition Act claims are dismissed.

The Limitations Defence

Page: 150

[635]

The defendants argue that, in any event, the claims under s. 36 of the Competition Act

are statute-barred.

[636]

Section 36(4) of the Competition Act contains a two year limitation period for the

commencement of civil actions arising out of the breach of Part VI (which includes the price

maintenance offence in s. 61 and the conspiracy offences in both the present and the former s.

45). It states:

(4) No action may be brought under subsection (1),

(a) in the case of an action based on conduct that is contrary to any

provision of Part VI, after two years from

(i) a day on which the conduct was engaged in, or

(ii) the day on which any criminal proceedings relating thereto

were finally disposed of,

whichever is the later … [emphasis added].

[637]

[638]

Tim Hortons says that the “conduct” at issue in this case was either, or both, of:

(a) the joint venture agreement concerning Maidstone Bakeries,

which was entered into in March 2001; or

(b) the distribution agreements with GFS and Sysco, which were

entered into no later than May 2004.

It relies upon the decision of the Federal Court of Canada in Garford Pty Ltd. v.

Dywidag Systems International Canada Ltd., 2010 F.C. 996, [2010] F.C.J. No. 1259 (“Garford

Pty v. Dywidag”), in support of the submission that the limitation period begins to run when the

agreements were consummated. In that same case, Russell J. held that the “discoverability”

principle could not be used to extend the limitation period when the statute itself tied the

commencement of the limitation period to a specific event, namely “the day on which the

conduct was engaged in.”

[639]

Tim Hortons also says that, even if the discoverability principle applies, the plaintiffs

were aware of the relevant facts at least two years before the Competition Act claims were added

to the pleading in November 2010. By November 2008 – two years earlier – the plaintiffs had

been aware for years that the donuts were supplied by the joint venture and they knew the price

being charged.

[640]

I will begin by examining the nature of the offences. They have been set out earlier, but

in summary:

Page: 151

(a) section 61(1)(a) prohibits a party from, directly or indirectly …

(a) by agreement, threat, promise or any like means, attempt to

influence upward, or to discourage the reduction of, the price at

which any other person engaged in business in Canada supplies or

offers to supply or advertises a product within Canada;

(b) under Old Section 45 (s. 45(1)(b)) prohibits a party from

conspiring, agreeing or arranging with another party to enhance

unreasonably the price of a product; and

(c) under New Section 45 (s. 45(1)(a)) prohibits a party from

conspiring, agreeing or arranging with a competitor to fix,

maintain, increase or control the price of a product.

[641]

The plaintiffs plead that, since the Always Fresh Conversion, the defendants have used

agreements, promises and other like means to fix, maintain, increase or control the price of

Always Fresh donuts and timbits or to increase unreasonably the price thereof.

[642]

In Garford Pty v. Dywidag, Russell J. concluded, based on Laboratoires Servier v.

Apotex Inc. above, that the essence of the offence under s. 45 is the conspiracy or agreement,

which is different from the effect of the offence, namely the undue lessening of competition. He

referred to Eli Lilly & Co. v. Apotex Inc., 2009 F.C. 991, [2009] F.C.J. No. 1229 in which

Gauthier J., as she then was, held that the operative date for the commencement of the limitation

period was the date of the agreement and not the occurrence of the effects of that behaviour.

Russell J. concluded, at para. 43:

As the authorities show, the continuing effects of a conspiracy,

agreement or arrangement are not what are actionable under

subsection 36(1) of the Competition Act. The limitation period in

subsection 36(4) is based upon "conduct" - i.e. the conspiracy or

agreement in this case - and not upon its effects.

[643]

I agree with Tim Hortons’ submission. The Joint Venture Agreement was entered into

in or about March, 2001. The various distribution agreements were entered into between TDL

and Sysco and GFS in the period March 1, 2003 to May 5, 2004. Taking the Plaintiffs’ pleading

on its face and accepting that these agreements constituted “agreements, arrangements, or other

means” in the language of the Competition Act, section 36(4) operates to bar the Plaintiffs’

claims. The two year limitation period commences when the conduct in question – the

agreements – occurred.

[644]

The plaintiffs reply that there is a genuine issue requiring a trial about whether the

limitation period has expired, for three reasons.

Page: 152

[645]

First, the plaintiffs say that the conduct is continuing, since the price of Always Fresh

donuts and timbits are constantly changing. This argument was addressed and rejected in

Garford Pty v. Dywidag.

[646]

Second, the plaintiffs say that the discoverability principle applies. The proposition that

the discoverability rule applies to s. 36(4) of the Competition Act was rejected in Garford Pty v.

Dywidag at paras. 31 to 33:

I think it is clear, then, that there is no general application of the

discoverability rule as alleged by the Plaintiff, that it is always a

matter of statutory construction, and that the "law does not permit

resort to the judge-made discoverability rule when the limitation

period is explicitly linked by the governing legislation to a fixed

event unrelated to the injured party's knowledge or the basis of the

cause of action" (Ryan, above, at paragraph 24).

From these principles, it is clear why, in Laboratoires Servier,

above, Justice Snider relied upon Fehr, above, to conclude that the

time period in subsection 36(4) of the Competition Act ran from a

specific date that was independent of knowledge and that the

discoverability principle did not apply.

For these reasons, then, I think I must conclude that the Plaintiff

cannot rely upon the discoverability principle to extend the

limitation period in this case. In addition, even if the

discoverability principle were applied in this case, on the evidence

before me it is clear that the Plaintiff's subsection 36(4) claim

would still be time-barred.

[647]

Even if the discoverability rule applies, Tim Hortons’ interest in the Joint Venture was

publicly known as of March 2001 and the fact that donuts were being supplied by the Joint

Venture was known to the Plaintiffs prior to their conversion to Always Fresh in October of

2002. The plaintiffs knew the prices at which donuts and timbits were being supplied by 2004 at

the latest and the plaintiffs reasonably discovered the alleged breaches of the Competition Act

well before November 2008 (i.e. two years prior to the inclusion of the claims in the Statement

of Claim on November 28, 2010).

[648]

Finally, the plaintiffs rely on the common law doctrine of fraudulent concealment to

extend the limitation period. As described by the Court of Appeal in Giroux v. Trillium Health

Centre et al. (2005), 74 O.R. (3d) 341, [2005] O.J. No. 226 (C.A.) at para. 29:

Stated succinctly, it is aimed at preventing unscrupulous

defendants who stand in a special relationship with the injured

party from using a limitation provision as an instrument of fraud.

Page: 153

[649]

The facts of that case were particularly egregious. It was alleged that a physician

treating the plaintiff’s relative had lied to the deceased’s family concerning communications with

the deceased. He prepared a false set of notes to make it appear that he had diagnosed the

deceased’s cancer and claimed that he had informed the deceased who had refused treatment.

The physician’s conduct was manifestly dishonest, unprofessional and fraudulent. There is no

basis for a conclusion in this case that Tim Hortons has engaged in such conduct.

[650]

F.

Accordingly, the Competition Act claims are statute-barred.

The Liability of THI

[651]

In addressing the common issues, I have summarized the plaintiffs’ pleading to the

effect that THI is liable for the actions of TDL on the grounds of agency, holding out, or alter

ego. Tim Hortons says that these claims have no prospect of success, that the plaintiffs have put

forward nothing other than bare allegations for which there is no factual foundation and that

there is no genuine issue requiring a trial concerning the liability of THI.

[652]

In light of my conclusions on summary judgment, it is unnecessary to resolve this

question, but I will set out my disposition of the issue.

[653]

It has long been the law that a parent corporation and its subsidiaries are distinct legal

entities and their independent nature is to be respected in the absence of exceptional

circumstances. In Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co.

(1996), 28 O.R. (3d) 423, [1996] O.J. No. 1568 (Gen. Div.), aff’d [1997] O.J. No. 3754 (C.A.),

Sharpe J., as he then was, stated at para. 22:

… the courts will disregard the separate legal personality of a

corporate entity where it is completely dominated and controlled

and being used as a shield for fraudulent or improper conduct. The

first element, “complete control,” requires more than ownership. It

must be shown that there is complete domination and that the

subsidiary company does not, in fact, function independently.

[654]

Perell J. summarized the law in Miquelanti Ltda. v. FLSmidth & Co., [2011] ONSC

3293, [2011] O.J. No. 2490 at paras. 18-22:

The separate legal personality of the corporation, however, is not

lightly disregarded and a shareholder is liable for the wrongs of a

corporation only in very limited circumstances: Gregorio v.

Intrans-Corp. (1994), 18 O.R. (3d) 527 (C.A.); Canada Life

Assurance Co. v. Canadian Imperial Bank of Commerce (1974), 3

O.R. (2d) 70 (C.A.); Transamerica Life Insurance Co. of Canada

v. Canada Life Assurance Co. (1996), 28 O.R. (3d) 423 (Gen.

Div.), affd [1997] O.J. 3754 (C.A.); B.G. Preeco I (Pacific Coast)

Ltd. v. Bon Street Developments Ltd. (1989), 60 D.L.R. (4th) 30

Page: 154

(B.C.C.A.); Constitution Insurance Co. of Canada v.

Kosmopoulos, [1987] 1 S.C.R. 2; 801962 Ontario Inc. v.

MacKenzie Trust Co., [1994] O.J. No. 2105 (Gen. Div.).

The corporate veil may be pierced when the corporation is

incorporated for an illegal, fraudulent, or improper purpose, or

where respecting the separate legal personality of the corporation

would be flagrantly unjust: 642947 Ontario Ltd. v. Fleischer

(2001), 56 O.R. (3d) 417 (C.A.); Kosmopoulos v. Constitution

Insurance Co., supra; Transamerica Life Insurance Co. of Canada

v. Canada Life Assurance Co., supra; Clarkson Co. v. Zhelka,

[1967] 2 O.R. 565 ( H.C.J.); Parkland Plumbing & Heating Ltd. v.

Minaki Lodge Resort 2002 Inc., 2009 ONCA 256 at paras. 49-54.

The separate existence of a corporation may be ignored when the

corporation is under the complete control of the shareholder and its

existence is being used as a means to insulate the shareholder from

responsibility from fraudulent or illegal conduct: Transamerica

Life Insurance Co. of Canada v. Canada Life Assurance Co.,

supra; Aluminum Co. of Canada v. Toronto (City), [1944] S.C.R.

267 (S.C.C.).

In order to pierce the corporate veil, two factors must be

established: (1) the alter ego must exercise complete control over

the corporation or corporations whose separate legal identity is to

be ignored; and (2) the corporation or corporations whose separate

legal identity is to be ignored must be instruments of fraud or a

mechanism to shield the alter ego from its liability for illegal

activity: Transamerica Life Insurance Co. v. Canada Life

Assurance Co., supra; Haskett v. Equifax Canada Inc. (2003), 224

D.L.R. (4th) 419 (C.A.); Gregorio v. Intrans-Corp., supra;

Parkland Plumbing & Heating Ltd. v. Minaki Lodge Resort 2002

Inc., supra at paras. 49-54.

[655]

The plaintiffs rely on Wilson v. Servier (2000), 50 O.R. (3d) 219, [2000] O.J. No. 3392,

(S.C.J.) at para. 23, where on a certification motion Cumming J. refused to exclude the parent

corporation from the action, stating, “[I]t is far too early to put the plaintiff to the task of

unraveling the apparently complex corporate web of [the parent] and its affiliates, and of proving

her case.” To state the obvious, that was a certification motion, based only on the pleadings. On

this motion, the plaintiffs have an obligation to lead evidence on the issue or they risk losing.

The plaintiffs respond that the defendants have failed to answer questions with respect to matters

that are relevant to the liability of THI. That is not a sufficient answer – the plaintiffs have an

obligation to do more than speculate on what the evidence might show. If they considered the

issue important, they should have brought a motion to compel answers.

Page: 155

[656]

In this case, there is absolutely no evidence that TDL was incorporated for any illegal,

fraudulent or improper purpose or that the corporate structure is being used by THI to insulate

itself from such conduct. Nor is there any evidence to support a finding that it would be unjust to

respect the separate legal personalities of THI and TDL.

[657]

The “group enterprise theory” has sometimes been asserted as a way of fixing a parent

corporation with liability for the actions of its subsidiaries or other corporations in the “group”.

This theory has not been accepted by Canadian courts: see B.G. Preeco I (Pacific Coast) Limited

v. Bon Street Holdings Ltd., [1989] B.C.J. No. 1032 at 7 (C.A.); Hughes v. Sunbeam Corp.

(Canada), [2000] O.J. No. 4595 at paras. 43-49 (S.C.J.), var’d on other grounds (2002), 61 O.R.

(3d) 433 (C.A.), leave to appeal to the S.C.C. refused, [2002] S.C.C.A. No. 446; 801962 Ontario

Inc. v. MacKenzie Trust Co, [1994] O.J. No. 2105 at paras. 25-38 (Gen. Div.). In the latter case,

after a thorough review of the authorities, Spence J. summed them up as follows, at para. 37:

These decisions do not support a claim that the test in Salomon v.

Salomon has been superseded by a new "business entity" or "single

business entity" test. They merely illustrate the principle that, in

particular fact situations; where the nature of the legal issue in

dispute makes it appropriate to have regard to the larger business

entity, the court is not precluded by Salomon from doing so. In a

few cases, there are statements that the court will lift the corporate

veil" where injustice would otherwise result". I am not able to

conclude that such statements are intended to remove the authority

of the Salomon principle. I think they may be more in the nature of

a shorthand formulation reflecting the approach of the courts in the

cases discussed above.

[658]

The plaintiffs argue that THI could be held liable for the actions of TDL, because it

exercises such control over TDL that TDL has become its agent or alter ego. They say that this

control is exhibited since “TDL’s profits flow up to THI and THI may well guarantee TDL’s

debts.” Even if these statements were supported by the evidence, they would not establish that

TDL is the legal agent of THI or that THI is liable for its actions. The same allegations could

likely be made about most parent-subsidiary relationships, but the mere facts do not create an

agency.

[659]

The plaintiffs rely on the case of Buanderie central de Montréal Inc. v. Montréal (City),

referred to earlier in my discussion of the common issues, in support of the proposition that TDL

could be the alter ego of THI based on the close relationship between the companies and THI’s

“control” of TDL. Buanderie was a tax case, and the Court’s observations about the alter ego

concept must be considered in that context. Indeed, Gonthier J., who delivered the judgment of

the Supreme Court of Canada, cautioned about the extension of the concept, at para. 36 of his

reasons.

Page: 156

[660]

Finally, the plaintiffs rely on agency by estoppel, discussed earlier. The plaintiffs say

that THI has allowed TDL to appear to the world as its agent and that it is estopped from

repudiating the existence of that agency.

[661]

In order to establish agency by estoppel, the plaintiffs must show:

(a) that THI has, by its words or conduct, allowed TDL to appear

as its agent;

(b) that the plaintiffs have dealt with TDL as THI’s agent in

reliance on such conduct or holding out; and

(c) detriment to the plaintiffs as a result.

[662]

The plaintiffs rely on the defendants’ statement of defence in which it is acknowledged

that THI carries on business in Canada through its subsidiary TDL. This is not holding out. Nor

is it a statement that TDL is the agent of THI. It simply describes a common commercial

arrangement in which a foreign parent does business in Canada through a Canadian subsidiary. It

does not make the subsidiary the agent of the parent.

[663]

Nor does the inability of the defendants’ representatives on their cross-examinations to

clearly isolate THI’s role in various corporate activities mean that there was a holding out of

agency. It simply reflects that the corporate structure was interconnecting and complex. There is

nothing in THI’s annual reports or public filings that reflects a holding out of an agency

relationship.

[664]

Finally, there is no evidence that the plaintiffs treated TDL as an agent of THI in

reliance on any representation by THI.

[665]

G.

For these reasons, I would also dismiss the claim against THI.

Conclusions on Summary Judgment

[666]

I have given anxious consideration to the directions given by the Court of Appeal in

Combined Air. I have also considered the fact that this is a putative class action, that the claim

meets the requirements of s. 5(1)(a) to (d) of the C.P.A. and that the dismissal of the claims of

the representative plaintiffs will put the action in suspense and make it unlikely that another

representative will come forward to take their place.

[667]

I have concluded, however, that this action cannot possibly succeed, because the

plaintiffs are asking the Court to do something it cannot do – rewrite their franchise agreements

to give them a greater share of the profits they derive from the franchisor’s business system,

products, trademarks and know-how.

Page: 157

[668]

The plaintiffs’ real complaint about the Always Fresh Conversion, buried under boxes

of financial statements, statistics, affidavits, expert opinions and transcripts, and expressed with

eloquent and passionate advocacy by their counsel, is that they don’t get a bigger share of the

donut profits.

[669]

Their real complaint about the Lunch Menu is exactly the same. They want a bigger

share of the soup and sandwich profits.

[670]

At its core, this case is not complex. True, the plaintiffs have amassed a huge record

and the defendants have added their share to the pile. True, there are some conflicts in the

evidence, but many of those conflicts are irrelevant to the issues. This is not a case in which it is

necessary to make multiple findings of fact or to make findings of credibility.

[671]

The mountain of evidence adduced by both parties is largely irrelevant, because the

plaintiffs’ claims are based on a contractual and legal argument that is fundamentally flawed.

The plaintiffs’ claims have been dressed up in inflammatory language, like “economic harm” and

“mark-ups” and “commercially unreasonable”, but in the final analysis they are flawed. They are

flawed because the franchisor has done nothing more than what it is legally entitled to do.

[672]

Tim Hortons, as franchisor, is entitled to tell the franchisees what to buy and where to

buy it, and what to sell and how to sell it. It is entitled to make a profit on what the franchisees

are required to buy and it is entitled to determine the amount of its profit.

[673]

There are contractual and statutory limits to what Tim Hortons can do. It must abide by

the terms of its contracts. It must deal fairly with its franchisees and act in good faith and in

accordance with reasonable commercial standards in the performance and enforcement of its

contract. It cannot deprive the franchisees of the benefits of the contract or undermine the very

foundation of the contract. There is no evidence, considering the contract as a whole, that Tim

Hortons has failed to discharge these obligations.

[674]

It has been established beyond dispute that the Always Fresh Conversion was a rational

business decision made by Tim Hortons for valid economic and strategic reasons, having regard

to both its own interests and the interests of its franchisees. The evidentiary record provides

ample support for the conclusion that scratch-baking was unsustainable in the long run and that

the move to Always Fresh baking was beneficial for franchisees.

[675]

The evidentiary record also provides ample support for the conclusion that the

franchisor engaged in extensive discussion and communication with its franchisees before the

Always Fresh Conversion and that the change was supported by the majority of franchisees. The

franchisor informed the franchisees that the cost of raw materials would increase under Always

Fresh, but that this would be offset by labour savings and other savings and conveniences. The

experience of the franchisees over time has confirmed this assertion.

[676]

It has also been established that the implementation and expansion of the Lunch Menu

was a rational decision made by the franchisor after due consideration of the interests of the

Page: 158

franchisees, most of whom embraced the concept. There are commercial justifications for the

Lunch Menu, including the desirability of keeping stores busy during off-peak hours, promoting

sales of other products, such as coffee, tea and donuts in conjunction with Lunch Menu items and

keeping up with competitive pressures from other QSR franchises.

[677]

The Lunch Menu is not “imposed” on franchisees. The evidence is that it is carefully

researched by Tim Hortons and that there is broad consultation with franchisees, through the

Advisory Board, on menu changes and on the pricing of menu items. There is also consultation

with franchisees on price increases and franchisees actually vote on any price increases.

[678]

The unchallenged evidence is that in negotiating the price of the Always Fresh donut

out of Maidstone Bakeries, Tim Hortons gave due regard to the interests of its franchisees , while

at the same time considering its own interests, as it was entitled to do. There is absolutely no

evidence of criminal conduct or anti-competitive effects.

[679]

The fact of the matter is that under the Tim Hortons system, the franchisees are given

the licence to sell Tim Hortons trademarked coffee – a brand that is about as iconic as there is in

Canada. Coffee is the highest margin product the franchisee sells – the food cost is low, the

labour cost is low, and the sale price is high. Coffee is an enormous part of every franchisee’s

sales and accounts for a large part of every franchisee’s profits. There are other items in the

menu that are also highly profitable. What matters, at the end of the day, is whether the

franchisee makes sufficient profit overall to justify his or her investment and to remain in the

business. The suggestion by the plaintiffs that the franchisor has an obligation to price every

menu item so that they can make a profit on that particular item is not supported by the contract,

by the law or by common sense. It is simply not the responsibility of the court to step in to

recalibrate the financial terms of the agreement made by the parties.

VI.

CONCLUSIONS

[680]

For the foregoing reasons, the plaintiffs’ individual claims are dismissed. Counsel

should arrange a case conference in due course to discuss future steps in this proceeding.

[681]

Costs may be addressed by written submissions, in accordance with a timetable to be

agreed upon between the parties. The submissions, excluding the costs outline, shall be no more

than ten pages in length and shall be delivered to me care of Judges’ Administration.

___________________________

G.R. Strathy J.

Released:

February 24, 2012

Page: 159

Schedule “A”: Common Issues

Always Fresh frozen Baked Goods

Class A-1 Members: The conversion class

1. Did one or both Defendants breach s.7.03(a) of the License Agreement and/or

Operating Agreement (collectively, the “Agreement”) entered into by each Class A-1

Member by:

a. requiring the franchisees to undertake the AF conversion;

b. following the AF conversion, requiring the franchisees to purchase the

Always Fresh (“AF”) frozen donuts, timbits, muffins and cookie (the “AF

Baked Goods”) at commercially unreasonable prices;

c. following the AF conversion, requiring the franchisees to purchase the AF

Baked Goods at prices that were not offset by savings in labour, waste or

operational savings;

2. Did one or both Defendants breach s.3.00(f) or (i) of the Agreement by:

a. representing to franchisees, through the Advisory Board members and directly,

that they could deliver the frozen AF donut to the franchisees’ stores for 11 to 12

cents;

b. signing the JV agreement with IAWS Group plc (“IAWS”) on March 6, 2001

without reasonable analysis of the impact of the increased costs at the franchisee

level;

c. requiring the franchisees to undertake the AF conversion;

d. following the AF conversion, requiring the franchisees to purchase the AF Baked

Goods at commercially unreasonable prices;

e. following the AF conversion, requiring the franchisees to purchase the AF Baked

Goods at prices that were not offset by savings in labour, waste or operational

savings;

f. representing that the increased food cost of the AF Baked Goods would be offset

by savings in labour, waste and other operational expenses;

g. failing to take reasonable steps to consider and redress the commercially

unreasonable prices of AF Baked Goods;

Page: 160

3. With respect to the Class A-1 Members:

a. did the Agreement contain an implied term that the ingredients and commodities

franchisees were required to purchase from the Defendants and/or manufacturers

and distributors designated by the Defendants would be sold to the franchisees at

commercially reasonable prices?

b. if so, did one or both Defendants breach that implied term by requiring the

franchisees to purchase the AF Baked Goods at commercially unreasonable

prices?

4. As a result of any of the conduct described in 2.a. to g. above, did one or both

Defendants breach their duties to the Class A-1 Members:

a. under the Arthur Wishart Act (Franchise Disclosure), 2000 or similar statute, to

act fairly, in good faith and in a commercially reasonable manner; or

b. under the common law, to act fairly, in good faith and in a commercially

reasonable manner?

Class A-2 Members: Post-conversion franchisees purchasing AF Baked Goods

5. With respect to the Agreement entered into by each Class A-2 Member:

a. did the Agreement contain an implied term that the ingredients and commodities

franchisees were required to purchase from the Defendants and/or manufacturers

and distributors designated by the Defendants would be sold to the franchisees at

commercially reasonable prices?

b. if so, did one or both Defendants breach that implied term by requiring the

franchisees to purchase the AF Baked Goods at commercially unreasonable

prices;

6. As a result of the conduct described in 5.b. above, did one or both Defendants:

a. breach their statutory duties to the Class A-2 Members to act fairly, in good faith

and in a commercially reasonable manner; or

b. breach their common law duties to the Class A-2 Members to act fairly, in good

faith and in a commercially reasonable manner?

Class A-1 and Class A-2 Members

Page: 161

7. In requiring the franchisees to purchase the AF Baked Goods, did one or both

Defendants breach the Competition Act in one or more of the following ways:

a. by agreement or other like means with other parties to the chain of supply of AF

frozen donuts and Timbits, influencing upward or discouraging the reduction of

prices for those products charged by those other parties in the supply chain, in

contravention of s.61(1) until March 11, 2009;

b. by agreement with other parties to the AF frozen donut and timbit supply chain,

enhancing unreasonably the price charged for those products by those other

parties, in contravention of s.45(1)(b) until March 11, 2010; or

c. by agreeing with IAWS to fix, maintain, increase or control the price for the

supply of AF frozen donuts and timbits, in contravention of s.45(1)(a) from and

after March 12, 2010; and

d. if so, are the Class A-1 and/or Class A-2 Members entitled to recover from one or

both Defendants the full costs of their investigations and the full costs of this

proceeding on a complete indemnity basis under s.36(1) of the Competition Act?

8. By virtue of waiver of tort, are the Defendants liable on a restitutionary basis:

a. to account to the Class A-1 Members for any part of the Defendants’ financial

benefit from the AF conversion as a result of the conduct described in issues 1 to

4 and 7 above?

i. If so, in what amount and for whose benefit is such accounting to

be made?

ii. Or, in the alternative, such that a constructive trust is to be imposed

on all or any part of the Defendants’ financial benefit from the AF

conversion for the benefit of the Class A-1 Members? If so, in

what amount and by whom are such profits held?

b. to account to the Class A-1 and Class A-2 Members for any part of the

Defendants’ financial benefit from the sale of some or all the AF Baked Goods as

a result of the conduct described in issues 2.d., 4 (referable to 2.d.) and 5 to 7

above?

i. If so, in what amount and for whose benefit is such accounting to

be made?

ii. Or, in the alternative, such that a constructive trust is to be imposed

on all or any part of the Defendants’ financial benefit from the sale

of some or all the AF Baked Goods for the benefit of the Class A-1

Page: 162

and Class A-2 Members? If so, in what amount and by whom are

such profits held?

9. Have the Defendants been unjustly enriched to the detriment of the Class A-1 or

Class A-2 Members as a result of any of the conduct referred to in issues 1 to 7

above?

The Lunch Menu

Class B Members

10. Did one or both Defendants breach one or more of s.7.03(a), s.3.00(f) and s.3.00(i)

by:

a. requiring franchisees to purchase the ingredients and commodities for the Lunch

Menu at commercially unreasonably high prices from the Defendants and/or

manufacturers and distributors designated by the Defendants and/or setting the

maximum prices for Lunch Menu items at commercially unreasonably low prices,

such that the Lunch Menu as a category generates revenue for the Defendants

while franchisees lose money because the costs associated with selling the Lunch

Menu exceed the revenue generated by those sales;

b. failing to perform any form of product category or menu analysis on the Lunch

Menu, contrary to reasonable commercial practices;

11. With respect to the Class B Members:

a. did the Agreement contain an implied term that the ingredients and commodities

franchisees were required to purchase from the Defendants and/or manufacturers

and distributors designated by the Defendants would be sold to the franchisees at

commercially reasonable prices?

b. if so, did one or both Defendants breach that implied term by requiring the

franchisees to purchase the ingredients and commodities for the Lunch Menu at

commercially unreasonable prices?

12. As a result of any of the conduct described in 10. above, did one or both Defendants

breach their duties to the Class B Members:

a. under the Arthur Wishart Act (Franchise Disclosure), 2000 or similar statute, to

act fairly, in good faith and in a commercially reasonable manner; or

b. under the common law, to act fairly, in good faith and in a commercially

reasonable manner?

Page: 163

13. By virtue of waiver of tort, are the Defendants liable on a restitutionary basis as a

result of any of the conduct referred to in issues 10 to 12 above:

a. to account to the Class B Members for any part of the Defendants’ financial

benefit from the Lunch Menu? If so, in what amount and for whose benefit is

such accounting to be made? Or, in the alternative,

b. such that a constructive trust is to be imposed on all or any part of the Defendants’

financial benefit from the Lunch Menu for the benefit of the Class B Members?

If so, in what amount and by whom are such profits held?

14. Have the Defendants been unjustly enriched to the detriment of the Class B Members

as a result of any of the conduct referred to in issues 10 to 12 above?

All Class Members

15. If one or more of the common issues 1 to 7 or 10 to 12 are answered in the

affirmative, is the Defendant Tim Hortons Inc. liable to the Class Members:

a. as a direct participant in the wrongful conduct;

b. on the basis of agency by estoppel and/or

c. on the basis that it is the alter ego of the Defendant The TDL Group Corp. or

one or more of its corporate predecessors?

16. If one or more of the common issues 1 to 7 or 10 to 12 are answered in the

affirmative, how are damages to be computed as payable between the Defendants and

allocated for distribution to the Class Members?

17. Should one or both Defendants pay prejudgment and post-judgment interest, at what

annual rate, and should the interest be compound interest?

18. Should one or both Defendants pay the cost of administering and distributing any

monetary judgment and/or the cost of determining eligibility and/or the individual

issues? If so, who should pay what cost, why, in what amount and to what extent?

CITATION: Fairview Donut Inc. v. The TDL Group Corp., 2012 ONSC 1252

COURT FILE NO.: CV-08-00356806-CP00

DATE: 20120224

ONTARIO

SUPERIOR COURT OF JUSTICE

B E T W E E N:

FAIRVIEW DONUT INC. AND BRULE

FOODS LTD.

Plaintiffs/Moving Parties on Certification Motion/

Respondents on Summary Judgment Motion

- and -

THE TDL GROUP CORP. AND TIM

HORTONS INC.

Defendants/Respondents on Certification Motion/

Moving Parties on Summary Judgment Motion

__________________________________________

REASONS FOR JUDGMENT

__________________________________________

Strathy J.

Released:

February 24, 2012