760437 Alberta Ltd. Plaintiff - v. -, 2012 ABQB 266

Court of Queen ’ s Bench of Alberta Citation: 760437 Alberta Ltd. v Fabutan Corporation, 2012 ABQB 266 Date: 20120430 Docket: 1001 13653 Registry: Calgary Between: 760437 Alberta Ltd. Plaintiff - and - Fabutan Corporation Defendant Corrected judgment: A corrigendum was issued on June 12, 2012; the corrections have been made to the text and the corrigendum is appended to this judgment. _______________________________________________________ Memorandum of Judgment of the Honourable Madam Justice B.E.

Romaine _______________________________________________________ Introduction [ 1 ] Unfortunately, a sister and brother who had for years co-existed in a successful business venture suffered a breakdown of their personal and business relationship, leading to this litigation. At issue is whether the franchisor Fabutan Corporation, run by the

brother, was justified in refusing to renew franchise agreements held by his sister. Facts [ 2 ] Douglas McNabb is the President of Fabutan Corporation, a business that promotes indoor tanning services and franchise opportunities. Mr. McNabb and his parents became involved in the tanning service business in the 1990s. In 1992, Mr. McNabb bought the Fabutan business from its previous owner and became President. Mr. McNabb’s parents continued to be involved in the business until they divorced in about 2002. The divorce was highly acrimonious, and resulted in Mr.

McNabb’s father, Frank McNabb, having no further financial interest in the Fabutan companies and limited, if any, contact with the rest of the family. [ 3 ] Darcy McNabb is Mr. McNabb’s sister. In 1992, she decided to enter the tanning franchise business. From time to time, the agreements relating to those franchise locations were amended and renewed for ten year periods without incident. At different times Ms. McNabb owned up to nine Fabutan franchise locations. After she was in a car accident, she down-sized her holdings to two locations, which are the subject of this litigation.

The history of these franchises is as follows. [ 4 ] On December 1, 2000, Ms. McNabb and her company 760437 Alberta Ltd. entered into a franchise agreement with 510933 Alberta Ltd., a Fabutan company, relating to a tanning salon referred to as SouthTrail or Studio #100. On April 16, 2003, she and 760432 executed a second franchise agreement with Fabutan in relation to a tanning salon referred as Bridlewood or Studio #151. [ 5 ] Ms. McNabb testified that she began lending money to Mr.

McNabb and the Fabutan-related companies in 1991 or 1992 when he purchased the company and required a loan to finance the purchase, and that she continued to make substantial loans to Mr. McNabb or Fabutan from time to time. She also made loans to 418759 Alberta Ltd., the “Tanning Depot”, a related family company that supplied the franchisees, in which she became a shareholder with other family members. At the time of these events, Mr. McNabb in the process of buying out Ms. McNabb’s interest in the Tanning Depot over time, but she was still a shareholder. [ 6 ] On January 17, 2006, Mr.

McNabb borrowed about $141,000 from his sister when Fabutan was in a tough spot financially. Fabutan was the subject of an inquiry brought by the Commissioner of Competition under the Competition Act relating to alleged misleading advertising practices. The Commissioner, Fabutan and Mr McNabb entered into a consent agreement whereby Fabutan and Mr.

McNabb agreed that Fabutan would make no false or misleading representations to the public, would make no statements without adequate and proper testing, would undertake certain practices with respect to advertising, would post a corrective notice on its website, would withdraw certain promotional materials it had been using; would establish a compliance program internally and would pay an “administrative monetary penalty” of $62,500. Mr. McNabb was to make a personal charitable donation of $12,500.

The loan was to cover these penalties and the costs of the proceedings, and was evidenced by a demand promissory note. Ms. McNabb suggests that the loan was made at a lower interest rate than Mr. McNabb would have been able to obtain through normal channels. [ 7 ] Over the years, Ms. McNabb loaned Mr. McNabb and Fabutan-related companies approximately $1.6 million. At the time of the events in issue, roughly $450,000 was owed to Ms. McNabb by various Fabutan companies by way of demand loans. [ 8 ] In December, 2009 Fabutan organized a sales contest for its franchises and employees.

On January 10, 2010, Karina Kipp, the Director of Sales and Marketing for Fabutan, sent an email to participants with the result of the contest, which included the following comments: Once again, the intention of these contests is to give CEO’s a chance to win a cool prize. Sometimes events occur in these contests that put into question how winners achieve sometimes very high results. While no one who breaks the rules would ever be permitted to win one of these contests sometimes loopholes within the rules are discovered thus putting other participants at a disadvantage.

To reduce the possibility of the results of these contest being put into question in the future we are considering the exclusion of franchisees going forward. So, in order to uphold our standard of fair and equal opportunity for all participants in our contests, we are also awarding two iPod winners!

Darcy McNabb from studios #100 & #151 AND Sara Newcombe from studio #27 [emphasis in original] [ 9 ] It is clear from subsequent events and the testimony at trial that, foolishly, the content of this email was authorized by Mr. McNabb. It is also clear that recipients of the email would have concluded that the snide implication of cheating referred to Ms McNabb. All further events occurred in 2010 unless otherwise indicated. [ 10 ] Ms. McNabb did not take this calmly. On January 10, she emailed the following to Ms. Kipp, copied to her brother: I think this makes me sound pretty bad.

Makes it sound like I used loopholes to win which I don’t think is the case. I cleared with you before I entered and my brother also knew I was competing. If you disagree would love to know what your are considering loopholes as you yourself said you felt I won fair and square. Why the comment about people finding ways to use loopholes and put others at a disadvantage. Seems directed directly at me as you are awarding a second prize because of this. A simple because a franchisee won we have decided to award a prize to the highest ceo as well. Pretty upset about the way I and others think this makes me look.

I personally do not feel these comments to be very professional and am a little hurt by them. [ 11 ] Mr. McNabb responded the next day with an email that included the following comments: It was made clear in the contest winners email that no rules were broken. Karina explained the various ways which were used to win the contest. Although it is likely we will disagree I believe they were accurately described as loopholes. These loopholes put other contestants at a disadvantage. This is the reason that I incurred the cost of buying 2 prizes.

We did not award the second prize because a franchisee won, we did it because we felt that other CEO’s were put at a disadvantage by the things done to win the contest. Most of the loopholes could not have been done by a CEO and only by a franchisee. If we were able to confirm that any franchisee had won a contest this way we would have sent out the same email. As for being hurt, I know Karina feels the same way after, as she described “begging you” not to sell large order to your friends. If you would like to discuss this further let me know. [ 12 ] Within minutes, Ms.

McNabb responded as follows: Begging me not to sell large orders to my friends? I actually asked Karina if friends could buy and she said no problem as long as they pay full price she would probably do the same thing if she was in it. Simply calling in favors from friends. However I did not sell LARGE orders to friends at all. I had one friend buy Amino and that is it and I believe 2 friends bought lotion and all were at full price. You are telling me you don’t think any other ceo had friends buy. What are the loopholes I used perhaps she could explain them to me.

I did tell Karina many ways that could have been used but did not use these to my advantage. If that is what I was going to do I would have posted way higher numbers. You have confirmed nothing and perhaps should have talked to the Franchisee in question before sending out the email. Breaking rules using loopholes same thing. I have asked several people what this sounds like and they all agree it does not sound good on my part. Thats fine you guys want to make me look bad go ahead. Karina knew I was entering cleared it with her before I did and I did nothing but go in and sell stuff.

So would be appreciated if you could tell me what loopholes I used or what I did that ceos could not have done as well. [emphasis in original]

[ 13 ] The email exchange accelerated throughout the day with each sibling attempting to justify their position, and the tone became more personal and biting, referencing past family difficulties and resentments. Ms. McNabb asked for a retraction, and did not get one. [ 14 ] On January 28, Ms. McNabb sent an email to her brother, commenting that she had thought over what had happened, that what was done with respect to the contest was “unforgivable and very hurtful”, that she had given him a opportunity to withdraw the accusations and noting that he had not done so.

She referred to past grievances about their relationship, and concluded with the statement that she no longer wished to be Mr. McNabb’s “bank”, commenting: “(y)ou need to take the next 30 days to find financing elsewhere as I no longer have an interest helping out someone willing to treat me and disrespect me the way you have . . . Please have my money from all loans to your companies back to me by March 1/10.” [ 15 ] Mr. McNabb responded, including the following comments: . . . I must say I never saw this coming.

Given how bad things are in the industry, current credit availability, and the fact that our sales are down drastically in all companies we won’t be able to get financing to meet your demand request so probably no need to wait until March 1/10 to take action. I really wish I had a better answer but I guess you will have to realize on your security and take some of the assets you have registered. [ 16 ] There was a flurry of emails relating to why Mr. McNabb may find it difficult to repay the loans and the terms of repayment, punctuated by accusations back and forth.

A Fabutan management employee, Dave Hollohan, was drawn into the conflict to review the loan documentation, and Mat Rockey, the Vice-President of Operations, became involved in an attempt to calm the situation. It didn’t work; the heated emails continued, with at one point Mr. McNabb telling Ms. McNabb that he didn’t care if she disclosed the entire email chain to others, and inviting her to engage a lawyer to collect the money. [ 17 ] Mr. Hollohan cautioned Mr.

McNabb that things were becoming very serious, and that he was feeling awkward in being included in some very personal email exchanges, commenting in a February 5, email: . . . I get the feeling Darcy just thinks you are `spinning things’ when you note her demand for payment could crumble the entire business and the staff here would be on the street. . . . that is very scary because it is reality. . . [ 18 ] Mr. McNabb persisted in stone-walling Ms. McNabb over the options for payment and the tenor of the emails continued to deteriorate. On February 5, Mr. McNabb advised Ms.

McNabb that he could not meet her March 1, deadline and advised her to “(d)o what you have to do and we’ll see where that takes us. . .”. [ 19 ] On February 11, Mr. McNabb offered to retract the cheating allegations if Ms. McNabb would be willing to retract her demand for payment. He had a notice sent out on that day to franchisees on “Force”, Fabutan’s internal website, that read as follows: On January 8 th , 2010 we announced 2 winners of the Pack your shorts contest! It seems that some perceived this to imply that cheating had taken place in the contests.

This communication is simply to assure everyone that no cheating took place and that the winners won their prizes without breaking any of the rules. [ 20 ] Ms. McNabb retorted that she had told him on February 10, that the retraction was no longer important, as she had cleared things up with people who were important to her. She commented that the situation was now far bigger than the contest allegations. [ 21 ] Mr. McNabb responded, on February 13, saying that despite Ms.

McNabb’s wish to terminate their business relationship, the “money will remain owing to you into 2013" and asked for an extension in the time to repay to September 1.

[ 22 ] On February 18, Ms. McNabb emailed the Fabutan employee she had typically dealt with when renewing her franchises and asked who she would notify to let them know she wanted to renew the franchise for the SouthTrail studio, which was due to expire in December. She received a response indicting that Mr. McNabb would contact her. The evidence with respect to the normal process of franchisee renewal is that the renewal is discussed in a meeting of Fabutan staff, called a “funnel meeting”. In this case, there was no meeting. Mr. McNabb decided to make the decision on his own. [ 23 ] On February 19, Mr.

McNabb and Ms. McNabb spoke on the telephone. Ms. McNabb testified that Mr. McNabb told her that he was not going to renew her franchise, that the conversation became quite heated, with Mr. McNabb making threats of revenge and reference to past incidents. Mr. McNabb admits that he made inappropriate comments, but pled stress over the loan demands. [ 24 ] On February 22, Mr. McNabb sent an email to Ms.

McNabb that included the following statements: This email outlines the call you made today to my cell phone at 11:33 am today, Saturday, February 20 th , 2010 regarding the situation surrounding the renewal of your franchise agreement. You said you were calling to clarify further from our call yesterday that you would go into “revenge mode” if Fabutan Corporation exercised its full and absolute legal right to not renew your Franchise Agreement . . . known currently as SouthTrail Fabutan.

You stated that you would be calling Frank McNabb, our estranged father who would “have your back” on this and who has made numerous threats against both Fabutan and myself personally and that “I didn’t want that to happen”. In my opinion this is a threat to cause undue harm to Fabutan Corporation, affiliated companies, myself and even my/our family. These threats in my opinion fall outside of your acknowledged legal right to pursue monies owing to you. I assume based on the previous communication attached below to . . . of our office that despite the above you are interested in renewing your agreement.

If so please confirm this prior to February 28th, 2010 as per the requirement of your franchise agreement. Fabutan Corporation has made no decision as to whether or not we will be renewing the aforementioned franchise agreement at this time. These threats potentially affect my family and employees and thus are both very disturbing and distressing. I have discussed the above and mattes surrounding the monies owing to you with legal counsel and have been advised to discontinue further discussions.

In the event your legal counsel has any further correspondence or communication on this matter please have them direct it . . . my lawyer. [ 25 ] Ms. McNabb responded indicating she had a very different recollection of the conversation, and noting that Mr. McNabb knew she wanted to renew her franchise as he told her on Friday the 19th that he would not be renewing it because of their quarrel. Nevertheless, she confirmed that she wanted to renew. Ms.

McNabb also indicated that she had retained counsel and expected payment of the debt owing to her on March 1. [ 26 ] The reference to Frank McNabb is key to what occurred subsequently. Ms. McNabb testified that the Saturday phone call was quite heated, with Mr. McNabb telling her that she could not see his sons, her nephews. She denies saying that she would call their father, but does admit that she said that she had cut the wrong person out of her life at the time of the divorce, which Mr. McNabb would take to be a reference to their father. [ 27 ] Ms.

McNabb’s counsel followed these emails within a few days with a demand letter to Mr. McNabb’s counsel. [ 28 ] On March 11, Fabutan was able to re-finance in order to pay down some of Ms. McNabb’s demand loans, although some other loans remained outstanding. [ 29 ] Mr. McNabb and Ms. McNabb did not have contact again until April 22, when Ms. McNabb emailed Mr. McNabb asking for a formal reply to her request for renewal of the SouthTrail franchise, as it was now over 60 days since she had made her request. Mr.

McNabb responded that it was not Fabutan’s intention to renew the franchise, but that he would extend the existing agreement for six months to allow her to sell the location. He stated that the reason for the non-renewal was that “recently as a result of a dispute between our companies you threatened legal action against Fabutan”, and that “you no longer wish to continue this business relationship”.

[ 30 ] Ms. McNabb responded that the prior events were a personal dispute, and not a dispute between her corporation and Fabutan, and that she had never indicated that she wanted to end her company’s relationship with Fabutan. Mr. McNabb responded on April 28, disagreeing with her, but “temporarily” withdrawing his notice of non-renewal until he sought legal advice. [ 31 ] Ms. McNabb had lunch on May 6, with Cheri Weder, the “local area representative” for Fabutan. Ms. Weder states in an affidavit (admitted in evidence at the trial by consent of the parties) that Ms.

McNabb threatened revenge on her brother, and that she would compete with Fabutan if her franchise agreements were cancelled. Ms. McNabb states that these comments are inaccurate, that she said she would be in “defence mode” and would have no choice but to be independent if the franchise agreements were not renewed. I can make no finding of credibility between the two versions of this lunch given that Ms. Weder’s allegations are by way of affidavit, but this ultimately has no major relevance to what occurred later, except that Ms. Weder reported her version to Mr.

McNabb, and this may have helped to prompt what next occurred. [ 32 ] On May 25, Mr. McNabb’s counsel sent an email to Ms. McNabb’s counsel as follows: Re the SouthTrail studio, pursuant to clause 4.3 of the Franchise Agreement, the Franchisor refuses to renew the term of this agreement. The Agreement expires on December 1, 2010. The reasons follow: 1. The Franchisor has received more customer complaints about this studio than about any other studio in the Fabutan chain. The complaints are varied. Customers complain they are not able to get an appointment; they find the studio unsanitary and dirty.

In addition, several employees have complained about their working conditions. Cumulatively the complaints reflect poorly on the Fabutan brand. 2. Further Darcy McNabb in February and March of this year made unreasonable demands for repayment of funds owing to her by the Fabutan group of companies. These demands poisoned the business relationship between her/her company and the Fabutan companies. The Franchisor no longer wishes to be in a business relationship with Darcy McNabb and 760437 Alberta Ltd. Further the Franchisor does not elect to compensate the Franchisee pursuant to clause 4.3(

b) of the Franchise Agreement, SouthTrail. Re the Bridlewood studio, pursuant to clause 16.7 of the Franchise Agreement, given the termination of the SouthTrail franchise agreement, the Franchisor elects to terminate this Bridlewood agreement. The Bridlewood agreement expires on November 30, 2010. [ 33 ] Concurrent with this letter, Mr.

McNabb’s counsel offered to settle the renewal issue in a “confidential settlement” under which the franchise agreement for Studio #100 would be extended to November 11, 2011 on existing terms, and the franchise agreement for Studio #159 would be extended to January 1, 2012 on existing terms. The offer to settle was expressed to be open for three days and noted that it would “permit your client to sell those two locations in a measured manner to a purchaser(

s) acceptable to Fabutan”. Ms. McNabb noted that this offer would actually shorten the term of the Bridlewood franchise. [ 34 ] Ms. McNabb’s then counsel advised that she had not been retained on this issue, but only the loan repayments, and Mr. McNabb emailed Ms. McNabb on May 31, to the same effect. [ 35 ] On June 2, new counsel for Ms. McNabb advised Mr. McNabb’s counsel that in his view, the reasons for termination were not adequate to support a non-renewal and that the attempted cross-termination was also ineffective. The letter requested a franchise agreement for a five year term for SouthTrail by June 11.

By a June 13, email, counsel for Ms. McNabb suggested that, in the alternative, the parties could operate under a 5 year extension to the previous agreement. Counsel for Mr. McNabb responded indicating that he disagreed with the position set out in the June 2, letter, but “that said”, if Fabutan was to review the franchise, it needed to have the lease documents for the two locations, and would renew based on the “updated Franchise Agreement it now uses”. Counsel then referred to dividend cheques owed to Ms. McNabb by virtue of her shareholding in the Tanning Depot, and “minutes to be signed”.

He also indicated that he had instructions to pay out the last two loans owing by Fabutan to Ms. McNabb. On June 24, counsel for Ms. McNabb

asked for a copy of the updated franchise agreement. [ 36 ] Unfortunately, Frank McNabb now entered the dispute. Ms. McNabb testified that she had no relationship with her father until she reconnected with him about mid-June when she began to perceive that her brother had been responsible for alienating her from her father at the time of the divorce. She testified that she felt during the spring of 2010 that she was being pushed out of the family and that her mother was more aligned with her brother.

She contacted her father, but told him she was just calling to reconnect, and did not want his help with what was happening at Fabutan. [ 37 ] However, the senior Mr. McNabb sent an email to Mr. McNabb on June 28, copied to Ms. McNabb, that included the statement “I am aware of your shenanigans, my recommendation is to stop”. Mr. McNabb immediately sent an email to his sister on June 29, asking whether she had authorized their father to communicate on her behalf and if she had therefore dismissed her counsel.

He then apologized for the lack of timely communication and indicated that “we plan to renew your franchise agreement for a period of five years as per the terms of the original franchise agreement”. He refers to the request for copies of the leases and states “we will be exercising our option under Clause 6.4 in conjunction with your renewal”. [ 38 ] On the same day, June 29, counsel for Mr. McNabb sent a dividend cheque of $49,600 together with a number of corporate documents and minutes to Ms. McNabb’s counsel on trust conditions. Ms.

McNabb’s counsel responded that he was not instructed to act for her in these corporate matters, but that he was aware that Ms. McNabb wanted the franchise matter cleared up before any other matters were addressed. He returned the cheque and documents. [ 39 ] Counsel for Mr. McNabb responded within a half hour indicating that Fabutan would not proceed with a renewal of the franchise agreement unless the corporate documentation was signed, and making threats to pursue litigation and solicitor-client costs if Ms.

McNabb failed to accept payout of the remaining loans (which had not yet been tendered). [ 40 ] The same day, June 29, Ms. McNabb emailed counsel for Mr. McNabb directly confirming her counsel was only acting on the franchise dispute, that she did not need legal assistance with the corporate matters or payment of the remaining loans and commenting that “I have never said I will refuse payout of any loans so your threat to sue me for costs is ridiculous”. [ 41 ] On July 6, Mr. McNabb’s counsel sent an email to Ms.

McNabb’s counsel on the franchise issue, repeating the demand for copies of the lease agreements and stating that under an updated franchise agreement, Fabutan would take over the lease and sub-lease to the franchisee. He stated he would “shortly receive” the draft updated franchise agreement presumably from Mr. McNabb. [ 42 ] Despite Ms. McNabb’s email, Mr. McNabb’s counsel then advised her counsel on the franchise renewal matter as follows: As to payout of the two loans and payment of the dividend, both as referred to in our exchange of emails of June 29, this is linked to the renewal.

All three matters will proceed together. They will proceed as a package. Ms. McNabb after our exchange of emails emailed me directly. I have not read the emails. I will continue to deal with you alone. [ 43 ] Frank McNabb weighed in with an email on July 7 to Mr. McNabb, Mr. McNabb’s counsel and copied to Ms. McNabb, advising that he knew about Mr. McNabb’s counsel sending correspondence to Ms. McNabb’s counsel on non-franchise matters despite being told to stop, and making miscellaneous threatening comments. Mr. McNabb advised his counsel that he would contact Ms.

McNabb directly, and did so on July 2, as follows: We are aware that you have instructed your legal counsel to cease acting on your behalf. Fabutan Corporation will communicate directly with you regarding the matter of your franchise renewal.

As per Clause 4.2 of the agreement, executed and agreed to by our parties, Fabutan Corporation is prepared to renew your Franchise Agreement for the renewal period of 5 years. Also per Clause 4.2, Fabutan Corporation will require you, the franchisee, to execute the standard form of Franchise Agreement in use by the Franchisor at this time. Further, Fabutan Corporation will exercise its option to sublease as per Clause 6.4 of the Franchise Agreement. We will require a copy of your lease for our review. Please forward a copy as soon as possible.

Once we have received and reviewed your lease documentation we will then forward to you for execution the appropriate documentation required to complete the renewal including, but not limited to, the current form of franchise agreement in use. We acknowledge that the notice period for the renewal of your Franchise Agreement has expired but we will extend the period to 12:00pm, Monday July 12th, 2010.

The aforementioned Clause 4.2 of the agreements states “If the Franchisee is not prepared to execute the Franchisor’s standard form of renewal Franchise Agreement, this Agreement shall then terminate at the end of the Term.” If we have not received in writing your confirmation that you wish to renew as outlined above by 12:00p., Monday, July 12 th the Franchise Agreement will terminate on November 30 th , 2010 as per the agreement. All Clauses relating to termination will then apply. [ 44 ] Mr. McNabb admitted that Fabutan had never exercised the option to sublease with respect to any other franchisee.

By email dated July 13, Mr. McNabb agreed to give Ms. McNabb until August 16 to decide whether or not to renew. It is noteworthy that Ms. McNabb was not sent a draft of the allegedly updated standard form of franchise agreement, and still had not received that document by August 16. [ 45 ] In the meantime, however, their father was sending various abusive and threatening emails to Mr. McNabb, although in one, he states specifically that he represented no one and that Ms. McNabb had asked him to stay out of the situation. [ 46 ] On August 16, shortly before noon, Ms. McNabb emailed Mr.

McNabb, stating that she assumed that from the lack of communication that Fabutan expected both studios to cease operating by November 30, and commenting: . . .if you wish to negotiate a new franchise agreement with myself for both locations, I would be willing to do so on my terms and conditions. So that there is no misunderstanding and we can be clear and no longer waste anymore time, I will not sign any form of agreement that you or your legal council [sic] have or will prepare .

Given the proven abilities of your management skills to put the business second and your personal feelings first, your intentions will always be a concern for me. I am of the position that you and Fabutan Corporation need me as a part of your chain a lot more than I need you. If you wish for me to remain part of your franchise and continue to be the flagship of the company, I will only do so under my terms and conditions. Unlike your previous attempts with terms and conditions, mine will be fair to both parties and will definitely not include you holding either of the leases. [emphasis in original] [ 47 ] Ms.

McNabb continued with comments in a personal vein, obviously very emotional. [ 48 ] Within hours, Mr. McNabb responded as follows: Thank you for your correspondence (attached below) dated Monday, August 16 th , 2010 stating that you have chosen not to renew your Franchise Agreement related to the Fabutan Franchise located at 15, 4307, 130 th Ave SE, Calgary, Alberta as per the terms of Clause 4.2 of said agreement. You stated that you (or your company) will “ not sign any form of agreement that you or your legal council have or will prepare ”.

It is a condition of all franchise renewals that the franchisee must execute the current form of Franchise Agreement. Fabutan Corporation has never made an exception to this condition. You have also taken the position from prior correspondence that this in effect terminates the Franchise Agreement for the location located at #207, 2335 162 nd Avenue SE, Calgary, Alberta, T2Y 4S6. We accept your position that the agreement relating to this location

will also terminate effective November 30 th , 2010. Given that you are not willing to renew your agreement under the terms of the current form of Franchise Agreement Fabutan Corporation is forced to terminate your franchise agreements effective November 30 th , 2010. Further, as the situation between our parties has become very difficult we propose that the effective date for termination of the aforementioned agreements be moved up to September 1 st , 2010. Please notify us if you are in agreement with this.

The offer to change the termination date is open until 2:00pm, Tuesday, August 17 th , 2010. [emphasis in original] [ 49 ] With remarkable alacricy, Mr. McNabb advised all the Fabutan franchisees by email early the next day as follows: This letter is to serve as notice that Darcy McNabb and her company 760437 Alberta Ltd. have chosen not to renew the Franchise Agreement with Fabutan Corporation for the Fabutan franchise located at #15, 4307 - 130 th Avenue SE, Calgary, Alberta. The Franchise Agreement will terminate November 30 th , 2010.

As many of you who have recently renewed are aware, the renewal clause in the Franchise Agreement states that the Franchisee shall have the Option to Renew the Agreement upon such terms and conditions contained in the standard form of Franchise Agreement in use by the Franchisor at the time of renewal. The agreement we had asked Darcy to execute was the same agreement that the last 10 franchisees have executed for renewals and/or purchases. All renewing franchisees are subject to this condition with no exceptions.

The terms contained in the current form of Franchise Agreement as described above including our request to sub-lease were not acceptable to 760437 Alberta Ltd. and its controlling shareholder, Darcy McNabb. She informed us in writing that she “ will not sign any form of agreement that you or your legal council have or will prepare .” leaving us no alternative but to terminate the agreement noted above.

Given the personal nature of the situation regarding the renewal and in an attempt to reduce the influence emotions were having on the process surrounding the renewal Fabutan Corporation proposed that we engage a third party arbitrator to help attain a resolution. This suggestions [sic] was ignored. I apologize that this notice is a little more detailed than normal but thought it was appropriate given the family relationship that has existed between myself and Darcy McNabb. We will forward more details regarding the territory and SouthTrail location over the coming months.

If any of you would like to discuss this situation with me personally feel free to give me call. [emphasis in original] [ 50 ] It is noteworthy that, despite what this announcement indicates, Ms. McNabb had still not received a draft franchise agreement to review. Mr. McNabb characterized this as a “really bad oversight”, saying that in previous years, Ms. McNabb had signed whatever Fabutan had put in front of her. This suggestion of “oversight” is not credible given Ms. McNabb’s repeated requests for the agreement. In other testimony, Mr. McNabb suggested that he was waiting to see Ms.

McNabb’s leases before he would send her a form of renewal agreement. I must conclude that his failure to send a draft renewal agreement was deliberate, as Mr. McNabb intended to extract onerous provisions from Ms. McNabb when the time came to execute the agreement [ 51 ] Not surprisingly, this announcement caused a major reaction among the Fabutan employees and franchisees. [ 52 ] There was a great deal of email and facemail traffic among franchisee supporters of one sibling or the other, expressing concern over the damage this dispute between the McNabbs would do to the Fabutan business. Customers of Ms.

McNabb’s franchises were concerned, and Ms. McNabb was upset over what she saw as inaccurate facts and damage to her reputation. Affidavit evidence from third parties as to what Ms. McNabb said to Fabutan employees after she saw a copy of Mr. McNabb’s email was tendered at the trial. Ms. McNabb testified that her reaction was misrepresented by some of the affiants, but admitted that her first reaction was that if she was terminated she would have no choice but to compete with the Fabutan franchise. Ms. McNabb sent a lengthy email to Mr. McNabb setting out her

interpretation of the facts, and responded to franchisees and friends who had contacted her with her denial of Mr. McNabb’s allegations.

[ 53 ] One of the franchisees who became very involved at this stage was Jim Romeril who owned two studios with his wife, one of which he had purchased from Ms. McNabb. Mr. Romeril described Ms. McNabb as one of his best friends. The Romerils were also still indebted to Ms. McNabb for the purchase of one of the franchises. These business and personal relationships with Ms. McNabb did not affect the credibility of the Romerils as witnesses, and I am satisfied that they had genuine concerns over the damage that was being done to the Fabutan brand by the dispute between the McNabbs. [ 54 ] Mr.

Romeril became very concerned after the August 17 announcement that Ms. McNabb would “go independent” and that this would affect the Fabutan franchise. He testified (and I accept) that Ms. McNabb had not told him this, but that he assumed that this would be the natural progression of where events were going. [ 55 ] Mr. Romeril arranged a meeting on August 23 among himself, his wife, Mr. McNabb and Mr. Rockey. Ms. Weder was also present. Mr. Rockey was also very concerned about what was happening between the McNabbs. Both Mr. Romeril and Mr. Rockey felt that the only way to resolve matters was to persuade Mr.

NcNabb to remove himself from the renewal process. [ 56 ] Mr. Romeril testified that Mr. McNabb was initially reluctant to discuss the issues between himself and his sister. When the Romerils raised concerns over what might happen if Ms. McNabb was terminated as a franchisee and became independent, Mr. McNabb suggested that he would open “corporate” studios in Ms. McNabb’s territory to drive her out. Mr. Romeril said that he found this attitude “shocking”, that he suggested that it was not legal for a franchisor to systematically “kick-out” a franchisee for its own benefit. Mr.

Romeril confirmed her husband’s testimony about the meeting. [ 57 ] Mr. Rockey had a similar recollection of the discussion at this meeting, and agreed that he had attempted to ensure that the Romerils, who he knew to be close to Ms. McNabb, would recognize what would happen in Ms. McNabb’s territory if she decided to compete with Fabutan, but that this was not what Fabutan wanted to do. [ 58 ] Unfortunately, Mr. McNabb’s father also became involved, sending Mr. McNabb a threatening and abusive email on August 22 and provoking a strong reaction from Mr. McNabb. Mr.

McNabb served a “Notice of Trespass” on his father, copied to the police, which prompted further abusive emails that involved unrelated parties. [ 59 ] Mr. Romeril testified that he had a lengthy telephone conversation with Mr. McNabb on August 24. Mr. Romeril testified that he thought the outcome of that conversation was that Mr. McNabb agreed that he would sit down with Ms. McNabb, Mr. Romeril and Mr. Rockey to discuss the personal issues that were causing the problems. [ 60 ] Mr. Romeril testified that, despite his hopes, it was a short and “cold” meeting. Ms. McNabb did not say much, and Mr.

McNabb commenced by asking Ms. McNabb whether she had brought a royalty cheque for the SouthTrail studio, which at that point was about ten days late. Ms. McNabb said no, and asked Mr. McNabb whether he had a dividend cheque for her from the Tanning Depot, which was then about three or four months overdue. He did not. Mr. Romeril stated that Mr. McNabb was “all business”, and stated that they had an obligation to treat all franchisees in the same way. He wanted a confidentiality clause in any agreement and he said that he required a security bond, so that if Ms.

McNabb violated her agreement, he would have redress. No dollar amount for the bond was discussed. Mr. Romeril was left with the feeling that Mr. McNabb was looking for an excuse to cancel the franchise agreements. Mr. Rockey didn’t recall specifically what was discussed, but confirmed Mr. Romeril’s role as a mediator, and left the meeting “with a good feeling”. [ 61 ] Ms. McNabb confirmed that a confidentiality clause was mentioned, and that there may have been discussion about a small bond being posted. She recalled Mr.

Romeril doing most of the talking, and said that she was still pretty upset about the purported termination. [ 62 ] Later that evening, Mr. McNabb sent Ms. McNabb a letter that included the following term of renewal: 1) You would execute a copy of our most current franchise agreement and all related documentation, a copy of which is attached.

2) Given your expressed concern that we will be looking to terminate your agreement for any cause no matter how minor we would amend the Franchise Agreement to allow termination only if a court deemed the cause to be reasonable. Termination would be effective immediately upon a judgment by the court. 3) Security relating to the agreement would include the following: a. Registered liens on all assets including all tanning beds, furniture, washer, dryer and computer equipment. A Fabutan representative would be required to personally obtain the serial numbers for registration. b.

As per your Franchise Agreement we had proposed to exercise our option to sub lease. Given your refusal to agree to a sub lease as per the Franchise Agreement we would propose an alternative. We propose that a $50,000 bond be posted in trust. This bond would be posted as security in the event your franchise agreement was rightfully terminated as outlined in Clause 2 payable against monies owing or awarded by the court for damages. 4) A confidentiality agreement would be required regarding these matters.

A breach of the confidentiality agreement proven in court would be considered cause for termination of the Franchise Agreement. 5) As you are aware Frank McNabb has made multiple communications to our office addressing the issues surrounding your Franchise Agreement. We have asked in writing whether or not he has been authorized to communicate on your behalf and have had no response. We realize that you are unable to control or be responsible for Frank McNabb’s actions.

However we would require written acknowledgement in a form mutually agreed to by both our parties that Frank McNabb’s past, present and all future communications have, and will not, be authorized by you or your related companies. 6) A written covenant that you will not sell, rent, lease or provide the shares of the company that holds the assets, any of the equipment, customer/client lists or any other items required for the operation of the Fabutan Franchise either directly or indirectly or through, on behalf of, or in conjunction with any other person or entity related to Frank McNabb, and further an undertaking that Frank McNabb will not be employed, engaged in, own, or have a financial interest in the company as defined earlier in this paragraph. 7) It seems the cheque and dividend issue remains a impediment to us reaching a resolution.

Dave Hollohan picked up the original documents and cheque from our lawyers office this afternoon. I can make arrangements to have it delivered to you and the required documents signed on Monday. We agreed that we will both do our best to reply to correspondence within 48 hours so I look forward to your prompt response. [ 63 ] The alleged “current franchise agreement” was not in fact attached and was sent to Ms. McNabb the next day. The letter was copied to Mr. Romeril and Mr. Rockey. [ 64 ] Ms.

McNabb reacted adversely to the bond requirement, which she felt had not been imposed on any other franchisee, and which she thought was very high. She felt she was being manipulated so that Mr. McNabb could represent to others that he was trying to settle the matter. She felt that the draft franchise agreement sent to her was one that no other franchise would agree to sign. [ 65 ] In short, Ms. McNabb felt that this was not a peace proposal and not “remotely fair”. She decided she needed to get a lawyer involved. Mr.

Romeril agreed, testifying that he thought the bond requirement was excessive and not in line with what had been discussed, and the demand for liens on assets had also not been discussed. Mr. Rockey, an employee of Fabutan at the time of his testimony, was more cautious in his comments, saying that when he saw the email after the fact, he was sceptical whether Ms. McNabb would accept the proposal, particularly the $50,000 bond requirement, but that he hoped it was a start to negotiations.

[ 66 ] Mr. McNabb admitted that these seven conditions were unique to Ms. McNabb’s franchises. [ 67 ] On August 31 and September 1, the McNabbs engaged in a series of heated emails prompted by Ms. McNabb’s request for a paper copy of the franchise agreement so that it could be reviewed by a lawyer. Mr. McNabb initially demanded a response by noon on September 2. When Ms. McNabb said that this was unreasonable and asked for a list of reasons why she was being terminated, Mr. McNabb refused to comply, and imposed another deadline of 2:30 on September 3. Ms.

McNabb asked for more time to get a lawyer involved, and Mr. McNabb refused, indicating that in any event he would not be making any changes to the draft agreement and that: . . .We will be moving forward under the presumption that we are unable to reach an agreement. . . Should you obtain legal advice that you feel would be conducive to a productive dialogue feel free to conduct us. [ 68 ] Unfortunately, in her frustration, Ms. McNabb sent an intemperate email on September 5 to a number of franchisees, setting out her version of events and commenting on the new franchise agreement Mr. McNabb had sent her.

She attached the agreement to her email and noted particularly clauses that she advised the addressees permitted the franchisor to terminate the agreement. She closed with the following inflammatory comment: . . .Read carefully and if anyone cares to discuss feel free. If not just want to wish you all the best of luck and hope you never tick off the President. If he will do it to the sister who has been his bank and financial support for the growth of his business since day one, he will do it to anyone.

Yes he feels just in terminating the person he has on many occasions called the model franchisee, the best and most successful owner they have ever had in his words, the owner of the top store in the country I believe 7 years running, and better yet the person he still owes over $200000.00 too. [ 69 ] Mr.

McNabb, of course, responded in kind to the franchisees, including as follows: It is Fabutan Corporation’s position that the allegations and statements sent to you by Darcy McNabb contain half truths, inaccurate and misleading statements many of which are not relevant to the franchisor - franchisee relationship we enjoy with you. This situation may have further legal ramifications and thus we will not provide comments in response to the potentially libel and defamatory accusations made in the email.

We will however provide a response to the insinuation that Fabutan Corporation would act unreasonably in the renewal of your Franchise Agreements. Franchisees at the end of their 10 year term are given the option as per their agreement to renew for a period of 5 years under the terms of the franchise agreement in existence at that time. This option was made available to Darcy McNabb and was not accepted. The circumstances surrounding this renewal presented some unique challenges to the Fabutan brand and as a result we requested additional security.

The security we asked for along with the other clauses noted in the email have been contained in every Franchise Agreement executed since Fabutan sold its first franchise. Specifically, Fabutan Corporation offered to renew the Franchise Agreement and additionally looked to exercise Clause 6.4 of the agreement, the Option of the Franchisor to Sublease. This was the first time we had ever made this request but felt it was necessary given the circumstances. [ 70 ] Mr. McNabb also withdrew his proposal of August 6. [ 71 ] Mr.

Rockey now stepped in to try to stem the damage caused by this latest salvo between the McNabbs. He met with Ms. McNabb on September 7, and reviewed with her an email she planned to send to Mr. McNabb with respect to proposed options to resolve the matter, and encourage her to send it. Although the email includes references to past grievances, it sets out the following as options: 1. We do nothing and at the end of November I go on my own as an independent as per the nonrenewal and termination notices you have given me. This will possibly result in 2 outcomes.

One being we fight each other head to head until one of us folds and mom ends up in wheelchair or severely disable from the stress on her. Another we fight head to head and I pursue one of the few options down the legal path. (You may also do the same if you feel you have options on that path as well) Neither of us wins in either situation but instead in both cases innocent people get affected negatively. The only winners would be the lawyers who in my opinion have already profited enough for this situation to get nowhere. 2.

You resign me as a new franchisee on both locations (as I am currently in termination and non renewal status) with the same

2. You resign me as a new franchisee on both locations (as I am currently in termination and non renewal status) with the same agreement I currently have in place at SouthTrail and we move forward. My leases stay in my name. I will continue to be the model franchisee (as you and others at head office have often referred to me as) and operate in the same manner I have for the past 18 years.

I would hope that the fees be waived as I feel you have forced me to waste a whole lot of money on legal fees that did not need to be spent even after my lawyer repeatedly asked you not to send stuff pertaining to a totally separate matter. I have heard from the grape vine that you seem to think I want to renew only to find ways to screw with Fabutan. I plan to do nothing different then I have for the past 18 years unless it is for the better and has a positive outcome on my business or that of others in the company.

This makes no sense to me as I have spent a great deal of money and time trying to keep my business so if my plan were to screw with Fabutan why would I have bothered. I would have taken your first termination last March or April or one of the various other ones along the way and left. Have I made the comment that I may take that road if I am terminated yes I have and I am sure you didn’t expect with my nature that I would just allow you to shut me down and go away quietly.

The latest I heard is that I have apparently got 5 or 6 locations already picked out and ready to go possibly in my father’s name. (Not sure what of this is correct just things I have heard that you are saying) Another thing that does not make sense as I would not need anything to be in my fathers name as I could do it on my own due to the non renewal and your failure to purchase my stores. It would make no sense for me to start a competing chain only to have it compete with myself if we did arrive at an agreement to keep me on board.

I would be more then willing to sign an agreement aside from the franchise agreement I have now that states I will not start or be involved in starting any competing tanning salon company while under the term of this agreement and would only even consider such a possibility if I was at some point terminated or not renewed at a later date. My idea is not to screw you or any owners out there as should be obvious to you with the leniency I have had on both Mat and Deb and Jim. I do not run or do business in that way. My handshake and my word are and always will be honorable.

I know we could argue about that I’m sure from your opinion till the end of time and not get resolve but I can rest assure you there are many others out there who would agree with that point. I have no more desire to see you or be a part of your personal life anymore than you have ever had interest in being part of mine this is simply a possible business solution and a solution that may offer some peace to mom as she never should have been dragged into a business dealing of this nature. The agreement I have now has been and will be more then you need from me.

I have never been delinquent or misrepresented the brand in the past 18 years and fail to see why that would be a question now. I would have no interest in causing damage to a brand that affects so many other people as I am sure has been obvious throughout this process if not to you I think it has to others. I could have gone on the attack way back in Feb if damaging the brand and the company was what I wanted. It should be obvious that there would be nothing in it for me to fight and spend the money I have on a renewal only to sabotage it in the end. 3. Third option would be for you to buy out both my locations.

I would be looking for $800000.00 for both stores. I would carry it a hundred percent at 12% over 6 years. I would be looking for security in this situation such as the mortgage on the house and probably a couple of stores the stores could be released when the debt paid down below $400000.00. Furthermore I would be more then willing to sign something that said our agreement would remain confidential. I would also expect you would be willing to make it known to all that the original letter you sent out in regards to termination was not accurate. Ms.

McNabb expressed a preference for the second option. [ 72 ] The response from Mr. McNabb on September 8 was to deliver Notices of Termination of both franchise agreements indicated to be effective noon on September 8 alleging the following: Default occurred relating to the following clauses:

Article 6, Lease Arrangements and Commencement of Business Clause 25.9, Further Documents Clause 9, Personal Guarantee - Copies of lease documents for the location noted above was requested of you both through your legal counsel and yourself directly - sent via correspondence delivered May 25, 2010 and may 26, 2010 respectively. To date, no copies have been delivered to the Franchisor Clause 9.1(e), Standards of Operation “The Franchisee will do nothing which would tend to discredit, dishonor, reflect adversely upon, or in any manner injure the reputation of the System, Trademark, the Franchisor, the Franchisee, or any other franchisee of the Franchisor.” Clause 10.9, Proper Use

“No advertising by the Franchisee or other use of the Trademark shall contain any statement or material which may, in the judgment of the Franchisor, be in bad taste or inconsistent with the Franchisor’s public image, or tend to bring disparagement, ridicule, or scorn upon the Franchisor, the Trademark, or the goodwill associated therewith..” - Attempts have been made in verbal and written form to other franchisees, members of public, colleagues and Franchisor Representatives to damage or discredit the Franchisor This notice of Termination acknowledges your email sent August 16th, 2010 stating you “...will not sign any form of agreement that you or your legal council have or will prepare. ” Further, as stated in Fabutan Corporation’s reply of August 16th 2010 and in conjunction with the termination of Studio #100 on the same date, we accepted your position that Studio #151's Agreement will terminate also.

At this time I would like to bring to your attention to specifically, but not limited to, clauses 16.1, 20.1 and 20.2 as well as

Article 19 of your Franchise Agreement. We also reference Clauses 8(

a) and 9 of the Fabware Agreement. Please review and govern yourself accordingly. Immediate action is required. [emphasis is in the original] [ 73 ] These Notices were sent from Tracey Warren, the Director of Franchise Operations of Fabutan, and delivered to Ms. McNabb’s house. Ms. McNabb was very upset and contacted her counsel. Around 2:00 p.m., Ms. Warren and various IT people from Fabutan attended one of the studios and deleted programs and data from the computer systems, including the Fabutan software program required to run the business, which contained client information. [ 74 ] Mr.

Rockey explained that, while he was not involved in this, the intention of the Fabutan IT team was to disconnect Ms. McNabb’s access to the Fabutan software remotely, but that she had discovered her termination before they expected it, and her computer was off-line. They were thus required to attend at the studio to effect the disconnect. Mr. McNabb authorized that action. [ 75 ] Again, Ms. McNabb’s father inserted himself in the proceedings with extremely abusive voice messages to Mr. McNabb and emails to some franchises and Fabutan employees. [ 76 ] On September 9, Ms.

Weder informed the Fabutan franchisees that Ms. McNabb’s franchise agreements had been terminated. [ 77 ] Counsel swiftly became involved over the purported termination and computer deletions, and on September 22, an order was issued by this Court restraining both parties from making disparaging comments about each other in any medium, communicating about the issues with anyone other than Mr.

Romeril, enjoining Fabutan from terminating the franchise agreements and re-imposing the status quo with respect to such agreements, reinstating the Fabutan software and restoring internet connection, emailing franchisees to advise that the issue of termination was now before the Court and restoring Ms. McNabb’s franchise information. Analysis [ 78 ]

Section 4.2 of the SouthTrail franchise agreement states that, provided that the agreement has not been terminated and the franchisee is not in default, the franchisee shall have the option to renew for a further five years upon payment of the reasonable costs of renewal and either:

a) upon such terms and conditions as set out in the existing agreement or,

b) that may be contained in the standard form of franchise agreement in use by the franchisor at that time.

[ 79 ] Thus, renewal is a right of the franchisee that can be exercised if the agreement has not been terminated or the franchisee is not in default. Fabutan has not established that either of those pre-conditions precluded renewal. [ 80 ] There are certain timing and notice provisions in

Section 4.2 that are not a major issue here, although it is arguable that Fabutan breached the 60 day provision within which it was to provide advice as to whether the franchisee was entitled to renew. [ 81 ] Fabutan argues that there was no common intention to enter into either a renewal of the old franchise agreement on its terms or a standard form of franchise agreement in use at the time, and that therefore specific performance is not possible. [ 82 ] I cannot accept this submission; the existing franchise agreements contained a right to renew on ascertainable terms.

This is not a situation where such right must be inferred from conduct or oral representations or an extension of the doctrine of good faith. [ 83 ] This argument also misinterprets the doctrine of common intention. The issue is whether, under the existing franchise agreements, there was a common intention to allow renewal, either on their existing terms or using the standard form of renewal agreement.

While there is some ambiguity in the clause, it was clear that there was an intention to allow the franchisee the right to renew, and the essential terms of that renewal contract can be ascertained. [ 84 ] These were contracts of adhesion, and their

interpretation must be coloured by that fact. The prior franchise agreements between the parties were always renewed for ten year terms and always using the current standard form of renewal agreement. The agreement to renew is not clear enough to give the franchisee an election between existing terms and a new standard form, and at any rate, Ms. McNabb accepted through her conduct that she would be willing to negotiate a standard form of agreement. By the same token, Fabutan accepted through its conduct with respect to prior contracts that such renewal would be for a ten year term.

The issue remains whether the form of renewal contract and special terms and conditions that Fabutan through Mr. McNabb attempted to foist on Ms. McNabb and 760437 met the requirement of being a standard form of renewal agreement in use at the time. [ 85 ]

Section 4.3 of the franchise agreement provides that the franchisor may refuse to renew the agreement provided that:

a) either the franchisee is entitled to continue to conduct substantially the same business within the same area subsequent to the expiration of the term (the franchisee is entitled to “go independent”), or

b) the franchisee is compensated by the franchisor by repurchase or some other means for the fair market value of the going concern value of the studio as if the agreement had been renewed. If the franchisor decides not to renew, it must provide reasons. [ 86 ]

Section 18.2 provides that the franchise agreement shall not be terminated by the franchisor “except for good cause” and list certain events that shall constitute “good and sufficient cause” for the franchisor to terminate immediately. Those events include a number that are not relevant to this situation. The only event that may be relevant is a failure of standards of cleanliness, subject to notification and an opportunity to cure. Fabutan purported to use this as a reason for termination on May 25, but there was no opportunity to cure, nor was there any evidence led that would establish this as a valid complaint.

Section 18.2 also provides that a violation of any other term of the agreement may be good cause, but allows an opportunity to cure. No specific violation has been alleged. [ 87 ] The issue therefore, is whether the various rationales posed by Fabutan through Mr. McNabb are “good cause” sufficient to allow Fabutan to terminate the agreement. Fabutan concedes that the two notices to terminate delivered on September 8 are invalid. [ 88 ] Mr. McNabb testified that he was very upset about Ms. McNabb’s actions in involving their father in the dispute. He saw this

as a deliberate move on Ms. McNabb’s part to seek revenge for what had occurred between them. Mr. McNabb testified that he wasfearful of his father’s involvement and reluctant to re-experience emotional pain that he had lived without for years after the divorce. Mr.McNabb claimed it was this perception that Ms. McNabb was involving their father in order to hurt him that made him decide not torenew Ms. McNabb’s franchise agreement. He also attributed his decision not to renew on Ms. McNabb’s making disparaging remarksabout “Fabutan and its president”. However, it is clear that Mr.

McNabb was threatening not to renew the franchise agreements longbefore any of this had occurred. [89] Mr. McNabb attempted to characterize his decision to terminate his sister’s franchise agreements on the basis of concernabout the damage she might do to the corporate brand, but this was unconvincing. He conceded that Ms. McNabb had never defaultedunder her previous franchise agreements, and that Fabutan had never before demanded an assignment of leases. He admitted onexamination for discovery that this demand was to ensure that Fabutan could evict Ms.

McNabb’s company from the studios if thefranchise agreement was terminated, but admitted that Fabutan did not have this power over any of the other franchises. In the same waythat Ms. McNabb called the loans in revenge for the contest email, Mr. McNabb refused renewal of the franchise agreements in revengefor the calling of the loans. Both siblings were unrestrained in their conduct by any concern for the franchise brand, or what their disputewas doing to the Fabutan business, and both acted badly.

Adding Frank McNabb to the mixture only exacerbated an already difficultsituation. [90] There was a great deal of evidence about the senior Mr. McNabb’s involvement, and about whether his threats to Mr.McNabb were real or without substance. There is no doubt that the senior Mr. McNabb was abusive, harassing and threatening to his son,and while Ms. McNabb submits that his threats were empty, it is also clear that Mr. McNabb does not consider them in that light. Icannot, however, find that Ms.

McNabb requested or encouraged her father in his distressing behaviour, or, that she should bearresponsibility for his over-the-top behaviour, although her initial decision to re-engage contact with him was unwise in the context of herfamily relationships. [91] Fabutan also suggests that Ms. McNabb’s conduct in calling her loans provides good cause for termination of the franchiseagreements. The conduct of a creditor in validly exercising her right to call loans cannot constitute good cause to terminate an unrelatedcontract.

The issues of reasonable notice or the reasonableness of the demands was not before this court, but at any rate, there werenegotiation over timing and extensions were granted. In the end, Mr. McNabb had forty-two days to repay the loans. It is noteworthy thatonly one of the loans called related to money loaned to Fabutan directly, and this was the loan of $141,000. This loan was repaid onMarch 11. The threats to the viability of Fabutan caused by this conduct were exaggerated. [92] Fabutan submits that the comments made and electronic messages sent by Ms.

McNabb through the course of these eventsundermined “management’s” authority and damaged Fabutan’s business interests, discredited the “franchisor” and the brand and werethus destructive of an ongoing trusting franchise relationship. This is essentially the argument referred to by: Lisus & Ship, Restrictionson Unilateral Termination of Franchise Agreements (2010) 49 Canadian Business Law Journal 113, the “loss of trust and confidenceargument”.

As noted by the authors, the success of this argument turns on the factual record, and it is open to the court to reject the claimthat a franchise business relationship has deteriorated to such a point as to justify termination. [93] In this situation, the business relationship between Ms. McNabb and Fabutan can continue, particularly if it does so withoutMr.

McNabb’s interference in decisions and communication that would in the normal course be within the scope of employment ofothers in the Fabutan organization. [94] It is clear that all recipients of the destructive communication between these siblings recognized such battles for what theywere: a family matter that was prejudicial to the best interests of Fabutan but that was essentially a squabble between Mr. McNabb andMs. McNabb, rather than Fabutan and Ms. McNabb.

It is noteworthy that the bulk of these communications did not occur until after May25, and that they were confined within the corporation and the franchisee community. Obligation of Good Faith [95] The Franchises Act, R.S.A. 2000, c. F023, s. 7 imposes on each party to a franchise agreement a duty of fair dealing in itsperformance and enforcement. As noted in Shelanu Inc. v. Print Three Franchising Corp., (ON CA), [2003] O.J.No. 1919 (C.A.) at paras. 5 and 69, the duty of good faith requires a franchisor to give consideration to the interests of the franchisee inthe exercise of its discretion.

A decision by a franchisor not to renew for alleged good cause is an exercise in discretion. Whether or not aparty under a duty of good faith has breached the duty will depend on the circumstances of the case, including whether the party subject

to the duty conducted itself fairly throughout the process: Shelanu at para. 74. Compliance with the terms of the contract does notnecessarily mean that the franchisor has discharged its duty of good faith: Shelanu at para. 21. [96] It is clear that a franchisor cannot exercise its power or discretion out of vindictiveness, or to gain leverage or a bargainingadvantage over the franchisee: Shelanu at para. 76. [97] I find that the conduct of Fabutan through its president Mr. McNabb breached this obligation of good faith.

Examples of badfaith in this case include the circumstances of the initial denial of the renewal, the flip-flopping of decisions on the renewal and thevariety of largely unsubstantiated reasons for non-renewal, the attachment of onerous terms of renewal not imposed on other franchiseesin the absence of reasonable or rationale grounds, the failure to provide Ms.

McNabb with a proposed form of standard agreement untilwell into the process and then only when accompanied by onerous conditions, the imposition of unreasonable time periods for review ofdocumentation, the unjustified linking of the renewal to the dividend and buy-out issue relating to the Tanning Depot, and themisrepresentation of Ms. McNabb’s position to other franchisees.

I must add to this lengthy list the conduct of Fabutan personnel whenpurporting to immediately terminate the franchise agreements in September 2010, under Notices to Terminate that Fabutan nowconcedes were invalid. [98] The franchise agreements are clearly contracts of adhesion: S.R. Petroleum Sales Ltd. v. Canadian Turbo Inc. (1995), A.R. 52(Q.B.) at paras. 30-32. While Ms.

McNabb was a creditor of Fabutan and in that sense, there was less inequality of bargaining powerthan usual in a franchise relationship, the evidence is clear that prior to these events she signed whatever form of documents were put infront of her by Fabutan. [99] As contracts of adhesion, the franchise agreements must be interpreted strictly against Fabutan as drafter, regardless ofwhether there is any ambiguity. Ms. McNabb and 760437 as franchisees are entitled to the benefit of the most favourable

interpretation. Ifind that the combined contracts and special conditions that Mr. McNabb was seeking to impose on Ms. McNabb did not meet thecontractual requirement of

Section 4.2 of being a standard form of contract in use at the time. Mr. McNabb, without reasonablejustification, acted in a way that would “substantially nullify the bargained objective or benefit contracted for by the other, contrary tothe original purpose and expectation of the parties”: Gateway Realty Ltd. v. Arton Holdings Ltd., (NS SC), [1991]N.S.J. No. 362 (S.C.) at para. 60. [100] It was legitimate of Ms.

McNabb to question whether the contract that she finally received was a standard renewal contract inuse by Fabutan, particularly given the context of what was occurring and the lengthy delay in getting her the document. It was legitimatefor her to question the imposition of the onerous conditions purported to be required by Fabutan. This questioning did not constitute arefusal to execute a standard renewal contract, and Mr. McNabb’s

interpretation of comments on Ms. McNabb’s emails to establish sucha refusal is not credible or reasonable. [101] Mr. McNabb submits that neither party had clean hands in their conduct, citing Ms. McNabb’s inappropriate comments toFabutan employees and other franchisees. On behalf of Fabutan, he submits that she went “over the line” and that this disentitles her tospecific performance. I agree that Ms. McNabb’s conduct once she started to publish her grievances on Force were far from constructive,and helped to damage the family relationship.

However, I am not prepared to find that this conduct justifies the severe penalty oftermination of her franchise agreements. As I have indicated, I am not persuaded that the business relationship between Fabutan thecorporation and Ms. McNabb the franchisee has deteriorated to the point where it cannot continue to operate. Conclusion [102] The franchise agreements contain a commitment to renew on ascertainable terms. I find that the franchisee has met the relevantconditions. I also find that Fabutan has not established good cause to terminate the franchise agreements.

Nor has Fabutan provided goodcause to refuse the renewal, nor even offered the alternatives to renewal that would be the franchisee’s right if renewal was refused underSection 4.3. The evidence is clear that Fabutan through Mr. McNabb intended to take penalizing action if Ms. McNabb decided to “goindependent” pursuant to

Section 4.3(a), and failed to make any reasonable offer of compensation to her under

Section 4.3(b). I havefound that Fabutan through Mr. McNabb was guilty of bad faith on the course of the negotiations over the renewal. While Ms. McNabbherself acted in an inappropriate fashion, particularly in the latter part of the negotiations, this conduct does not disentitle her to specificperformance of the right to renew.

[ 103 ] Thus, I directed that 760437 was to be offered a renewal of the SouthTrail franchise agreement for ten years upon the terms and conditions contained in the standard form of franchise agreement in use by Fabutan at the time 760437 purported to exercise its right of renewal. I found that the parties had agreed that the standard form of agreement was set out in the trial volume 4T. [ 104 ] I directed that there would be no requirement of additional security to be extracted as a condition of the renewal. To be clear, there would be no assumption by Fabutan of 760437's leases.

There would be a GSA provided in accordance with and subject to Clause 25(10) of the agreement. There would be no requirement with respect to contact with Frank McNabb and no confidentiality agreement. [ 105 ] The royalty rate was to be as set out in the standard form, and 760437 was only responsible for the reasonable costs of putting this standard form of agreement in place from this point on.

The purported termination of the Bridlewood franchise agreement was vacated, and no additional security measures by Fabutan shall be pursued with respect to that franchise arising out of the facts of this dispute. [ 106 ] There was to be a neutral posting on FORCE satisfactory to both parties acting reasonably that merely advised that the SouthTrail franchise agreement has been extended and that the Bridlewood franchise agreement remained in force. [ 107 ] After the trial and decision, the parties asked me to address whether Ms.

McNabb was to provide a personal guarantee of 760437's obligations under the SouthTrail franchise agreement. If Fabutan’s last three renewals prior to January, 2010 of franchise agreements involving franchisees that had never defaulted on their obligations included a personal guarantee, Ms. McNabb must provide a personal guarantee. If not, she is not required to do so. Fabutan must prove that such personal guarantees were required to the reasonable satisfaction of Ms. McNabb’s counsel. Ms.

McNabb must sign the franchise agreement as a joint franchisee as she was to have done previously. [ 108 ] If the parties are unable to agree on costs, they may be addressed. Dated at the City of Calgary, Alberta this 30th day of April, 2012. B.E. Romaine J.C.Q.B.A. Appearances: Trevor McDonald and Benjamin T. Aberant for the Plaintiff

Graham Price, Q.C. and Matthew James for the Defendant _______________________________________________________ Corrigendum of the Memorandum of Judgment of The Honourable Madam Justice B.E. Romaine _______________________________________________________ Please note the change on page 26 under Appearances. Benjamin T. Aberant has been added as co-counsel under the Plaintiff.