Alan Arsenault Holdings Ltd v TDL Group Corp, 2016 ABQB 97

Court of Queen ’ s Bench of Alberta Citation: Alan Arsenault Holdings Ltd v TDL Group Corp, 2016 ABQB 97 Date: 20160219 Docket: 1601 00466 Registry: Calgary Between: Alan Arsenault Holdings Ltd. and MRMA Holdings Ltd. Applicants - and - The TDL Group Corp. Respondent _______________________________________________________ Memorandum of Decision of the Honourable Mr. Justice R.A. Neufeld _______________________________________________________ Overview and History of Events [ 1 ] This matter arises from a dispute between the licenses of two Tim Hortons franchises, Alan Arsenault Holdings Ltd. and MRMA Holdings Ltd. and their licensor, The TDL Group Corp. (“Hortons”).

[ 2 ] At issue is whether the court should order Hortons to comply with and carry out the terms of a settlement agreement entered into between the parties in March 2012 and if so, on what terms. [ 3 ] The application was filed on January 28, 2016, and argued before me on February 4, 2016. It is based on the Affidavit evidence of Maria Arsenault, the principal owner of MRMA Holdings Ltd. and the hands-on manager of the two franchises. These are comprised of a store in the Country Hills area (Licence #1879) and another on Westwinds Drive NE (Licence #2895).

In response, Hortons filed the Affidavit of Jeff Parkinson, its Director of Business Development, Alberta. [ 4 ] The licence agreement for the Westwinds Restaurant was originally entered into on January 12, 2006. It was substantially amended, such that it and a related sublease agreement would expire on February 2, 2016. The license agreement relating to the Country Hills restaurant was not placed into evidence.

However, it was common ground among the parties that the agreement would expire on its terms in March, 2020. [ 5 ] Although both restaurants (and particularly the Country Hills restaurant) have been financially successful, prior to 2012 the Applicants and Hortons had disagreements. It can be inferred from subsequent events that Hortons was especially concerned with Mr. Arsenault’s actions. Mr. Arsenault, the principal owner of Alan Arsenault Holdings Ltd., did not provide evidence in this proceeding.

Consequently, the nature of Hortons’ concerns regarding his actions is not clear, and is in any event, not important. [ 6 ] For their part, the Applicants were concerned with erosion of the value of their franchises as a result of introduction of new Hortons stores within the business footprint of existing operations, which they referred to as “cannibalization”. [ 7 ] In 2011, Hortons took steps to terminate both franchises. In response, an action was commenced against Hortons. The dispute was subject to a mediated settlement.

The Terms of Settlement documented a compromise between the parties in a Settlement Agreement dated March 4, 2012 (the “Settlement Agreement”). It had the following features (among others): 1) The Applicants would be entitled to continue to hold the franchises to operate both stores for a period of two years. 2) After two years, operatorship of the franchises would transfer to a new party, under Hortons’ succession plan program. This phase would last for a further four years, during which the Applicants would receive a royalty of 7% of gross income.

At the conclusion of the four year period, Horton’s would pay the Applicants $400,000 per store. 3) During the entire six year period, Mr. Arsenault was to have no involvement whatsoever in the operation or administration of either restaurant. [ 8 ] To effectuate the transfer of ownership and orderly succession, two essential steps were required: 1) First, a new operator (or operators) needed to be chosen. This was to be done cooperatively, but with Hortons having the final say. 2) Second, the Applicants would need to enter into an Operating Agreement with the new operator.

The Settlement Agreement contained the form of agreement to be entered into between the Applicants and the prospective operator(s). [ 9 ] As structured, the efficacy of the Settlement Agreement relied on the cooperation of both sides, especially in respect of selection of the new operator(s). There were two problems with this that arose from financial disincentives created by the Settlement Agreement. [ 10 ] To begin with, there was from the outset a financial disincentive for the Applicants to agree on a timely change of operatorship.

As soon as that happened, they would no longer receive revenue associated with operation of the restaurant(s), but instead would receive only the 7% royalty provided for under the settlement. [ 11 ] There was also a financial disincentive for the Applicants to agree on an existing Hortons operator taking over the restaurants. They believed that such an operator would give management preference to its existing franchise(s), which were not subject to a 7% gross income royalty.

Hortons, on the other hand, would be financially indifferent if one of its franchises was to succeed at the expense of another. [ 12 ] In view of this commercial misalignment, in retrospect it is not surprising that timely selection of the new operator(

s) was problematic. This was exacerbated by the fact that the Settlement Agreement did not contain hard and clear deadlines for such selection, leaving it open for argument that no such deadlines exist. [ 13 ] It also became apparent during the protracted (and ultimately unsuccessful) succession process that the lack of clarity in respect of deadlines was fertile ground for development of “sidecar” issues. That is, issues of contract

interpretation arising due to passage of implicit milestones. [ 14 ] For example, when no agreement was reached prior to the notional commencement date for change of operatorship (March 1, 2014), a disagreement arose as to whether and on what terms the Settlement Agreement should be (or had been) changed so as to accommodate that delay.

The Applicants contended that Hortons had agreed to slide the entire succession plan period of third party operation by a full year, whereas Hortons asserted (correctly in my view) that it had only offered to delay the start date for new operatorship by a matter of months. [ 15 ] Perhaps because of the delay, a side issue also arose regarding the Applicants’ responsibility for renovation costs of the restaurants post-changeover of operatorship.

In addition, the parties vehemently disagreed on whether the promise to pay a 7% royalty on gross income was related to the four year period of March 1, 2014 to March 1, 2018 (the succession plan time period contemplated in the Settlement Agreement), or to the four years following change of operatorship, whenever that was to occur.

[ 16 ] The result of these disagreements was that even after replacement operators that were mutually agreed upon had finally been identified in August, 2014, much remained to be done in order to effectuate the changeover. This included completion of Operating Agreements between the Applicants and the new operators, as well as completion of training of those operators by Hortons. A

schedule was proposed by Hortons that would have this done in time for turnover in the first half of November, 2014. [ 17 ] This was initially rejected by the Applicants, in part because Ms.

Arsenault wanted the new operator (couples) to work a shift in each store in order to evaluate which store to assign to which new operator. [ 18 ] After an exchange of unpleasant correspondence between counsel in late August, 2014, counsel for Hortons wrote to advise that they had decided on how to assign the two stores (having not heard back within a Hortons-imposed three day deadline), and also reiterating, in detail, Hortons’ position in respect of the major commercial issue remaining in dispute, namely the time period for royalty payments. [ 19 ] The Applicants’ counsel responded by letter dated September 22, 2014, which stated in full: “Thank you for your September 5, 2014 letter.

First, Ms. Arsenault is shocked by TDL’s complete lack of compassion and understanding regarding her obligation to care for her mother as a result of a medical condition and her resulting inability to respond by TDL’s arbitrarily-imposed 3 business day deadline. Further, TDL has refused to even address Ms. Arsenault’s comments as to (

i) why she wants to have each of the proposed operators to work as shift in each store, and (ii) why there is no prejudice in doing so. This is far from negotiating in “good faith” and is simply school yard bully tactics. Second, there are outstanding issues on the terms of the Operating Agreement. First, Ms. Arsenault continues to require four years of royalty revenue. Second, we have still not received a response to our June 9, 2014 letter with respect to issues of the cost of any renovations to the Restaurants and the costs of maintenance and equipment replacement. Again, Ms.

Arsenault is not prepared to move forward without certainty that she is receiving full compensation for the sale of her Restaurant and she wants these issues finalized prior to any Operating Agreement being signed.” [ 20 ] In effect, at this juncture of the protracted (and unsuccessful) succession process, the Applicants had played their trump card.

They would not enter into the Operating Agreements required to effectuate transfer until a satisfactory resolution of outstanding commercial issues had been achieved. [ 21 ] At that point, the e-mail correspondence trail goes cold, although “without prejudice” discussions apparently took place for much of the first half of 2015. The Applicants continued to operate both stores as before. It is not clear whether the prospective operators were actually trained. [ 22 ] In August, 2015, Hortons did give notice of its intention to appoint an affiliate as operator.

This was immediately opposed by the Applicants, through counsel, as a conflict of interest. [ 23 ] By letter dated October 2, 2015, counsel for Hortons wrote to formally put an end to the Settlement Agreement. He asserted that by her actions, Ms. Arsenault had frustrated the operator selection process and had thereby breached the Settlement Agreement.

On behalf of Hortons, he confirmed that the Westwinds licence would expire in accordance with its terms on February 2, 2016 and the Country Hills licence would remain in place, with an expiry date of March 25, 2020. [ 24 ] Counsel for the Applicants responded by letter dated January 5, 2016 taking issue with what was described as Hortons’ unilateral declaration of termination, and asserting that the Settlement Agreement remains in effect.

The Application [ 25 ] On Thursday, January 28, 2016, the Applicants filed this Originating Application, returnable on Monday, February 2, 2016, seeking to restrain the Respondent from unilaterally, and prematurely, terminating the terms (eg. length) of the franchises that the parties agreed to in the Settlement Agreement dated March 4, 2012.

The relief requested was, inter alia , for: #4 – An Order granting the Applicants an injunction restraining and prohibiting the Respondent, the TDL Group Corp. (TDL), or any of its affiliated or related entities or any person acting on its instructions, from terminating the franchise licenses for, or taking possession and control of the operations of, the Applicants’ Tim Hortons’ franchises, referred to as Restaurants #2895 and #1879 (the Restaurants), until the time agreed to in the Terms of Settlement, which is to occur on February 28, 2018; #5 – An Order that TDL comply with its obligation to work co-operatively with the Applicants to select a replacement operator for the franchises in good faith, including conducting any training needed for any mutually agreed to operators, as agreed to in the Terms of Settlement. [ 26 ] By agreement of the parties, the matter was argued before me on February 4, 2016.

Ms. Arsenault continues to manage both restaurants pending a decision. Nature of Injunction Requested [ 27 ] In their written and oral submissions before me, the parties disagreed as to the nature of relief requested. Hortons argued that the Applicants are seeking a permanent, mandatory injunction, because I would be mandating performance of specified actions. The Applicants maintain that they are seeking a prohibitive injunction. They say that the order sought is to compel Hortons to perform its

existing contractual obligations. This has been held to constitute a prohibitive injunction, rather than a mandatory one, because in such circumstances no new rights or obligations are being created: TDL Group Ltd v 1060284 Ontario Ltd , [2001] OJ No 3614, (Ont SCJ) at para 9 . [ 28 ] The importance of determining the characterization of the injunction as mandatory or prohibitive is that the standard to be met by an Applicant seeking a mandatory injunction is more stringent. It must satisfy the court that: 1. There is a very strong probability of grave damage should the injunction not be granted; 2.

Damages are not sufficient to remedy that grave damage; 3. The balance of convenience favors an injunction; and 4. The Court is able to frame an injunction in terms such that the enjoined party is capable of understanding exactly what it must do: Airco Aircraft Charters Ltd v Edmonton Regional Airports Authority , 2010 ABCA 364 at para 28 . [ 29 ] The test for a final prohibitive injunction is lower. The Applicant must demonstrate: 1. An existing legal right; and 2.

That an injunction is an appropriate remedy. [ 30 ] In determining the appropriateness of injunctive relief, in the context of a final prohibitive injunction, the Court has broad discretion. It may consider the issues of balance of convenience and irreparable harm, but is not compelled to do so: Schoof v British Columbia [Medical Services Commission] , 2010 BCCA 396 at para 28 . [ 31 ] In this case, the Applicants have, in part, framed their request for relief in such a way as to invoke a negative obligation.

They also argue that where an injunction is sought compelling compliance with a contract, that is also properly characterized as a prohibitive injunction as it serves to prohibit the Respondent from not complying with that contract – here, by repudiating the Settlement Agreement and returning the contractual relationship between the parties to the four corners of the Licence Agreements. [ 32 ] For the purpose of this decision, I will assume that the Applicants’ characterization of their requested injunction as being a permanent, prohibitive injunction is correct and the less stringent test applies.

Are the Applicants Entitled to a Permanent Injunction? [ 33 ] In exercising my discretion to grant or refuse to grant a permanent, prohibitive injunction, I am guided by four primary considerations: 1. Have the Applicants established an existing right to operate under the terms of the Settlement Agreement? 2. Would the Applicants suffer irreparable harm as a result of termination of that agreement? 3. Does the balance of convenience favor granting of an injunction on the terms sought? 4. Is a prohibitive injunction an effective remedy?

Factor #1 – Existence of Right to Operate Under the Terms of the Settlement Agreement [ 34 ] The Applicants argued that the Settlement Agreement allows them to continue to operate both restaurants, notwithstanding the fact that the agreed-to date for transitioning to new operatorship is now two years past.

They blame the delay on Hortons’ insistence on selecting the operator of its choice, followed by Hortons’ intransigence in refusing to agree to the Applicants’ position regarding royalty entitlement (and to a lesser extent, responsibility for renovation costs). [ 35 ] The Applicants argued that the onus of proof regarding entitlement to repudiate the contract belongs to Hortons, and that it failed to discharge that burden. [ 36 ] I do not agree. [ 37 ] On the limited record before me, it appears that from time to time, both parties were guilty of behaviour that made it difficult to effectuate a changeover of operatorship in the time frame contemplated under the Settlement Agreement.

After a proper trial, it may be that one side’s version of events will triumph over the other. However, at this stage it appears to me that in the end result, it was the Applicants who chose to shut the transition process down by refusing to proceed with the Operating Agreements necessary to put the agreed-upon operators in place unless and until agreement was reached on commercial side issues. In my view, following subsequently unsuccessful attempts at settlement, Hortons was entitled to repudiate the Settlement Agreement when it did.

The succession contemplated in the Terms of Settlement Agreement was simply not occurring, and there was limited financial incentive for the Applicants to re-engage. [ 38 ] I emphasize here that my findings are based on limited affidavit evidence. Should this matter be fully litigated, a different Court might find that Hortons was not entitled to terminate the Settlement Agreement, and if so, damages will be available to the

Applicants. On the evidence before me at this time, however, it is my view that Hortons was entitled to terminate, and the rights and obligations of the parties are governed by the original licence agreements. [ 39 ] Assuming that the Settlement Agreement remains in effect, it is necessary to consider whether a permanent prohibitive injunction is appropriate. That leads me to a consideration of the remaining three factors – irreparable harm, balance of convenience and effectiveness of a prohibitive injunction.

Factor #2 – Irreparable Harm [ 40 ] Although this application seeks a final, as opposed to interlocutory, injunction, it is still relevant to consider whether irreparable harm will result if an injunction is refused. [ 41 ] Hortons argues that even if it is ultimately determined that the Settlement Agreement was breached by Hortons, damages would be an adequate remedy.

It undertakes to maintain proper accounts of the revenue that might have been foregone by the Applicants over the remaining term of the Settlement Agreement. [ 42 ] The Applicants argue that premature termination of the Settlement Agreement will cause irreparable harm. First, it will damage the reputation of the Applicants as restaurant operators. Second, it will deprive them of the opportunity to pursue the selection of a replacement operator for the Westwinds location who will maximize restaurant revenue (and hence, maximize their royalty entitlement).

They say that accounting for revenue alone is not sufficient, as it will be impossible to determine whether and to what extent variations in restaurant revenue post-operator changeover are due to the new operator as opposed to any number of other factors that determine sales. [ 43 ] In my view, there may be some element of irreparable harm caused by termination of the Settlement Agreement and, consequently, expiry of the Westwinds licence. However, a claim for losses would still include (presumably) all of the royalty revenue guaranteed to the Applicants.

The debate would be whether a more motivated operator would have exceeded those minimum revenue targets – something that is more speculative, but also of less importance. [ 44 ] As for the reputational damage issue, I am not satisfied on the affidavit evidence that much is to be made of that. In the first place, the Applicants already agreed to being replaced as operators under the very Settlement Agreement sought to be enforced. With that agreement terminated, the Applicants will continue to operate the Country Hills restaurant, and are in fact entitled to do so, for two years more than was previously the case.

They will also be free of the contractual obligation to ensure that Mr. Arsenault is no longer involved in management or administration of either store. The situation here is quite different than the Quizno’s case cited by the Applicants in respect of reputational damage: Quizno’s Canada Restaurant Corp v 1450987 Ontario Corp, [2009] OJ No 1743 . Accordingly, I am not satisfied that the Applicants would suffer irreparable harm if an injunction is not granted. Factor #3 – Balance of Convenience [ 45 ] The Applicants argue that the balance of convenience favors granting a permanent, final injunction.

They point to the excellent operating record of Ms. Arsenault in particular, and say that Hortons has long acknowledged her accomplishments in the field. Because Hortons has nothing to lose from Ms. Arsenault’s continued management of both stores, and because she wishes to do so, the balance of convenience favors the status quo. [ 46 ] I have no doubt that Ms. Arsenault is a capable and successful manager. However, the purpose of the Settlement Agreement was to resolve undisclosed issues that led Hortons to terminate both restaurant licences in 2011.

It did so by transition of operatorship from the Applicants to new operators, who were to be in place by March 1, 2014. That is the context for determining the status quo and the balance of convenience in this case. [ 47 ] Granting an injunction would perpetuate the impasse between the parties regarding new operatorship and do little to effectuate the transition required. Refusing the injunction will resolve that impasse by allowing Hortons to put a new operator in place for the Westwinds restaurant, while leaving the Applicants in place as operators of the Country Hills restaurant until March, 2020.

In my view, from the perspective of balance of convenience, that is a more appropriate result. Factor #4 – Efficacy of a Prohibitive Injunction [ 48 ] The last factor of importance in my decision is whether a prohibitive injunction would be an effective remedy, given the issues between the parties. [ 49 ] As discussed earlier, and as the name connotes, a mandatory injunction is one in which the Court mandates performance of one or more positive actions. For a number of reasons, such injunctions are rarely granted. [ 50 ] A prohibitive injunction is a simpler, more straightforward remedy.

As pointed out by the Applicants, it can require performance of existing legal obligations. For example, an order prohibiting a party from not complying with a contract can just as easily be worded as compelling or mandating that it comply with that contract. [ 51 ] Irrespective of how the injunction sought here is labelled, it is clear that absent intervention by the Court to dictate an enforceable process and timeline for changeover of operatorship under the Settlement Agreement, an injunction (like the Settlement Agreement itself) would be an empty vessel.

An Order compelling the parties to cooperate and be agreeable is no more efficacious than an agreement promising to do so. An order amending dates for performance of certain actions, and restating the financial obligations of

the parties in accordance with those dates (eg. specifying a new four-year royalty period) would resolve an outstanding issue, but would be fraught with danger given the limited evidentiary record before the Court. And in any event, it would constitute the imposition of a new contractual obligation to replace one that was inadequately described in the Settlement Agreement to begin with. That is not the role of the Court. It is also not the purpose of a prohibitive, as opposed to mandatory, injunction. Conclusion [ 52 ] In

summary, I am not prepared to grant a permanent, final injunction as sought. Based on the limited evidence filed, and the submissions before me, I find that Hortons was entitled to terminate the Settlement Agreement. The Agreement clearly contemplated, and was predicated upon a changeover of operatorship by March 1, 2014. Some 18 months later, Hortons decided to put an end to a situation that was at an impasse, and in my view it was entitled to do so. [ 53 ] I also find that even if the Settlement Agreement was unlawfully terminated by Hortons, injunctive relief is not appropriate.

In that event, the Applicants will not suffer irreparable harm.

They can obtain monetary damages that will compensate them for Hortons’ breach, including damages attributable to their inability to have input into the new operator for the Westwinds restaurant, if that can be proven. [ 54 ] The balance of convenience also favors refusal of an injunction rather than returning the parties to operate under an agreement to cooperate, given the apparent inability of both parties to do so over an extended period of time. [ 55 ] And finally, a prohibitive injunction, that is to say an injunction that does not specifically mandate the steps needed for changeover of operatorship in a way that should have been done in the Settlement Agreement itself, would not be an effective remedy.

It would simply perpetuate a stalemate. I would decline to make such an order on that basis alone. [ 56 ] The application is dismissed. [ 57 ] Counsel can speak to costs at a later date if agreement is not reached. Heard on the 4 th day of February, 2016. Dated at the City of Calgary, Alberta this 19 th day of February, 2016. R.A. Neufeld J.C.Q.B.A. Appearances: David De Groot for the Applicants Geoffrey D. Holub for the Respondent