Alberta Court Denies Statutory Damages Because No Signed Franchise Agreements

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In 1384334 Alberta Ltd v Buster’s Pizza Donair & Pasta Enterprises Ltd., a June 16, 2020, the Court of Queen’s Bench of Alberta found that the parties had never agreed on the essential terms of a franchise agreement.  As a result, the court denied the plaintiffs’ claim for net losses under Alberta’s Franchises Act and unjust enrichment claim.  But it allowed their claim for damages for conversion of leased equipment which two of the defendants sold to a third party. 

 Key facts 

In early 2008, the defendant Busters entered into a lease for a restaurant in West Edmonton.  Busters’ principal, Alex, negotiated the lease.  The plaintiffs’ principal, Fred, was responsible for permits and renovations.  TMR Development, one of Fred’s companies, paid a lease deposit and renovated the premises.  138 was later incorporated to run the restaurant.  138 opened the Busters restaurant in August 2008. 

Also, in March 2008, Fred agreed to complete improvements for other restaurants in Red Deer and Sherwood Park.  In August 2008, the parties began disputing about those improvements, and TMR Development started an action.  This action was later struck after a successful security for costs application. 

138 operated the West Edmonton restaurant from August 2008 to September 2009.  138 and Busters never had an agreement about the terms under which 138 would operate the restaurant.  138 never paid any royalty fees.  There were no signed agreements between the parties.  

The restaurant was unsuccessful.  In August 2009, the plaintiffs found a buyer and referred that buyer to Alex.  Later, in September 2009, 138 gave notice that it intended to vacate the restaurant in September 2009 and that it would remove all property expect that which the landlord placed in the restaurant.  Busters then changed the locks at the restaurant, preventing 138 from accessing it, and sold it to the buyer. 

The plaintiffs claimed that they were entitled to their net losses under section 14 of Alberta’s Franchises Act because they never received a disclosure document.  In the alternative, they claimed that they were entitled to damages for unjust enrichment as a result of Busters’ sale of the restaurant and damages for conversion of certain leased equipment that Busters took possession of and sold to the buyer. 

The plaintiffs could not recover their net losses because there was no franchise agreement  

The court held that the parties had not formed a consensus on all the elements of the agreement, including fees and whether a personal guarantee would be required.  The parties had not fully executed any of the documents because they are not formed an agreement on all those terms.  Further, the plaintiffs did not establish during the trial what the terms of any verbal agreement were.  There was therefore no ‘franchise agreement’ as defined under the Franchises Act that the plaintiffs could cancel. 

Busters was not unjustly enriched 

The court found that Busters was enriched and the plaintiffs suffered a depravation as a result of the closure and sale of the restaurant.  Busters sold the restaurant for a profit.  TMR Development made significant payments to start the restaurant.  That investment was lost. 

However, the court found that there was a juristic reason for the enrichment.  TMR Development provided its renovation services to 138, not to Busters.  There was no expectation that Busters would provide a refund to TMR Development should the restaurant close.  The plaintiffs knew that, if they had to close the restaurant, they would not be able to sell Busters’ proprietary property such as the trademarks and recipes.   

On closing the restaurant, the plaintiffs were only entitled to take the equipment and leasehold improvements, provided that removing the leasehold improvements would not cause significant damage to the premises.  There was no evidence that Busters did not return equipment to the plaintiffs (except certain leased equipment), or that the plaintiffs could remove certain leasehold improvements without damaging the premises. 

The plaintiffs were entitled to damages for conversion 

138 purchased some equipment through a conditional sales contract with an equipment lessor.  This equipment was not returned to 138.  After Busters locked the plaintiffs out of the restaurant, it worked with the lessor to purchase the equipment and later sold it to the buyer. 

The court found that both Busters and Alex, who directed the taking, were liable for conversion, and that the plaintiffs were entitled to the fair market value of that equipment.  Busters argued that 138 was in default of the lease agreement and that it was entitled to purchase the equipment from the lessor.  However, the court found that there was no evidence any defaults.  Moreover, only the lessor would be entitled to take back possession of the equipment if there were defaults.  Busters had no right to do so. 

The court dismissed Busters’ counterclaim, which was based on alleged deficient work at the Red Deer and Sherwood Park Busters’ restaurants, unauthorized use of the trademark and equipment, and non-payment of royalties and other fees. 

This decision shows the value of advancing various common law causes of action in situations were a contractual claim is not available or does not provide suitable remedies.