British Columbia Court Awards Damages Against Licensee for Breach of Retail Bakery Licence Agreement

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By: Anthony Pugh, Law Works
Editor: Ben Hanuka, Law Works

In Wheatberries Bakery Ltd. v Tracy’s Cafe Langdale Limited, a February 19, 2021, decision of the Supreme Court of British Columbia, the court allowed a licensor’s claim against a former licensee for damages based on termination of the licence agreement without notice.

Key facts

The licensor, Wheatberry Bakery (“Wheatberry”), operated bakeries and coffee shops throughout the coast of BC.  Its principals, the Yellowleys, had also set up an affiliate, Wheatberry Bakery (Langdale) (“Langdale”) to operate a kiosk at the BC Ferries Langdale Terminal under a licence agreement with BC Ferries.

In 2008, the Yellowleys sold the kiosk to Peter Cervo and Tracy Duperreault through a share sale.  The parties also entered into a service agreement under which Langdale was to pay royalties and purchase products from Wheatberry.  The agreement did not deal with termination by Langdale or termination without cause.

This business relationship between Wheatberry and Langdale continued for about 10 years.  In late 2017, Wheatberry proposed a revised service agreement to Langdale.  Under this proposed agreement, the royalty fee would be reduced in half.  However, Wheatberry expected to raise its prices for baked goods.

The parties never agreed to the revised agreement.  In February and March 2018, Wheatberry told Langdale that the new prices would be going into effect.

In March 2018, one of Wheatberry’s long time bakers at the bakery that supplied Langdale, Sandra Bryhn, gave notice that she was resigning.  But a month earlier, she set up her own bakery, Sandy’s Bake Shoppe Ltd.

Communications between Duperreault and Bryhn began by at least April 2018.  On April 15 and May 9, 2018, Duperreault made some complaints to Wheatberry about baked goods.  On May 12, 2018, Duperreault suddenly gave notice to Wheatberry that Langdale would be terminating the agreement immediately and would “no longer be in business”.  Duperreault rebranded the kiosk as Tracy’s Cafe Langdale Limited and began purchasing products from Sandy’s Bake Shoppe Ltd.

Because of the termination, production in bakery that supplied Langdale dropped and the three employees that replaced Bryhn and another baker who resigned at the same time left for other opportunities.

The court implied a term of nine months notice into the Service Agreement

The court implied a term of reasonable notice into the Service Agreement.  It held that the licence agreement was based on good faith, trust, and confidence, and implied that Wheatberry would be the exclusive supplier of baked goods to Langdale.  It would be inconsistent for a party to summarily terminate it without cause.

Two clauses in the Service Agreement showed the nature of the relationship.  Under the dispute resolution clause, the parties had to attempt to resolve any disputes through consultation, mediation and, if necessary, arbitration.  The agreement also could not be changed without the approval of both parties.

Further, Wheatberry became dependent on Langdale, since Langdale purchased over half of the baked goods that Wheatberry produced.

Finally, the negotiation of the agreement was a collaborative process.  It was not like other franchise agreements where the franchisor offers a ‘take it or leave it’ standard form agreement to a prospective franchisee.

The court held that a reasonable notice period was nine months, having regard to the following factors:

• the ten-year length of the relationship;
• the fact that the business relationship was one of mutual trust and dependency;
• the importance of the Service Agreement to Wheatberry, and
• the fact that the Service Agreement had required Wheatberry to provide baked goods to Langdale 364 days a year.:

The court also imposed this notice period because Duperreault did not act in good faith when it terminated the Service Agreement

• she gave no notice of the termination despite having known for some time that she would be terminating it;
• she did not attempt to use the procedure in the Service Agreement’s dispute resolution clause to resolve any complaints, and
• she claimed that Langdale would no longer be in business, yet it continued to operate.The court dismissed Langdale’s allegations that Wheatberry breached the Service Agreement and awarded damages to Wheatberry in the amount of $66,250, including lost royalties, lost sales, and lost employee training costs.