By: Anthony Pugh
Editor: Ben Hanuka

In a May 31, 2021, decision of the Ontario Superior Court of Justice in Coffee Time Donuts v 2197938 Ontario Inc., the court granted summary judgment against a franchisee for unpaid royalties and interest, based on an implied extension of an expired franchise agreement that the parties abided by for several years after it expired.

However, the court dismissed the part of the claim for outstanding royalties that were statute-barred – for royalties that were outstanding for more than two years before the court action was commenced.

Key facts

The parties entered into a franchise agreement on July 31, 2009, which expired after five years without provision for renewal.  The franchisees continued operating the franchise and made royalty and other payments as if the agreement was still active.

The franchisees stopped making payments in February 2016, but continued to use the franchisor’s name and suppliers.

The total arrears were $90,283.84, plus interest of 24% per annum, based on the franchise agreement, in the amount of $117,860.98, for a total of $208,144.82.

The franchisor, Coffee Time Donuts, brought a summary judgment motion (application) against the defendant franchisees for these arrears that had accrued since February 2016, a period of about five years.

The franchisee argued that it was not obligated to pay any of these amounts because the franchise agreement technically expired in 2014, even though they continued operating the business.

Franchise agreement was extended by conduct

The court found that the 2009 franchise agreement applied to the franchisee’s continued operation of the business – the parties followed the terms of the agreement and to hold otherwise would be commercially unreasonable.

In addition, the franchisees failed to put their best foot forward on the summary judgment motion, by failing to adduce evidence supporting their position or alleged agreement (or lack thereof) that they were entitled to operate the business without payment.

Given the absence of supporting evidence, the court held that the franchise agreement was effective until January 2021, when the franchise agreement was terminated on consent.

Royalty arrears that were more than two years were statute-barred

The court disallowed the part of the franchisor’s royalty arrears that were older than the two-year limitation period.  The franchisor’s claim for royalty arrears for the period of February 2016 to August 2017 – royalty arrears for this period were disallowed because they were statute barred.

Royalty arrears after that period, from August 2017 to January 2021 were allowed because they fell within the two-year limitation period (the franchisor commenced its action in August 2019).

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Anthony Pugh Associate