Author: Robert Jones, Law Works P.C.
Editor: Ben Hanuka, Law Works P.C.
In Royal Bank of Canada v. Everest Group Inc., an April 8, 2019, decision of the Court of Appeal for Ontario, the court dismissed a franchisee’s appeal from a summary judgment decision that granted to RBC judgment on loans that it made to a franchisee to set up a Paramount Fine Foods restaurant.
The Court of Appeal upheld the motion judge’s ruling that when the franchisee delivered a Notice of Rescission to its franchisor, RBC was entitled to treat that notice as an event of default under the loan agreements, and demand repayment in full.
(See our blog post about the motion judge’s decision here).
The franchisee, Everest, borrowed a loan from the Royal Bank of Canada (“RBC”) to finance its purchase and set up of a “Paramount Fine Foods” restaurant in Toronto’s Yorkdale Mall.
The loan agreements allowed RBC to demand repayment from Everest upon a “material adverse change in the financial condition [or] operation of [Everest]”, or if Everest “ceased to carry on business”.
Everest delivered a Notice of Rescission to Paramount, its franchisor, under s.6(2) of the Wishart Act. RBC made a demand for repayment and then sued Everest on the loans. Everest argued that its rescission claim against Paramount was a material improvement in its financial condition, and that pursuing its rescission claim was part of the ongoing operation of its business.
The motion judge’s interpretation of the loan agreements was correct
The court upheld the motion judge’s conclusion that there was no basis for requiring RBC to hold off from exercising its rights while Everest pursued its rescission claim against Paramount.
The events of default in the loan documents were clear and unambiguous. It was reasonable for the motion judge to find that:
- Everest’s decision to deliver a Notice of Rescission to Paramount, and to allow it to take back its restaurant, amounted to ceasing to carry on business; and
- this development was a material adverse change in Everest’s business.
The court held that Everest’s interpretation of the loan agreements did not accord with common sense or business reality.
This decision confirms that a lender has no obligation to delay enforcing its loans against a franchisee that is in the process of claiming damages from its franchisor. The creditor-debtor relationship between a franchisee and its lender is distinct from the franchise relationship between a franchisee and its franchisor.
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