Executive Summary: Key Legal and Evidentiary Issues

• Central dispute concerned the interpretation of a franchise agreement clause regarding the term and operation requirements for two restaurant locations.

• Parties disagreed whether the loss of one lease terminated the entire franchise agreement or if operations could continue at the remaining location.

• The drafting ambiguity in Clause 3 required the court to determine if the addresses should be joined by “and” (conjunctive) or “or” (disjunctive).

• Evidence focused on the parties’ intentions at contract formation, the business model, and whether two locations were meant to be operated as a single franchise.

• The Franchisee argued the doctrines of implied term, contra proferentem, and the duty of honest contractual performance were misapplied.

• The court found no damages owing but awarded fixed costs to the Franchisor as the successful party.

Background and facts

101011333 Saskatchewan Ltd. operated two Vern’s Pizza restaurants in Saskatoon, Saskatchewan, under a franchise agreement with Vern’s Pizza Company Limited. In 2016, the lease for one location (8th Street) was terminated, resulting in the closure of that restaurant. The Franchisor asserted that this event ended the term of the franchise agreement for both locations, while the Franchisee argued that the agreement remained in force as long as it continued to operate from the remaining Central Avenue location.

The dispute arose from a drafting omission in Clause 3 of the franchise agreement, which stated that the agreement would continue “for so long as the Franchisee shall have a good and valid Lease of the premises civically designated as [address of the premises to be used as the restaurant].” The parties never replaced the bracketed drafting note with the actual addresses, leading to ambiguity over whether the agreement required both locations to be operational or just one. The Franchisor maintained that the loss of either lease would terminate the agreement, while the Franchisee contended that the agreement would persist as long as at least one location remained.

Discussion of policy terms and clauses

Clause 3 was at the heart of the dispute, with its interpretation determining the outcome. The Franchisor argued for a conjunctive reading (“and”), meaning both locations had to be maintained, while the Franchisee argued for a disjunctive reading (“or”). The court considered the language of the agreement, the parties’ intentions at the time of contract formation, and the business context, including the fact that both locations were acquired together and operated under a single franchise agreement.

The court also examined related provisions, such as Clause 4, which required continuous operation from the locations described in the agreement, and considered doctrines such as implied term, contra proferentem, and the duty of honest contractual performance. The Franchisee’s arguments that the contract should be interpreted in its favor due to ambiguity, business efficacy, or alleged breaches of honest performance were rejected by the court.

Outcome and reasoning

The Court of King’s Bench granted summary judgment in favor of the Franchisor, finding that the termination of the lease at the 8th Street location ended the term of the franchise agreement. The Franchisee was permanently enjoined from operating as a Vern’s Pizza restaurant at the Central Avenue location. The court found that the parties intended both locations to be operated as part of a single franchise and that the loss of one lease terminated the agreement. No damages were awarded because the Franchisee had continued to pay royalties during the dispute.

On appeal, the Saskatchewan Court of Appeal upheld the lower court’s decision, agreeing that the agreement required the maintenance of both locations and that the judge had not erred in his interpretation of the contract or application of legal principles. The appeal was dismissed, and the Franchisor was awarded $3,000 in fixed costs as the successful party. No additional monetary damages were ordered, as the court confirmed that none were owing.