Legal Blog

Inducing Breach of Contract

There are times when lawyers write letters on behalf of their clients when they should not be doing so. One such occasion resulted in Yellow Submarine Deli Inc v. AGF Hospitality Associates Inc, a Dec./95 unreported decision of the Manitoba Queen’s Bench.

In March/87, Yellow Sub granted AGF an exclusive right to develop submarine franchises in Manitoba. By Apr./88 AGF had 12 operational franchises. In Apr./88, the sole shareholder in Yellow Sub agreed to sell his shares to a consortium, closing June/88. The consortium decided that they wanted the Manitoba territory back from AGF and enlisted the vendor shareholder’s help in doing so.

In April and May/88, employees of Yellow Sub wrote nasty demand letters to AGF relating to arrears of franchise fees. In May/88, Yellow Sub instructed Weibe, its solicitor, to inform AGF that its exclusive agreement was terminated. Weibe did so.

Weibe reviewed the agreement and decided that the agreement contained no provision whereby Yellow Sub could establish a new relationship with AGF’s franchisees. Nevertheless, on the instructions of Yellow Sub and the consortium, Weibe wrote to the franchisees on May 26/88 advising them of the termination of the AGF agreement and directing them to make all franchise payments directly to Yellow Sub. He also advised that Yellow Sub would be in touch with the franchisees to establish a new relationship with them.

On June 1/88, AGF’s solicitor wrote to Weibe denying that the agreement was properly terminated and alleging that Weibe’s letter to the franchisees was an unlawful interference with AGF’s contractual relationships. Weibe responded by sending another letter to the franchisees advising them to pay their franchise fees to their solicitors in trust. He did not recant from his previous letter.

Some franchisees paid their solicitors, some paid nothing, and none paid AGF. Yellow Sub tried unsuccessfully for an interlocutory injunction enjoining AGF from using its trademarks. Even after AGF notified its franchisees of its win in court, it still was paid nothing. AGF ceased operations.

Ultimately Yellow Sub went bankrupt and the only issue to be decided was AGF’s counterclaim against Weibe.

The judge held:

1. Weibe could have advised the franchisees of the termination, if the agreement provided for it; it did not.

2. Weibe’s statement that Yellow Sub would meet with the franchisees was a clear invitation for the franchisees to repudiate their contracts with AGF.

3. Weibe knew that the agreement created no provision for an assignment of AGF’s rights to Yellow Sub and no provision for an assignment of AGF’s receivables.

4. Weibe had no authority for what he did, other than the instructions from his client.

5. There is no justification for a solicitor asserting a legal right on behalf of his client when he knows that right does not exist.

The judge awarded AGF $48,100 against Weibe for the tort of inducing breach of contact.