Executive Summary: Key Legal and Evidentiary Issues

• Validity and enforceability of the unsigned Franchise Agreement and Sublease, including whether the accountant, Lorne Horning, had actual or ostensible authority to sign for Peaceful Sky.
• Existence (or not) of any alternate contract formation theory, such as oral agreements or acquiescence, and whether there was consensus ad idem on essential franchise and sublease terms.
• Effectiveness of contractual exclusionary language, particularly the “No Assurances or Obligations” clause in the Confidentiality Agreement, and whether it barred negligent misrepresentation claims in a franchise context.
• Allegations of negligent misrepresentation and non-disclosure regarding the risks, business model, financial projections, and experience of the franchisor, and whether reliance by Peaceful Sky was reasonable.
• Characterization of the transfer of the Humboldt store back to Lube Stop as either an agreed “hand back” or a wrongful taking amounting to conversion, including valuation of inventory and equipment.
• Scope of Peaceful Sky’s liability on Lube Stop’s counterclaim for unpaid rent, utilities, inventory, leasehold/building expenses and system charges, given the absence of an enforceable franchise agreement and sublease.

Background and parties

The dispute arose out of an attempted franchising relationship for a Lube Stop automotive service outlet in Humboldt, Saskatchewan. Lube Stop Systems Inc. (LSSI), controlled by long-time oil-change operator Ricardo Marcil, had existing corporate stores in small Alberta communities and one prior franchise in Saskatoon, run by experienced operator Ed Wiebe. Peaceful Sky Holdings Inc. was a closely held company whose principal, Michael Tang (a relatively recent immigrant with no Canadian business or automotive experience), sought a passive investment rather than an owner-operated business. His wife, Fan Zhang, was an accountant with HNG Accounting Group, where LSSI’s long-time accountant, Lorne Horning, also worked. Fan handled the Humboldt store’s bookkeeping for Peaceful Sky. From the outset, both sides entered essentially uncharted territory: LSSI had never before started a new franchise store with an inexperienced franchisee, and Peaceful Sky had not previously operated a Canadian business, much less a specialized automotive franchise. The court emphasized that the franchisor was financially strained, seeking to roll out an unusually ambitious “flagship” store in a town where it lacked experience and strong relationships, while the franchisee did almost no due diligence and wished to remain largely hands-off.

The Humboldt project and the franchise concept

In early 2017, LSSI (through a related company, 102019029 Saskatchewan Ltd. or 029 Sask) bought a former tire shop in Humboldt, intending it to become a Lube Stop location. Ricardo initially envisioned a relatively standard oil-change operation with some tire work, but the business model expanded significantly based on a concept prepared by a local manager, Lambert Stromberg, who had run the former tire shop. The planned store would handle not only passenger vehicles but also heavy-duty and agricultural vehicles, and offer wider mechanical services and a service truck. This significantly altered the risk profile relative to LSSI’s proven quick-lube model. Meanwhile, Mr. Horning prepared pro forma financial statements projecting revenues and profits for “Humboldt Lube Stop” using assumptions and information provided by LSSI’s management. The pro formas carried a “Notice to Reader” stating that the accountant merely compiled the projections from management’s assumptions, expressed no assurance, and cautioned that actual results could materially differ. Peaceful Sky, however, treated the pro formas as trustworthy and central. Michael testified he saw them as “the most important” document and said neither Ricardo nor Horning warned him about their speculative nature. No independent accounting or legal advice was obtained, nor did Michael or Fan investigate the Humboldt market, local competition, or the viability of the expanded service mix. Their enthusiasm rested largely on projected returns and their perception of Ricardo’s supposed depth of industry experience.

Key documents: application, confidentiality and draft agreements

On April 26, 2017, Michael signed a franchise application and a Confidentiality Agreement with LSSI and paid a $50,000 deposit, which went into LSSI’s lawyer’s trust account. The franchise application expressly stated that no franchise or other agreement would arise “by virtue only of” the application or deposit; rather, a franchise would only exist upon execution of a formal Franchise Agreement by both franchisor and applicant. At the same time, Ricardo provided printed drafts of a Franchise Agreement, a head lease between 029 Sask and LSSI, and a Sublease under which Peaceful Sky would occupy the Humboldt premises via LSSI. Critical sublease terms, including rent, flowed through from the head lease, so understanding the sublease required looking at both documents. The Confidentiality Agreement contained a pivotal “No Assurances or Obligations” clause. LSSI (defined as “the Company”) agreed to provide “Confidential Information” broadly defined to include forecasts such as the pro formas, but clause 8 stated that, although LSSI believed this information accurate, it made no representations or warranties as to its accuracy, completeness or fairness and would have no liability for any express or implied representations or omissions in that information. The court later held that this clause, read in its ordinary meaning, effectively disclaimed LSSI’s liability for negligent misrepresentation in the information it provided, including the financial projections, subject only to doctrines such as unconscionability or fraud, which were not properly pleaded on the facts.

The signing controversy and lack of contractual formation

A central legal issue was whether Peaceful Sky ever became legally bound by the Franchise Agreement and Sublease. Michael never signed either document. In June 2017, facing pressure from his mortgage lender to produce executed agreements and running short of funds for renovations, Ricardo cancelled a planned meeting at which he had expected Michael to sign, and asked accountant Lorne Horning to execute the signature pages for Peaceful Sky. Horning, who had previously been expressly authorized by Michael only to sign a release for the $50,000 deposit, signed the signature pages for both the Franchise Agreement and Sublease on June 20, 2017, after being told by Ricardo that Michael had already approved the agreements. Horning did not see the full documents, only the signature pages, and testified he knew he had no authority from Peaceful Sky to approve these contracts; he relied solely on Ricardo’s representation. Michael was not told about this signing and only received copies months later, in December 2017, by which time the store had nearly opened and leasehold improvements were substantially complete. The court held that there was no “actual execution” because no one with actual authority for Peaceful Sky signed. It further found there was no ostensible authority: any apparent authority had to come from Peaceful Sky’s own conduct, not from Ricardo’s misrepresentation. The only prior instance where Horning had signed anything for Peaceful Sky with Michael’s explicit consent was the deposit release; from that narrow authorization, it was a “dramatic leap” to assume he could bind Peaceful Sky to major, multi-year contracts. Moreover, Ricardo knew Michael had never communicated acceptance of the agreements and knowingly misrepresented to Horning that Michael was ready to sign. On these facts, the court ruled that neither the Franchise Agreement nor the Sublease was ever validly executed on behalf of Peaceful Sky.

Alleged oral agreements, acquiescence and consensus ad idem

LSSI argued that, even absent signatures, contracts emerged through oral agreement or acquiescence, pointing to the parties’ conduct after June 20, 2017: intensified construction, inventory ordering, negotiations with potential managers, greeting texts about becoming “business partners,” gifts exchanged, and Peaceful Sky’s acceptance that it was the franchisee by late July 2017. The court accepted that both sides behaved as though a franchise relationship existed and that each understood the other to be moving forward. Nonetheless, applying established principles of contract formation, the judge held that there was no consensus ad idem on essential terms. Important elements remained unsettled: the precise scope of the business (standard oil-change and tires versus the later-added heavy-duty, agricultural and service-truck lines); the term of the franchise (five years sought by LSSI versus three desired by Michael); and responsibility for the significant leasehold improvement costs. The draft sublease and head lease originally given to Michael were never produced in evidence, so the court could not know with sufficient certainty what Peaceful Sky had actually been offered on those points. Given that the franchisor itself had contracted in the application that a franchise would only arise upon execution of a written Franchise Agreement, and that franchise agreements are complex, “non-conventional” contracts requiring clear agreement on detailed operational terms, the court declined to infer a complete oral franchise or sublease from conduct alone. LSSI’s alternative theory that Michael’s silence or post-June actions amounted to acquiescence failed because Michael had never been told that Horning had signed for Peaceful Sky and the key post-June conduct unfolded under the shadow of Ricardo’s earlier misrepresentation to Horning about supposed approval.

Exclusionary language: entire agreement, notice to reader and no assurances

Several contractual provisions were advanced by LSSI as a complete defence to Peaceful Sky’s misrepresentation claims. First, the “Notice to Reader” in the pro forma statements was held to protect only the accounting firm HNG and its preparer; it did not refer to LSSI and could not be stretched to shield the franchisor from liability. Second, an “Entire Agreement” clause in the unsigned Franchise Agreement was given no effect. Since no binding Franchise Agreement was ever formed, the court held it would be illogical to imply an entire agreement clause into a supposed oral arrangement; such a clause is designed to cap and define obligations within an executed written contract, not to be retrofitted into a non-existent one. Third—and crucially—the Confidentiality Agreement’s “No Assurances or Obligations” clause was interpreted as an enforceable disclaimer of LSSI’s liability for negligent misrepresentation in the pre-contract information it supplied. The judge rejected attempts to set it aside based on unconscionability or a generalized “franchise-context” duty of good faith. Unconscionability was not properly pleaded (there was no clear allegation of an improvident bargain from inception), and the good faith duties discussed in franchise jurisprudence presuppose a valid franchise contract or a contract of adhesion, which did not exist here. While the court acknowledged that fraudulent misrepresentation can, in some circumstances, trump exclusionary clauses, fraudulent misrepresentation was deliberately not pleaded. On Saskatchewan authority regarding similar clauses in real estate transactions, the “No Assurances or Obligations” language was held sufficient to bar claims in negligent misrepresentation, both in contract (had there been a contract) and in tort.

Misrepresentation allegations and non-disclosure of risk

Although the liability-limiting clause ultimately defeated the misrepresentation claim, the court took care to indicate what it would have found had the clause not applied. It concluded that LSSI failed to disclose multiple material risks and limitations: that the Humboldt project was LSSI’s first attempt to start a new franchise store with an inexperienced franchisee; that the business model being built—heavily reliant on untested lines such as mechanical repairs, heavy-duty and agricultural vehicles, and a service truck—differed fundamentally from the core oil-change concept reflected in the pro formas; that LSSI lacked internal revenue and expense data for those expanded services and had limited tire experience, making projections especially speculative; that the pro formas omitted crucial costs, including leasehold improvements, some rent increases compared to the pro forma assumptions, and mechanic wages; and that LSSI itself was under financial strain, placing additional pressure and risk on the enterprise. The court considered these omissions capable of amounting to misrepresentations, particularly when Peaceful Sky relied almost entirely on Ricardo and Horning instead of conducting its own investigations. However, because Peaceful Sky had agreed in the Confidentiality Agreement that LSSI would “have no liability” for representations or omissions in the Confidential Information, the negligent misrepresentation claim could not succeed.

Conversion and the “hand back” of the store

A further key issue was whether LSSI committed the tort of conversion when it took over the Humboldt store at the end of 2018. By late 2018, sales were dismal, far below projections, and Michael advised Ricardo that the business was losing money daily. In December, Michael indicated that Peaceful Sky could not continue funding operations and might have to close. Ricardo responded that if Peaceful Sky wanted him to “take all of this over,” all accounts needed to be brought current, and asked for authority to assume control of the bank account, utilities, and operations effective January 1, 2019. Peaceful Sky laid off staff as of year-end and handed over control of the premises, inventory and operations to a new Ricardo-controlled company, 102066631 Saskatchewan Ltd., which took possession on January 1, 2019. Peaceful Sky claimed this amounted to a wrongful taking of its inventory, leasehold improvements and equipment. The court first rejected Fan’s evidence that Ricardo had promised, in essence, to reimburse Peaceful Sky its entire investment (including operating losses) as not credible and inconsistent with Peaceful Sky’s own pleadings, which admitted Lube Stop had not agreed to purchase the assets. Instead, the court found that, with Peaceful Sky insolvent or close to it, lacking other options and having requested Ricardo step in, no binding agreement was ever made on a buy-out formula. The arrangement was essentially a surrender of operations to mitigate ongoing losses and to protect employees from worse consequences. On these facts, even though LSSI and its affiliate obtained the use of assets (notably inventory) at takeover, the court held the conduct was not “wrongful interference” inconsistent with Peaceful Sky’s rights and thus did not amount to conversion. In any event, Peaceful Sky failed to establish reliable evidence of the value of the equipment and improvements as of the hand-over date, so damages could not be satisfactorily quantified.

Ricardo’s personal exposure and corporate separateness

Peaceful Sky also sought to hold Ricardo personally liable, effectively asking the court to pierce the corporate veil. The pleadings, however, did not clearly allege the traditional grounds for doing so, such as use of the corporate form as a sham, improper asset shuffling, or abuse of the corporate structure to shield fraud. Nor was there evidence that Peaceful Sky ever understood itself to be dealing with Ricardo in his personal capacity; the documentation—from the April 2017 Confidentiality Agreement and franchise application onwards—consistently identified LSSI as franchisor. While Ricardo clearly directed negotiations, construction and operational decisions, he did so in his role as a principal of LSSI and related companies. The court therefore declined to pierce the corporate veil and held that Ricardo bore no personal liability; any liability had to be analyzed through the corporate entities.

Counterclaim for rent, utilities, inventory and building costs

Although Peaceful Sky’s main claim failed, the court still had to address LSSI’s counterclaim, which sought various amounts said to be owing for rent, utilities, inventory, leasehold improvements, marketing, systems and training. The analysis was complicated by poor record-keeping and inconsistent billing practices between LSSI, its landlord affiliate 029 Sask and other related entities. On rent, the court found there was no enforceable written sublease but accepted that Peaceful Sky occupied the premises on a month-to-month oral basis and understood that it had to pay rent. Because Peaceful Sky gave less than a month’s notice before ceasing operations and did not prove that LSSI’s affiliated operator had itself paid rent for January 2019, the court accepted that January rent would technically be owing. However, LSSI held a $7,500 rent deposit, and when this amount was set off against the claimed January rent and related property tax component, the court effectively reduced the net rent recovery to zero. Utilities arrears of $2,392.11 were admitted in Peaceful Sky’s own trial brief and judgment was awarded for that sum.

Leasehold improvements, inventory and other charges

LSSI sought over $100,000 for leasehold improvements and additional building work originally invoiced by 029 Sask and various trades. The court refused this claim. Responsibility for leasehold improvements was an essential term on which there was never consensus, and the unenforceable Franchise Agreement could not be used to impose that burden. Moreover, because 029 Sask, not LSSI, had invoiced for the major improvement costs and there was no evidence that LSSI had either paid those sums or received an assignment of the claim, LSSI could not recover them in this action. As for opening and operating inventory, the billing trail was “a chaotic mess,” but the judge preferred Fan’s more methodical evidence over that of LSSI’s controller, and concluded that LSSI’s benefit from taking over inventory on January 1, 2019, and using it in ongoing operations, weighed against ordering further payments from Peaceful Sky. The entire inventory claim of more than $68,000 was therefore dismissed. Claims for advertising and marketing fees under the unenforceable Franchise Agreement also failed, as there was never a clear meeting of the minds on what Peaceful Sky was to pay or receive, and LSSI’s invoicing did not reliably track any contractual formula.

Systems, training and remaining building items

LSSI had more limited success on claims for certain operational systems and discrete building-related items. The court held that ISI, a specialized software platform used for inventory control and daily store reporting, was integral to the operation of a Lube Stop outlet and that LSSI had properly invoiced Peaceful Sky for these licences. Lube Stop recovered $2,835.51 under this head. However, it could not establish that fees paid for Epicor or Dropbox were properly attributable to the Humboldt store or necessary to Peaceful Sky’s operations, so those claims were rejected. Similarly, a $13,905.26 charge from Hergott Electric refused; the court again found it had been invoiced through 029 Sask, with no proof that LSSI had absorbed the cost. For Ace Plumbing work where Peaceful Sky had already paid a portion and a later settlement with the plumber reduced a judgment against LSSI and 029 Sask, the court allocated the benefit of that settlement roughly equally and fixed Peaceful Sky’s remaining share at $3,100. A small residual equipment-related amount of $444.86 tied to a Pumps & Pressures invoice was also awarded. By contrast, a sizeable $51,200 claim for “training” based largely on Ricardo’s retrospective estimates of his time, meals, travel and accommodation was roundly rejected as unsupported and never pre-agreed, even on the hypothesis that the Franchise Agreement might have been enforceable.

Outcome and overall result

In the end, the court declared that no binding Franchise Agreement or Sublease had ever come into existence, despite the parties’ mutual but flawed assumptions. Peaceful Sky’s claims for rescission, recovery of its investment and operating losses, negligent misrepresentation and conversion all failed, as did its effort to impose personal liability on Ricardo. On LSSI’s counterclaim, only narrow components—utilities arrears, certain plumbing and equipment-related building costs, and ISI system charges—were proven, leading to a modest monetary judgment of $8,772.48 in favour of Lube Stop Systems Inc., with no costs awarded to either side so that each party bore its own legal expenses.