Search by
Background and parties
The case arises from a franchise relationship between 10001325 Canada Inc. (the franchisee), a corporation created as the investment vehicle of Ms. Jiahui Lu and two silent partners, and Cacao 70 Inc. (the franchisor), operator of a chocolate-themed restaurant concept developed and controlled by Mr. Bing Tang and his co-investors and co-directors, Messrs. Guang Liang Xu and Ying Zhi Wang. The franchise concerned a Cacao 70-branded restaurant to be opened at Les Promenades de Gatineau mall (the Gatineau Mall). The Franchise Agreement was signed on 17 December 2016, with an anticipated opening around 1 June 2017 and a contractual term of 10 years.
Ms. Lu and her husband, Mr. Cheng Geng, were relatively recent Chinese immigrants. Ms. Lu held a master’s in business administration and had worked as a senior accounts manager in China; Mr. Geng held a master’s in civil engineering from the University of Ottawa and had construction experience. They wanted a franchise largely because they expected a franchisor to provide a tested system and ongoing guidance, compensating for their unfamiliarity with running a business in Canada. Cacao 70, controlled through a group of numbered companies held by Messrs. Tang, Wang and Xu, had grown from an independent dessert café in Montreal to a small network of chocolate-focused restaurants, some corporately owned and some franchised.
Pre-contractual representations and alleged fraud
The franchisee’s interest began when Mr. Geng received a Mandarin-language online advertisement on WeChat promoting Cacao 70 franchise opportunities aimed expressly at international students and new Chinese immigrants. The ad promised that with a comparatively modest investment (likened to the cost of a small apartment), investors could own their own Cacao 70 store, with site selection and operations led by the “corporate team.” It touted investment ranges of $650,000 to $850,000, a minimum equity contribution of $200,000, and an annual return on investment of 20–25% in the first five years, rising to 30–35% thereafter. A follow-on PowerPoint presentation in Mandarin further presented Cacao 70’s “Market Overview” (suggesting $1.5–$2 million annual store revenues and post-tax profits of $250,000–$300,000), an 18-department corporate organizational chart, and optimistic revenue projections and startup costing.
The couple visited multiple Cacao 70 locations and spoke to existing franchisees, who reported that the business could be profitable but required heavy owner-operator involvement and did not deliver very high margins. They nevertheless proceeded to in-person meetings with Mr. Tang and a broker, Richard Zhou, in February and March 2016. Mr. Tang repeated the themes of strong returns and suggested that if Mr. Geng worked as manager, there would essentially be “no risk” to his personal income, citing typical manager salaries around $50,000–$60,000 per year. Mr. Tang also mentioned that some stores had broken even in their first month.
The plaintiff later amended its pleadings to seek annulment of the Franchise Agreement on the basis of fraudulent inducement, arguing that the ad, the PowerPoint and the recorded meetings overstated Cacao 70’s tenure, falsely presented it as a market “leader” and “pioneer,” exaggerated financial projections, misrepresented the depth of the franchisor’s organizational structure, and, crucially, conveyed the idea that the venture was free of risk for the couple. It also sought to pierce the corporate veil and hold Messrs. Tang, Wang and Xu personally liable as alter egos of Cacao 70, invoking both shareholder-veil-lifting doctrine and director-liability theories based on extra-contractual fault, participation in corporate faults, and bad faith.
The franchise agreement and key contractual terms
The Franchise Agreement was drafted by the franchisor and largely presented on a standard form. Ms. Lu testified that no clause could be negotiated, characterizing it as a contract of adhesion, but the Court found that at least some verbal derogations were agreed upon and honoured, particularly concerning royalties, so it did not treat the contract as one of adhesion in a way that affected the outcome.
Two provisions framed the parties’ risk allocation: Article 1.6 stated that the franchisee understood and agreed that operation of the business involved risk and that success would “depend largely on [its] skills and involvement.” Article 1.7 provided that the franchisor made no representation or warranty as to the chosen location’s sales, revenues, profits or success. The Court ultimately held that these clauses could not be read as insulating the franchisor from liability for its own later contractual breaches; rather, they only limited representations about guaranteed results.
At the core of the plaintiff’s contractual case stood Article 7 (“Franchisor’s Obligations”), which expressly required Cacao 70 to “provide the Franchisee support and services,” including: initial training; additional training as reasonably required; planning assistance for the layout; provision of manuals; marketing policies and advertising fund management; determination of initial inventory; and sourcing competitive suppliers. Article 14.1 required the franchisee, “at its expense and risk,” to carry out construction and fit-out of the premises, while Article 5.1 required payment of a $50,000 initial franchise fee (plus taxes). Article 22.8 provided for an indemnity owed to the franchisor if the Agreement was terminated due to the franchisee’s default, based on a formula tied to average royalties and advertising fees over 12 months, multiplied by a time factor.
The Court interpreted Article 7 and the listed “support and services” in light of Quebec franchise jurisprudence, which treats franchise contracts as “relational contracts” that impose an ongoing duty of collaboration, information and support; franchisors must not only license intellectual property and know-how but must actively assist franchisees and, when market circumstances shift (such as the arrival of competitors), work to minimize economic harm rather than stand aside.
Construction, cost overruns and opening
Although the Franchise Agreement formally placed construction at the franchisee’s expense and risk, Cacao 70 effectively took control of the construction process with its chosen general contractor. It invoiced the franchisee via a series of short, lump-sum invoices labelled “Location construction deposit,” mostly in $100,000 increments. These invoices, together with the franchise fee invoice, brought the investment outlay for construction and fee to $627,487.50, somewhat above the approximately $600,000 budget that Mr. Tang had initially suggested to Ms. Lu and Mr. Geng. When the final demand pushed total construction charges to $570,000, and an additional $71,000 was forecast, the franchisee’s capital resources were effectively exhausted. This prompted a restructuring whereby $20,000 of the last construction instalment (plus an initial chocolate order) was turned into a loan from Cacao 70, to be repaid over three years, of which the franchisee ultimately paid about $17,478 before failure of the business.
The restaurant opened on 22 June 2017 after several postponements. The Court accepted that the franchisee had little control over the timing and that Cacao 70 assumed the lead role, but it declined to treat the construction delays and overruns themselves as discrete faults, largely because there was insufficient technical evidence on scheduling and critical path.
Competition within the mall and first franchisor fault
While the project was being built, two key competitors appeared in the Gatineau Mall: Chocolato, a chocolate-focused dessert outlet located in the food court a short distance from the Cacao 70 site, and Allô Mon Coco, a breakfast-and-brunch restaurant offering waffles and chocolate fondue. Evidence showed that both chains overlapped materially with Cacao 70’s concept: Chocolato in desserts and chocolate-based items; Allô Mon Coco in brunches and waffles with chocolate. The franchisee testified credibly that Cacao 70 never disclosed these impending competitors before contract signature and that she only learned of them when construction was already under way.
The franchisor insisted that these were not “real” competitors—Chocolato was described as an ice-cream and candy concept without table service, and Allô Mon Coco as a strictly breakfast venue with restricted hours—positions reflected in the lease’s competition clause, which narrowly protected Cacao 70 only from another sit-down dessert restaurant with an exterior entrance during the first year, subject to a grandfathering exception for tenants with pre-existing leases. The Court, assessing credibility and the lease language, inferred that Cacao 70 had in fact known about these tenants when it negotiated the master lease and tailored the non-competition protection so they would not be blocked.
Citing leading cases such as Provigo and Dunkin’ Brands, the Court held that Cacao 70’s duty of support included an obligation to identify, monitor and respond proactively to significant competitive threats in the immediate trade area. This did not mean guaranteeing success or shielding the franchise from every rival, but it did entail either producing competent market analysis to demonstrate why Chocolato and Allô Mon Coco did not materially threaten the franchise’s market or developing and sharing concrete marketing and operational strategies to distinguish Cacao 70 and help the franchisee compete (for example, menu emphasis, promotional campaigns, or positioning). No such study or support was provided; nor did Cacao 70 establish that it had ever commissioned broader market research on its competitive positioning. The Court characterized this inaction as the first major contractual fault in failing to meet the franchisor’s support obligations.
Personnel, training and operational support: second franchisor fault
Cacao 70 dispatched a manager and two assistant managers from Montreal to prepare the opening, but none of them spoke French, and one assistant spoke very little English, a serious handicap for a restaurant in Gatineau. The manager initially hired a floor manager who also could not function in French, prompting Ms. Lu to intervene; that person was then dismissed and replaced with a bilingual candidate, but at the cost of lost time just as the restaurant was opening.
The Court found that, beyond providing written manuals, Cacao 70 failed to deliver a proper, structured training program adapted to Ms. Lu and Mr. Geng’s lack of Canadian operational experience. The franchisor appeared to view its role as limited to store-level “operations,” and even then in a narrow sense, effectively ignoring the broader regulatory and human-resources context. The manager installed a tip-sharing scheme and mishandled payroll (including vacation pay), triggering an investigation by the CNESST and forcing the franchisee to engage legal and professional assistance. These compliance and payroll problems were largely traced to the manager Cacao 70 had supplied.
The Court rejected Mr. Tang’s position that franchisees are simply expected to hire accountants and shoulder such matters alone, emphasizing that employment practices and regulatory compliance are integral to “store operations” and form part of the know-how a franchisor is supposed to transfer. For recent immigrants unfamiliar with Quebec labour standards, these were “unknown unknowns” that Cacao 70 should at least have flagged and, ideally, helped them address as part of its support framework. The Court concluded that Cacao 70 did not make competent personnel available, nor did it build and deploy the kind of operational support structure suggested by its own promotional organizational chart. This constituted a second significant breach of its Article 7 support obligations.
Access, visibility and signage: third franchisor fault
The third major support failure concerned the restaurant’s access and visibility. For roughly five months, the Cacao 70 location operated without direct exterior access. When the rest of the mall closed at 6:00 p.m. several days a week, the mall’s main doors were locked, effectively cutting off the restaurant during peak evening hours. Only after some time did Cacao 70 persuade the landlord to leave the doors open and put up posters advising patrons they could still enter to reach the restaurant. The Court held that a capable franchisor should have anticipated permitting timelines and co-ordinated with the landlord in advance to ensure either timely construction of the exterior entrance or, failing that, a robust interim access and communication plan from day one.
Signage problems compounded the issue. The external façade of the mall facing the parking lot had space for branded signage, and the construction plans contemplated a high-contrast white background with black “CACAO 70 / ESPACE GOURMANDE” lettering. However, signage was significantly delayed and, when finally installed, used small black lettering directly on a dark grey wall, making the name almost invisible compared to the bright red or white signage of other tenants and even visually echoing the garbage area façade. It was the landlord, not the franchisor, that eventually suggested enlarging the signage during rent discussions in mid-2018.
These access and visibility shortcomings, the Court held, substantially undercut the restaurant’s ability to attract traffic—especially in a mall environment where both destination and impulse visits matter—and should have been squarely addressed by a franchisor purporting to provide layout planning, marketing advice and overall support. The fact that competitors like Allô Mon Coco opened with immediate, proper exterior access only underscored the contrast.
Collapse of the franchise and franchisor takeover
The restaurant’s monthly sales started modestly but promisingly (roughly $18,600 in the first partial month, rising to about $44,600 in July 2017) before dropping after Allô Mon Coco’s opening and then fluctuating in the low- to mid-$30,000 range. By early 2018, figures trended downwards into the twenties and low thirties, and by April–June 2018 revenue deteriorated further, sinking into the low-$20,000 range. Meanwhile, Ms. Lu and Mr. Geng had exhausted their capital; by late spring 2018 they were working without wages and using personal savings for living expenses. The evidence showed serious stress, health impacts on Mr. Geng, and mounting arrears to the landlord and suppliers.
On 20 July 2018, the franchisee sent a demand and termination notice, citing Cacao 70’s breaches of its obligations of support among other grounds, and formally resiliated the Franchise Agreement. The Court held that this constituted a legally justified unilateral termination of a contract of successive performance under Article 1604 CCQ, given the nature and accumulation of the franchisor’s defaults.
Cacao 70 took over operations on 1 August 2018. There was some inconsistency as to the exact closing date, but the Court preferred the franchisor’s written undertakings, which indicated that the restaurant was ultimately shut in October 2019. This meant Cacao 70 itself ran the location for more than a year without being able to turn it into a viable business. The Court treated this period almost as a “controlled experiment”: if the franchisor with full system knowledge could not achieve profitability or restore viability over a similar span, it became difficult to attribute the franchise’s failure to the franchisee’s alleged mismanagement rather than to the structural and support deficiencies already identified.
Fraud, veil-lifting and director liability rejected
Although the plaintiff alleged both pre-contractual fraudulent inducement and a broader scheme by the individual defendants to let the franchise fail and then capture the built-out store, the Court found that the high evidentiary burden for fraud and veil-piercing was not met. Assertions that Cacao 70 was a “pioneer” and “leader,” or that revenue ranges might reach $1.5–$2 million, were either puffery, marginally overstated, or not shown to have been determinative of the couple’s decision, especially given their own due diligence discussions with existing franchisees.
The “no risk” statements from Mr. Tang were interpreted, on an objective and contextual standard, as referring to the relative security of a manager’s salary if one spouse worked full-time in the store, not as a literal guarantee of zero business risk. Given Ms. Lu’s MBA and Mr. Geng’s business experience, the Court found that any contrary understanding would constitute an inexcusable error in the absence of true fraudulent intent. Crucially, the Court held that defects in Cacao 70’s later support, not fraudulent pre-contractual conduct, explained why Mr. Geng’s income ultimately proved far from secure.
On the alleged “scheme” to have the franchisee build out an asset and then seize it, the Court emphasized that Cacao 70 derived no real benefit from the takeover; it ran the business at a loss and eventually closed it. The evidence did not support a concerted fraudulent plan, nor did it justify lifting the corporate veil or imposing personal contractual or extra-contractual liability on Messrs. Tang, Wang and Xu. All individual defendants were therefore cleared of personal liability.
Damages analysis and set-off
The plaintiff initially claimed approximately $870,221 in damages, including investment loss, lost profits, unpaid wages, taxes, legal fees and other heads, and pursued a theory of annulment based on vitiated consent. Once the fraud theory failed, the Court assessed damages on a contractual breach basis, applying Articles 1607, 1611 and 1613 CCQ. It characterized the main recoverable loss as a reliance loss: the sunk investment that was meant to generate value over the 10-year term but was effectively rendered useless by the franchisor’s support failures.
The Court calculated the actual investment as $627,487.50 (construction invoices totalling $570,000 plus the $50,000 franchise fee and taxes) and accepted that these expenditures were undertaken in reliance on Cacao 70 fulfilling its ongoing support obligations. However, rather than awarding the entire amount, the Court apportioned damages over time. Because the contract was to run for 10 years, and the franchisor’s faults and their consequences manifested over roughly two years (one year under the franchisee’s operation and a further year under the franchisor’s own attempt to operate), the Court concluded that only two-tenths of the investment could be seen as an “immediate and direct” consequence of the breaches. After that period, other ordinary business risks—including eventual broader market shifts and even events like the COVID-19 pandemic—would have intervened.
This reasoning led to an award of $125,497.50 (two-tenths of $627,487.50) for lost investment. Applying the same logic to the loan repayments ($17,478.01) made under the construction-related loan, the Court added two-tenths of that sum, i.e. $3,495.60, as additional reliance damages. Claims for lost profits were dismissed as impermissible double recovery alongside investment loss and, in any event, unsupported by clear proof; the Court distinguished the famous Dunkin’ Brands case on the basis that there the entire franchise network had been irretrievably destroyed, whereas here only one location failed. Claims for moral damages, unpaid wages for Mr. Geng, tax remittances, and $161,319.32 in legal fees were also rejected for lack of a proper juridical basis or standing, and because the alleged abusive or fraudulent litigation conduct required to ground extra-judicial fee shifting was not present.
On its cross-application, Cacao 70 sought $115,834.61 for construction of the exterior access, an indemnity for early termination based on Article 22.8, and unpaid advertising contributions. The Court dismissed the construction cost claim because the franchisor’s own representative had acknowledged that the landlord, not the franchisee, bore that cost. It rejected the indemnity claim because Article 22.8 applies only when termination is due to the franchisee’s default, whereas here the termination flowed from the franchisor’s contractual breaches. However, the Court allowed the claim for $4,243.06 in advertising fees, holding that the franchisee remained obligated to contribute to the broader advertising fund absent proof of a total failure of the franchisor’s advertising activity.
The Court also dealt with a discrete cost issue relating to late-produced recordings (Exhibit P-43C). Because the plaintiff introduced these during its counter-proof, necessitating adjournments and translations of full recordings (later filed as Exhibits D-13 and D-14), the Court awarded the franchisor $1,149.75 in additional lawyers’ fees associated with that step and further granted it its translation costs as part of costs, even though the plaintiff succeeded overall on the main contractual issues.
Overall outcome and financial result
In the end, the Court held that there was no fraud and no vitiation of consent, and that the individual defendants were not personally liable. However, it found Cacao 70 in breach of its core obligation of support under Article 7 of the Franchise Agreement, primarily for failing to address serious competitive threats in the mall, for providing inadequate and incompetent personnel and training, and for mishandling the restaurant’s access and visibility. Those breaches justified the franchisee’s early termination and directly caused a significant portion of the investment loss. After calculating reliance damages, then setting off amounts owed by the franchisee ($4,243.06 in unpaid advertising fees and $1,149.75 for the franchisor’s additional lawyers’ fees related to Exhibit P-43C), the Court ordered Cacao 70 Inc. to pay 10001325 Canada Inc. a net sum of $123,600.29. In addition, the plaintiff was awarded its ordinary legal costs against Cacao 70 (excluding the P-43C translation-related costs), while Cacao 70 obtained its translation expenses as costs. Because costs are subject to tariff and later quantification, the exact total of all monetary amounts including costs cannot be fully determined from the judgment alone, but the clear successful party on the merits is the franchisee, 10001325 Canada Inc., with a principal financial award of $123,600.29 in its favour.
Plaintiff
Defendant
Court
Quebec Superior CourtCase Number
500-17-106244-190Practice Area
Corporate & commercial lawAmount
$ 123,600Winner
PlaintiffTrial Start Date