Mai Case Study

Case

Mai has been operating a small restaurant for the past 8 years in premises rented from her uncle Fred in the west end of Montreal Island. Over the past 5 years, many new residential subdivisions and commercial buildings have been built near her restaurant, which has greatly increased her overall business traffic and income.

Max, a recent university graduate, is very interested in investing in a restaurant business. Having visited Mai’s restaurant for meals on numerous occasions, he met with Mai last year with the hopes of becoming her business partner. Mai was not interested in dealing with co-owners/partners, so she told Max that he could either buy her business outright or become her franchisee.

Max did not have the money to buy her business, however he was interested in becoming a franchisee if the business would be sufficiently profitable. Mai told him that the cost of buying a franchise of “Le Chateau Mai Food” would be $650,000 plus 7% of his annual gross sales, and that his new restaurant would have to be located on the island of Laval.

Mai promised Max that he could make a fortune, and to prove this point, she showed him her confidential financial books and records. Max asked to see copies of her actual income tax returns ( both Federal and Quebec) for the past 3 fiscal years, in order to verify her gross sales and expenses, and Mai promised to ask her accountant for copies of same. In fact, Mai never got around to providing these tax returns to Max. Mai advised Max that several other people had asked to purchase franchises in the Montreal area, and warned him that he had better decide quickly.

After 2 days of contemplation and sleepless nights, Max decided to purchase the exclusive rights to open a Le Chateau Mai Food franchise in Laval. He signed Mai’s standard franchise agreement, which required Max to enter into a 5-year lease with Mai’s uncle Fred for specific premises located in a shopping centre near Highway 440 in Laval.

Max’s restaurant has been open for 8 months. His sales, while constant, have been much lower than the sales figures that Mai had shown him for her business in the west end of Montreal Island. When he complained to Mai about his low sales, she told him that he must be a bad businessperson. Mai also advised him that she had already sold two (2) new Laval franchises to a new operator several months ago. Max protested that she could not do this because of his exclusivity, but Mai responded that competition would be good for Max.

The two (2) new Laval based Le Chateau Mai Food franchisees opened last week, with lots of media coverage and minor celebrity guest appearances. On the same day, Max received a legal letter from Mai’s lawyers stating that Mai was revoking his franchise due to Max’s poor business performance and bad attitude.

Max believes that he has done nothing wrong and immediately sets up a meeting with you, his new lawyer.

QUESTION: Discuss the legal issues involved in this case. What actions do you recommend that Max should take and why?  Refer to the laws and court judgments contained in the textbook to support your answer.