Dhaliwall v. Hook Restaurant Ltd: earning sweaty equity in the restaurant industry

In July, 2021, following a four day trial, the Supreme Court of British Columbia released reasons for judgment in Dhaliwall v Hook Restaurant Ltd. The plaintiff Kayla Dhaliwall is a professional chef. The defendants were three restaurants in Vancouver: Hook, the Blind Sparrow and Bartholomew, where Ms. Dhaliwall acted as executive chef. The reasons for judgment can be read in full here.

At issue in Hook Restaurant was whether or not Ms. Dhaliwall and the defendants had reached a binding agreement with respect to her earning a “sweat equity” interest in the to-be-opened restaurant Bartholomew, and whether as a fall out from those negotiations (which the court found did not result in an enforceable agreement) she quit her employment with the defendants or was terminated.

Unfortunately oral agreements, never properly reduced to writing, are common in the hospitality sector. They are also notoriously difficult to enforce.

In Hook Restaurant the outcome turned largely on the court’s weighing and assessment of oral agreements and incomplete written records. The trial judge concluded that Ms. Dhaliwall and the defendants’ representative Mr. Gayman at best reached “an agreement to agree” on an ownership interest in Bartholomew which is not the same as an enforceable contract.

However, the court did find in Ms. Dhaliwall’s favour that she was wrongfully dismissed from her employment with the defendant restaurant group, who the judge found to be a common employer, and that she was entitled to damages in lieu of seven months’ reasonable notice. The court awarded Ms. Dhaliwall further compensation in the amount of $7,000 on account of contributions she made towards the eventual the opening of the Bartholomew restaurant. The facts of the dispute are summarized below.

The Facts

Ms. Dhaliwall was initially hired as the executive chef at the Blind Sparrow restaurant. The Sparrow, which is now closed, was located on the northern end of Denman Street in downtown Vancouver (Editor’s note: the Sparrow was a real West End gem; great beer list). Ms. Dhaliwall and the Blind Sparrow’s general manager, and largest shareholder, Mr. Gayman quickly developed a productive working relationship. Ms. Dhaliwall always made it known to Mr. Gayman that she was interested in obtaining an ownership interest in his future restaurant ventures, and from time-to-time the two would discuss various growth opportunities.

Building on their success with the Sparrow they worked together to open a new seafood restaurant in the English Bay area of Vancouver called Hook. In March 2017, a little over a year after Ms. Dhaliwall began working as the Blind Sparrow’s executive chef, she reached an oral agreement with Mr. Gayman whereby she would assist in setting up Hook, would act as its executive chef (in addition to her duties at the Blind Sparrow), and would receive a 3% ownership interest in Hook two years after its opening.

Hook opened in July 2017. Mr. Gayman, as he did at the Blind Sparrow, worked as owner/operator and general manager, and Ms. Dhaliwall, as envisioned, worked as executive chef at both Hook and Blind Sparrow, and received compensation from both. Hook was initially quite successful.

Sometime in late 2017, Ms. Dhaliwall and Mr. Gayman began discussing the possibility of opening another restaurant, which would be Mr. Gayman’s third. This restaurant would open as Bartholomew in 2019.

The negotiations between Mr. Gayman (acting on behalf of the larger ownership group) and Ms. Dhaliwall proved to be the genesis of the breakdown of the parties’ relationships. Ms. Dhaliwall was initially looking to secure a significant ownership share in Bartholomew in the range of 35%. However Ms. Dhaliwall had no funds with which to make an equity investment, and in order to attract other investors Mr. Gayman advised that her that her ownership interest would have to be significantly smaller. Ms. Dhaliwall only negotiated with Mr. Gayman, she had no contact with the other would-be investors.

The Oral Agreement

In spring 2018 Ms. Dhaliwall and Mr. Gayman came to a loose agreement with respect to Ms. Dhaliwall’s involvement in Bartholomew: in return for her responsibility for the kitchen side of the business, she would receive a 10% interest in Bartholomew. The terms of this agreement were never reduced to writing, and at trial the parties’ fundamentally disagreed on when or how Ms. Dhaliwall’s 10% interest in Bartholomew would crystallize. Ms. Dhaliwall’s position was that she was entitled to her 10% ownership interest immediately. The defendants’ position was that there was no agreement as to when her 10% interest would crystallize, and because her ownership interest would be on account of “sweat equity” she would have had to first earn that interest by performing services.

Some steps were taken to open Bartholomew in the summer or fall of 2018, but there were a number of delays and by November, 2018 , when they parties’ relationship ended, Bartholomew was still not open.

By fall of 2018 a series of adverse events collided. In September the Blind Sparrow was required to vacate its premises on account of the landlord having other plans for the building. In October 2018, Ms. Dhaliwall went on a voluntary medical leave in relation to injuries she suffered in a motor vehicle accident earlier in the year. In November 2018, Mr. Gayman and Ms. Dhaliwall had a series of meetings where their earlier discussions about her interest in Bartholomew came to a head.

At or about this time Mr. Dhaliwall learned that a shareholders’ agreement between the owners of Bartholomew was in existence, and that she would not be receiving her 10% interest in Bartholomew upfront, rather she would receive only 5% upfront with the other 5% one year after Bartholomew was in operation. Ms. Dhaliwall was unhappy with this development; she felt mistreated and deceived by Mr. Gayman. The court generally agreed with Ms. Dhaliwall’s version of these November, 2018 meetings and that the 5% interest in Bartholomew upfront was a “take it or leave it” proposition. Given her adverse reaction to this development, and the related tension that had developed between her and Mr. Gayman, the court concluded that Mr. Gayman did not want to continue employing her at Hook.

Although the defendants asserted that it was Ms. Dhaliwall who quit her employment, in all the circumstances the court rejected that position and made a finding that the defendants terminated her employment in late November 2018.

Damages

Having terminated her employment without reasonable notice, Ms. Dhaliwall was entitled to an award of damages in lieu of the notice she should have received from the defendants. Given her status as a senior employee with a specialized skill set, the court found that a seven month notice period was appropriate. Unfortunately for Ms. Dhaliwall, notionally extending her employment at Hook by seven months would not extend it as far as the two year anniversary of Hook’s opening, and thus the court found that Ms. Dhaliwall was not deemed to have earned her 3% interest in Hook that vested upon the two year anniversary of Hook’s opening.

Although the court was unable to find that the parties had reached a binding agreement concerning her obtaining an ownership interest in Bartholomew, the court nevertheless agreed that she had performed various services in furtherance of Bartholomew’s concept development and opening, and on that basis awarded her further compensation in the amount of $7,000.

Take Away

Entrepreneurs, especially at the start-up stage of a new venture, understandably look to save costs where they can – including by writing their own contracts, or forgoing written agreements all together. This is frequently the case when an agreement concerns a trusted senior employee, friend or family member, and is a practice to be avoided. There are other ways to save money.

Alcohol & Advocacy previously wrote an article about a dispute that ended up in the Alberta Court of Appeal concerning a one-page agreement for the purchase and sale of a bar, drafted without the assistance of counsel. You can read about that cautionary tale here.

In some transactions and employment relationships litigation can’t be avoided: the personalities and sources of conflict were on a collision course from the start. Fortunately, most of the time, a properly documented agreement will go a long way to keeping you and your business out of the courtroom – or at the very least narrowing the issues.

If you are in the midst of a dispute, or facing litigation, contact Dan Coles at Owen Bird.

*Alcohol & Advocacy publishes articles for information purposes only. They are not a substitute for legal advice, and persons requiring such advice should consult legal counsel.