CANADIAN FRANCHISE DISPUTES Paul J. Bates R. David House Jeffery P. Childs Bates Barristers Toronto OVERVIEW

A clash of expectations occurs when strains emerge in the relationship between franchisor and franchisee. When a franchise relationship goes awry, the resulting dispute can be an intense David versus Goliath struggle for financial compensation, a clash of attitudes between operational autonomy and compliance with system standards, and ultimately a contest over control of the brand. Franchisors feel a profound sense of ownership of the brand, and insist on the power to set standards for operations. Franchisors set down the terms of the franchise agreement, and they will assert those terms if a franchisee goes into “enforcement”. The franchisor may resort to enforcement if franchisee behaviour falls below standards relating to: timely payment of rents, royalties, advertising levies and other charges; operational performance in accordance with the standards set out in the franchise program; and general cooperation and assistance in achieving the goals of the franchise system. Conversely, the franchisee is the business operator on the front lines. A significant up-front investment is typically made by the franchisee as well as significant personal devotion to the enterprise not only from the individual franchisee but also from family members. A franchisor that does not provide operational support to the franchisee, especially during the early days of operation, can compromise the viability of the operation. Issues may also arise regarding the timely disclosure of information or unfair impinging on a franchisee’s region (when defined).

Further, when a brand declines or fails to meet challenges in

particular markets, relief from strict compliance with royalty, ad levy or other charged rates may also be necessary in order to protect the franchisee’s significant investment. Significant

2 renovations and investments required by the franchisor of the franchisee may also create the reasonable expectation that renewal for an additional term will occur. Franchise disputes often begin as an exchange of correspondence describing the complaints and presenting the responses of the franchisor and the franchisee. Where the franchisor intends to rely upon the provisions of the franchise agreement, it will deliver a notice of default specifying the acts or omissions complained of, and referring to the provisions of the franchise agreement that are relied upon. The notice will identify the cure, if any, which is required, and will caution the franchisee about other remedies that may be taken by the franchisor. Likewise, where the franchisee intends to rely up the provisions of the franchise agreement, it will usually deliver a list of demands specifying the acts or omissions complained of, the provisions relied upon, and identifying how they expect the franchisor to resolve the problem. In either situation, the other party may consider the enforcement notice or demand letter to be a breach of the dynamics of their relationship’ there is a common perception that the notice of default is a sign of “bad faith”. This is a difficult concept to define but usually rests upon the precept that the franchisor has an extra-contractual duty to cooperate with the franchisee to assist it to earn a good income. In Ontario, a duty of good faith and fair dealing has been enacted by s. 3 of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3, which provides: Fair dealing 3.(1) Every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement. 2000, c. 3, s. 3 (1). Right of action (2) A party to a franchise agreement has a right of action for damages against another party to the franchise agreement who breaches the duty of fair dealing in the performance or enforcement of the franchise agreement. 2000, c. 3, s. 3 (2). Interpretation (3) For the purpose of this section, the duty of fair dealing includes the duty to act in good faith and in

3 accordance with reasonable commercial standards. 2000, c. 3, s. 3 (3). This is a significant provision of wide application to franchise relationships. It applies to the performance and enforcement of franchise agreements. It is reciprocal, applying to both the franchisor and franchisee.

It provides for the court to determine reasonable

commercial standards that ought to be met by the parties. An allegation of bad faith or unfair dealings should not be disregarded. It is important to gather the facts and documents necessary to win a franchise dispute at court at the initial stages. Evidence becomes more difficult to retrieve over time, as witnesses’ recollections fade, documents go astray, and employees, whose knowledge is critical, become unavailable due to change of employment or other circumstances. Once the facts and documents are gathered, a response should be given to any allegation of bad faith “for the record”. Similarly, from the franchisee’s perspective, evidence and documents relating to the lack of support, decline in brand or undermining by operational staff need to be collected and preserved.

TERMINATION BY FRANCHISOR When the franchisor determines that the franchisee should no longer remain in the system, the franchisor will take business and legal measures to terminate the relationship. An initial step might include a warning meeting between district managers or others representing the franchisor and the owner of the franchisee’s business. The franchisor’s representatives may express very direct and determined views of the franchisee’s behaviour. The franchisee may have its own criticisms and concerns. Harsh words may be spoken on each side; opinions tend to be strongly held when it concerns the future of a business. One side or the other may start a volley of letters about expectations and demands. This may be followed by a notice of default, a formal legal document which recites the particulars of the franchise agreement, specifies the breach complained of and, if applicable, describes the actions that are necessary to cure the breach. A notice of default must be taken very seriously by a party to a franchise agreement. A franchisee in receipt of a notice of default ought to consult a solicitor with expertise in

4 franchise disputes; the failure to satisfy the franchisor’s concerns may lead to the most serious action possible - a notice of termination of the franchise agreement. This step is usually taken where the franchisor finds that the breach complained of cannot be, or will not be, cured to the satisfaction of the franchisor. A notice of termination will repeat and rely upon the contents of the notice of default, and invoke the termination provisions of the franchise agreement. At that point in time, the franchisor will often take steps to acquire possession of the franchise premises and business. In response, the franchisee may contest the breaches alleged by the franchisor, and dispute whether or not those breaches justify termination of the franchise agreement. Several levels of analysis must be considered in order to determine whether a franchisor is legally justified in terminating a franchise agreement.

The first step is to

determine whether the franchisee was in breach of the terms and conditions of the franchise agreement. The nature, scope and causes of any breach must be ascertained. The parties to the franchise agreement must also consider whether or not the breach can be cured. Preemptory termination without the opportunity to cure with reasonable notice and negotiations will not impress in evaluating the commercial reasonableness, fair dealing and good faith of the franchisor. Unless the contract provides otherwise, only breaches that are so serious as to deprive the innocent party of substantially all of the benefits of the bargain justify termination. To avoid the restrictions of this principle, franchisors provide for termination in the franchise agreement having regards to the type of breach and the frequency of its occurrence. It is common for franchisors to reserve the right to terminate the franchise agreement in circumstances where damages would be the appropriate remedy at common law. Franchisors are sensitive to certain types of conduct, insisting that termination may result in the case of actions or omissions that undermine the integrity of the franchise system by eroding the goodwill of the franchisor’s trademark, interfere with the economic efficiency of the system, or otherwise materially prejudice the franchisor’s interests.

GOOD FAITH AND FRANCHISE TERMINATION The Statutory Duty of Good Faith and the Arthur Wishart Act

5 Section 3 of the Arthur Wishart Act (Franchise Disclosure), 2000 imposes upon all franchisors in Ontario a duty of fair dealing to its franchisees vis-à-vis the performance and enforcement of the franchise agreement. While it is too early to offer a strong prediction of the judicial principles that will apply as the legislation is interpreted by the courts, a few guiding general principles can be stated. The court will determine whether the aggrieved party has fulfilled the requirements of the “good faith” standard, and whether it has acted in accordance with “reasonable commercial standards”. The court will be reluctant to substitute its business judgment for that of the franchisor, preferring to limit judicial review to the question of whether there was a reasonable basis for the franchisor’s actions concerning termination.

If a franchise agreement expressly deals with the business reasons for

termination, the court will be inclined to accept that the franchisee accepted the risk imposed by the franchisor’s actions. The court should defer to the franchisor’s opinion on business points, such as whether the franchisee’s conduct is harmful to the franchise system as a whole, including the trademarks and goodwill of the system. The court will expect a franchisee to respond to clear and consistent warnings of consequences, and the failure of a franchisee to do so will diminish a franchisee’s chances of establishing that the franchisor acted in bad faith or without regard to reasonable commercial standards. While there is no Supreme Court of Canada decision providing for an authoritative interpretation of “good faith” in the context of franchise agreements, the term “good faith” is often interpreted by the courts in juxtaposition to “bad faith”.1 In general, bad faith conduct arises when the actions of one party substantially nullify the objective of the franchise agreement or cause significant harm to the other party. The concept of good faith is a subjective one, and cases that have considered it have focus on individual franchise relationships, as opposed to the relationship between franchisor and franchisee as a whole. In determining good faith, the courts notice elements such as commercial fairness and reasonableness.

1

See Gateway Realty Ltd. v. Arton Holdings Ltd. (1991), 106 N.S.R. (2d) 180 (S.C.) at para 27; Machias v. Mr. Submarine Limited, [2002] O.J. No. 1261 at para 115; Mr. Submarine Ltd. v. Sowdaey, [2002] O.J. No. 4401 at para 57.

6 In determining whether the franchisor has complied with “reasonable commercial standards”, the court will consider factors such as past practice, or the “course of dealings” between the parties to the agreement, the custom of the industry, the oral promises made between parties, and the general equities of the action taken by the party. The concept of reasonable commercial standards is an objective one, and the courts generally interpret it with reference to the competitive marketplace as a whole. The inclusion of reasonable commercial standards in the statutory definition of fair dealing provides direction to the court and the parties to a franchise agreement with respect to the franchise relationship. The law regulates contractual conduct between individuals through the imposition of three standards: unconscionability, good faith and the fiduciary standard. According to the Court of Appeal for Ontario in 978011 Ontario Ltd. v. Cornell Engineering Co.2, all three standards are points on a continuum in which the law acknowledges a limitation on the principle of self-reliance and imposes an obligation to respect the interests of others. These standards are defined by P. Finn as follows: “Unconscionability” accepts that one party is entitled as of course to act self-interestedly in his actions towards the other. Yet in deference to that other’s interests, it then proscribes excessively self-interested or exploitative conduct. “Good faith,” while permitting a party to act self-interestedly, nonetheless qualifies this by positively requiring that party, in his decision and action, to have regard to the legitimate interests therein of the other. The “fiduciary” standard for its part enjoins one party to act in the interests of the other - to act selflessly and with undivided loyalty. There is, in other words, a progression from the first to the third: from selfish behaviour to selfless behaviour. Much the most contentious of the trio is the second, “good faith.” It often goes unacknowledged. It does embody characteristics to be found in the other two.3 In Cornell, the Court of Appeal described the circumstances in which the law requires more than self-interested dealing by one party. Weiler J.A. suggests that such circumstances share the following characteristics: firstly, one party relies on the other for information

2

[2001] O.J. No. 1446. P. Finn, “The Fiduciary Principle” in T.G. Youdan, ed.,Equity, Fiduciaries and Trust (Toronto: The Carswell Company, 1989), p. 4. 3

7 necessary to make an informed choice; and, secondly, the party in possession of the information has an opportunity, by withholding (or concealing) information, to bring about the choice made by the other party.4 Relationships where a duty of good faith has been imposed include, for example, an applicant applying for insurance; a doctor counselling a patient on a proposed treatment; the possessor of superior information dealing with one to whom that information is not reasonably accessible.5 In 2003, the Ontario Court of Appeal released a decision that has and will continue to have a significant impact on franchise law.

The decision in Shelanu v. Print Three

Franchising Corp.,6 released on May 20, 2003, deals with various franchise-related issues, including the duty of good faith. In Shelanu, the Ontario Court of Appeal considered the elements of the good-faith obligation between parties to a franchise agreement. The Court of Appeal noted that a fiduciary relationship does not exist between franchisor and franchisee; there is no legal requirement on a franchisor to act in the best interests of the franchisee. However, the franchisor must have regard to the legitimate interests of the franchisee in such matters as participation in the franchisor’s promotions and programs. The franchisor may act in its own interests so long as it deals promptly, honestly, fairly and reasonably with the franchisee. In Shelanu, the Ontario Court of Appeal overturned the decision of the trial court decision, which held that the franchisor had breached a common law duty to act in good faith. The Ontario Court of Appeal found that the actions of the franchisor did not constitute a breach of the franchisor’s duty of good faith to its franchisees. The Court of Appeal found that the trial judge failed to properly consider various material factors, including the following: the different nature of the business engaged in by the franchisee and the franchisor’s newly established business; the franchisee’s delay in complaining about the establishment of that business; and the lack of evidence with respect to the franchisee’s loss of income. The Court of Appeal also set aside the trial judge’s conclusion that the franchisor had breached “reasonable commercial standards” for the same reasons.

4 5 6

Cornell, supra note 2, at para 34. Finn, supra note 3, at 11. [2003] O.J. No. 1919.

8 In Beer v. Personal Service Coffee Corp7, MacFarland J.A. considered a statutory good faith claim asserted by a franchisee having regard to the franchisor’s breach of the statutory disclosure requirements of the Act. Section 3 of the Act imposes on each party to a franchise agreement a duty of fair dealing in its performance and enforcement. Section 3(3) defines the duty of fair dealing to include the duty to act in good faith and in accordance with reasonable commercial standards. Any breach of that duty by a party gives rise to an action for damages by the party wronged. A franchisor may make a claim against a franchisee for breach of the duty of good faith while the agreement is in force. Once an agreement ends, by rescission or termination, the statutory duty of good faith is spent, and the parties may look to other laws to determine their legal relationship, such as the common law, or the content of their franchise agreement. In 2 For 1 Subs Ltd v. Ventresca8, Metivier J. held that a franchisee breached the duty of good faith and fair dealing by refusing to provide financial information and selling assets in breach of the franchise agreement. TERMINATION

AND

FUNDAMENTAL

BREACH

OF

THE

FRANCHISE

AGREEMENT Where a duty of good faith exists, a breach of contract will not necessarily amount to a breach of the duty of good faith. The franchisor’s conduct will amount to a fundamental breach of the agreement if such conduct impairs the ability of the franchisee to carry on the commercial purpose of the agreement or deprives the franchisee of substantially the whole benefit of the contract.9 In such circumstances, the franchisee is legally permitted to escape its obligations under the franchise agreement. The ability of the franchisee to avoid its obligation under the franchise agreement has been severely restricted by the Court of Appeal’s decision in Shelanu. In Shelanu, the trial court held that the franchisor did not intend to be bound by the franchise agreement and that the franchisor’s breaches represented a fundamental breach. The Court of Appeal, however,

7

2005 CarswellOnt 3099, 2000, 256 D.L.R. (4th) 466 (Ont.C.A.) [2006] O.J. No. 1528 (Ont.S.C.J.) 9 Hunter Engineering Co. v. Syncrude Canada Ltd., [1989] 1 S.C.R. 426. 8

9 held that none of the franchisor’s breaches inhibited the ability of the franchisee to carry on the commercial purpose of the agreement or deprived the franchisee of substantially the whole benefit of the contract. Thus, there was no fundamental breach of the franchise agreement by the franchisor. CONSEQUENCES OF TERMINATION The termination of business under a franchise agreement does not end the economic connection between the parties. It will be necessary for the franchisor to account to the franchisee for any property of the franchisee that is seized at the time of termination, e.g., cash in the till, inventory that has been bought and paid for by the franchisee, etc. Similarly, the franchisee is required to account to the franchisor for sales up to the date of termination, and pay rents and royalties applicable to them. After termination, the franchisor will have many transitional issues to address. For example, the franchisor will be a successor employer under provincial employment standards legislation, responsible for the payroll deductions applicable to the continuing employment of the franchisee’s employees. Other creditors may make claims for payment of debts and obligations that arose under the franchisee’s business operations. Furthermore, there may be defaults under a premises lease to resolve in order for the business to continue at its current location. For the franchisee, termination means a loss of opportunity to derive continuing net operating income from a business. The franchisee’s loss of expectation can be calculated as the present value of that net operating income. However, there are many other considerations in calculating franchisee damages. Franchisees have sometimes claimed compensation for “unjust enrichment,” meaning compensation for loss of the goodwill generated by the franchisee.

Provided the franchisor had legal justification to terminate the franchise

agreement, the franchisee will have no right to such compensation. A franchisee must consider the interests of creditors and employees in deciding whether, and how, to rescind a franchise agreement. In 1490664 Ontario Ltd. v. Dig this

10 Garden Retailers Ltd.10, MacFarland J.A. discussed that a franchisee’s decision to turn out the lights and walk out the door may be feasible as against the franchisor, it is not so simple when the interests of others is considered, such as suppliers and employees. It is preferable for a franchisee to make reasonable efforts for an orderly winding down of the business in order to minimize its losses. Those actions make business sense, and do not amount to affirmation of the franchise agreement or waiver of the right to rescind. EXPIRATION and RENEWAL One aspect of the franchise relationship that occasionally results in a dispute concerns the rights of the parties upon expiration of the franchise agreement.

Most franchise

agreements provide for an initial term, i.e., 10 years, and a renewal term at the option of the franchisee. The option may be exercised provided that the franchisee can comply with renewal conditions specified in the franchise agreement, such as compliance with the terms of the franchise agreement during the initial term, and payment of renewal fees and charges (if applicable). The court will require strict compliance with renewal requirements, including the giving of proper and timely notice of renewal by the franchisee. In the absence of renewal, the franchisor will be free to retain, re-license, close, or re-organize the business for its own account. However, this does not preclude a claim against the franchisor, particularly if further significant investments, such as renovations, were required of the franchisee during the term of the franchise. It is also feasible to claim against a franchisor for failure to renew where the franchisee has not been given an opportunity to earn back investments made to the operation over the term of the franchise or where a franchisor chooses to replace a franchisee based on commercially unreasonable principles, particularly where the franchisee has been a solid operator and supporter of the brand. Typically, the right to renewal and the provisions governing renewal are defined by the franchise agreement. If the franchise agreement does not provide for renewal, the courts may consider what is fair in the circumstances, looking at the business relationship of the parties and determining whether the operation itself is viable or whether the franchisor has

10

[2005] O.J. No. 3040 (Ont.C.A.)

11 taken improper considerations into play by simply wishing to replace a franchisee for internal purposes such as nepotism or other improper considerations. Further, while disclosure is not normally required in the case of a renewal of a franchise agreement, if there has been a material change (as defined in the Arthur Wishart Act (Franchise Disclosure), 2000) in the terms of the franchise agreement, the franchisor is required to provide disclosure under s.5(7) of the Arthur Wishart Act (Franchise Disclosure), 2000. See below for further discussion of the disclosure requirements. INJUNCTIONS Many franchise disputes, particularly those related to termination or expiration, are initially brought to court as motions for interlocutory injunctions. These are motions to adjudicate the rights of the parties on a temporary basis until final determination at trial. With the increase in the number and intensity of franchise disputes, many decisions have been given on motions for interlocutory injunctions in franchise cases. There has been some judicial guidance. The over-riding principle is that a decision about an injunction is in the discretion of the court. The discretion must be exercised judicially. The party moving for an interlocutory injunction must demonstrate that it may be “irreparably harmed” in the absence of the requested order, i.e., an award of damages will not adequately compensate the complaining party. An injunction is an extra-ordinary remedy in that it is applicable only in those cases where damages will not suffice. In the case of the franchisee resisting termination, it may be asserted that an injunction is necessary to prevent destruction of a business. In the case of a franchisor seeking an injunction to terminate a franchise agreement, the franchisor may assert that the franchisee is using the franchisor’s trademarks and goodwill without authorization. There may be some merit, and some difficulty, in each of these positions. The real consideration at stake in many franchise termination injunctions is the need for very expeditious trial proceedings. In most cases, if a trial can be held on an urgent basis, for example in 90 days, it is probable that appropriate interim arrangements could be made to continue the status quo pending trial. The need for speedy trial proceedings in franchise termination cases is paramount. Rule 40.03 of the Rules of Civil Procedure requires a party seeking an injunction to give an undertaking as

12 to damages whereby that party “undertakes to abide by any order concerning damages that the court may make if it ultimately appears that the granting of the interlocutory order has caused damage to the responding party for which the moving party ought to compensate the responding party.” This rule is universally followed, and assiduously enforced. There are other principles applicable to the interlocutory injunction process in franchise litigation. The court will consider the “balance of convenience” between the parties – balancing the relative impact on the parties of granting or refusing the request for an injunction. This may require an assessment of whether the parties can continue to do business together during a litigation process. In some cases, it is appropriate to require monetary security from a party, for example when there has been a history of payment defaults. A franchisee’s promise to rectify past defaults should be secured by a deposit. The court may require one or both of the parties to “strictly comply” with the provisions of the franchise agreement pending the ultimate determination of the dispute. The court will look at the merits of the underlying dispute in determining whether an interlocutory injunction is appropriate in a franchise case. The threshold test of the merits for a typical injunction is a “serious issue” to be tried. When cross-examinations have not yet taken place on the affidavits filed in support of an injunction motion, the veracity of the contradictory assertions cannot be tested. After cross-examinations, the record is often so lengthy and complex that the court is not able to review in detail the merits of the franchise dispute. So long as the party seeking an interlocutory injunction can demonstrate a serious issue to be tried, the injunction analysis will be applied based upon the question of irreparable harm, balance of convenience, and the overall discretion of the court based upon pragmatic considerations, including whether the trial can be expedited. There is a natural judicial tendency to maintain the status quo pending trial, rather than to impose a significant change to the parties’ practical business relationship during the legal process. Although the status quo consideration tends to assist a franchisee’s position, recent cases have also attempted to prevent such orders from being over-reaching and causing irreparable harm to the franchisor. The courts will also be very careful not to create new rights in the granting of an injunction.

13 For a terminated franchisee, bringing an injunction is a daunting task. It is expensive and time-consuming. A franchisee should consider the massive resources required in this preliminary battle and seriously consider whether forcing a dysfunctional relationship to continue is in its best interests. An injunction can considerably compromise proceeding further with litigation, not only due to cost but also considering that the motion can be lost, resulting in wasted cost in addition to costs awarded to the franchisor. It is not unusual for a franchise agreement to contain covenants of non-competition by the franchisee. The court will enforce these provisions provided that they are found to be reasonable based upon the usual legal considerations applicable to covenants in restraint of trade. DISCLOSURE BY THE FRANCHISOR The disclosure provisions of the Arthur Wishart Act (Franchise Disclosure), 2000 put franchisees in a strong legal position where there has been misrepresentation or nondisclosure during the contracting process. The franchisor is required to provide a disclosure document to the prospective franchisee at least fourteen days prior to the signing of any franchise agreement under section 5 of the Act. This disclosure document must provide all material information to the franchisee in one document. The statutory mechanisms for disclosure by the franchisee cannot be waived or avoided. The franchisor will be obligated to rescind the franchise contract in the event of misrepresentation or non-disclosure. Alternatively, the franchisee may seek damages at trial. The franchisor has limited defences to an action for damages for misrepresentation or nondisclosure of a material fact.

A franchisor will want to show that the franchisee had

knowledge of the material fact and entered into the agreement with knowledge of the material change or misrepresentation. The franchisee’s remedies of rescission and damages are strictly time-sensitive.

If, for example, the franchisee has been provided with the disclosure

document but the franchisor failed to provide it either within the time required by section 5 or if the contents were insufficient, the franchisee then has 60 days within which to rescind the franchise agreement. On the other hand, if the franchisor never provided a proper disclosure document or provided one which was wholly insufficient as to be prevent the franchisee from

14 making an informed decision, then the franchisee has two years in which to rescind. Much of the litigation in this area has revolved around which period applies. In 1490664 Ontario Ltd. V Dig This Garden Retailers Ltd.11 the court found that where the franchisor did not provide a single disclosure document, the disclosure obligation was not satisfied and the two year period would apply. In Sovereignty Investment Holdings v 9127-6907 Quebec Inc.,12 the court found that section 6(1) of the Arthur Wishart Act (Franchise Disclosure), 2000 (60 day recission) is directed to the situation where the franchisee is unable to make a fully informed decision as a result of inadequate time or inadequate disclosure. On the other hand section 6(2) of the Arthur Wishart Act (Franchise Disclosure), 2000 (2 year recission) is directed to the situation where the franchisee is unable to make any informed decision because of fundamental deficiencies in the disclosure. It is interest to note that the recent Court of Appeal decision in MDG Kingston Inc. v MDG Computer13s found that the failure to provide proper disclosure renders an agreement subject to recission but that an arbitration clause could survive. The court stayed the action by the franchisee in light of the arbitration clause. INTERFERENCE BY THE FRANCHISOR The franchise bargain involves an exchange of benefits. support from the franchisor:

The franchisee expects

supply of products and services, advertising, and general

assistance to enable the achievement of common business objectives. An instance in which the franchisor may be alleged to impair or interfere with the franchisee’s business interests is known as “encroachment”.

In an encroachment claim, the franchisee alleges that the

franchisor has impaired its business by granting franchise rights to another franchisee in a territory serviced by the complaining franchisee. The theory of an encroachment complaint is that the franchisee’s revenues have been impaired by those circumstances – either the loss of

11

[2004] O.J. No 3008 (Ont.S.C.J.), aff’d [2005] O.J. No3040 (Ont.C.A.) [2008] O.J. No. 4450 (Ont.S.C.J.) 13 (2008), 92 O.R.(3d) 4 (Ont.C.A.) 12

15 sales, or loss of the opportunity to realize increases in sales. Some franchise agreements contain exclusive territorial rights granted to the franchisee. Many more franchise agreements do not contain that right and it is up to the Court to decide whether the new franchise location impacted negatively on sales. The terms of the franchise agreement will be the starting point in resolving encroachment complaints. Was the franchisee granted territorial rights? Or denied them? Or was the agreement silent on the point? There are borderline cases in which a franchisor grants new franchises for the purpose of increasing the aggregate revenues of the franchise chain, with the result that an existing location is marginally or incidentally affected. The court may look to the intent of the franchisor: was it to increase the overall business of the franchise system? Or did the decision deleteriously affect the complaining franchisee? These and other considerations will inform the court’s judgment of reasonable commercial standards for purposes of the fair dealing provisions of the Act. INTERPRETATION OF THE FRANCHISE AGREEMENT The usual principles of contract interpretation apply to a franchise agreement. Part of the franchise bargain is an expectation of uniformity in the dealings between the franchisor and all franchisees, including contractual terms. Systems and programs in place should be fairly and consistently applied brand-wide, not selectively in favour of some franchisees or by targeting franchisees in the hopes of creating a “default record”. The court will construe the words and phrases in their context in the agreement, according to established principles of contractual interpretation. However, the words and phrases of the agreement will not only be subjected to the standard contractual analysis, the Courts will also evaluate the terms of the agreement in light of the countervailing requirements of section 3 of the Arthur Wishart Act, namely the requirement of the franchisor to act in good faith, fair dealing and commercial reasonableness. CONCLUSION

16 When franchise relationships are working, both sides make money. Differences of opinion are easier to resolve in the expectation of future profits. When this is not the case, many interesting litigation issues and topics can arise. A bibliography of relevant legal citations follows.

Paul J. Bates R. David House Jeffery P. Childs Bates Barristers Toronto December 2008

17 BIBLIOGRAPHY OF FRANCHISE LAW CASES SUBJECT

CASE LAW

1. Franchise Relationship Not a fiduciary relationship.

Duty of fair dealing; Arthur Wishart Act.

Jirna Ltd. v. Mister Donut of Canada Ltd. [1972] 1 O.R. 251; aff’d [1975] 1 S.C.R. 2 (S.C.C.)

The existing common law provides that the relationship between a franchisor and franchisee is akin to that of a partnership, but it is not a fiduciary relationship.

See also TDL Group Ltd. v. Zabco Holdings Inc., [2008] M.J.No.316 (Man.Q.B.)

Court rejects defendant franchisee’s argument that the relationship was one of utmost good faith as well as the argument that the relationship was a fiduciary one.

a) Machias v. Mr. Submarine Ltd. (2002), 24 B.L.R. (3d) 228 (Ont.S.C.J.)

The Arthur Wishart Act imposes a duty of fair dealing on each party to a franchise agreement. Fair dealing includes the duty to act in good faith and in accordance with reasonable commercial standards. (Note Walford v. Miles, below).

*****

*****

b) Shelanu Inc. v. Print Three Franchising Corp. (2000), 11 B.L.R. (3d) 69 (Ont. S.C.J.), var’d [2003] O.J. No.1919 (Ont.C.A.) ***** c) Country Style Food Services Inc. v. Hotoyan 2001 CarswellOnt 2566 (Ont.S.C.J.)

The fair dealing provision of the Arthur Wishart Act codifies the existing common law of good faith in contractual dealings.

18 SUBJECT

CASE LAW

Duty of Good Faith, Common Law; Arthur Wishart Act.

1117304 Ontario Ltd.(c.o.b. Harvey’s Restaurant) v Cara Operations Ltd., [2008] O.J. No.4370 (Ont.S.C.J.)

The duty of franchisors and franchisees to act in good faith is a common law requirement that has been codified into section 3 of the Arthur Wishart Act.

Duty to act in good faith; Termination.

Shelanu Inc. v. Print Three Franchising Corp., (2000), 11 B.L.R. (3d) 69 (Ont. S.C.J.) var’d [2003] O.J. No.1919 (Ont.C.A.)

Both the franchisor and franchisee must deal with each other in the utmost of good faith (at para. 25, supra). Conduct by a franchisor or franchisee which demonstrates bad faith or manifests an intention not to conduct itself fairly in its dealings with the other will give rise to a claim for damages. For serious misconduct, the innocent party may have the right to terminate the franchise agreement (at para. 27, supra).

Duty to act in good faith is Gerami v. W.W. Pizza Chicken Ltd., reciprocal. [2005] O.J. No. 5252 (Ont.S.C.J.)

Franchisor does not have a duty to act only in accordance with the franchisee’s interest. The duty in a franchisorfranchisee relationship is instead one of good faith. The duty of fair dealing is reciprocal and mutual.

Pre-contractual duty to negotiate in good faith.

Franchisor sought leave to appeal a decision refusing to strike out portions of a statement of claim alleging a precontractual duty to negotiate in good faith. The court held that the case law was clear that there is no precontractual duty to bargain or negotiate in good faith. Motion for leave to appeal dismissed.

1402066 Ontario Ltd. (c.o.b. Cupps Coffee House) v. Cupps International, [2002] O.J. No. 2493 (Ont(Div.Ct.))

19 SUBJECT

CASE LAW

Duty to act in good faith.

Beaucage v. Grand & Toy Ltd., [2002] C.C.S. No. 6834, [2001] O.J. No. 5128 (Ont.S.C.J.)

Motion by franchisor to strike out various parts of the statement of claim as failing to disclose a reasonable or tenable cause of action. Portion of claim regarding duty of good faith to proceed to trial.

*****

*****

TDL Group Ltd. v. Zabco Holdings Inc., In this Manitoba case, the court noted that “the authority [2008] M.J. No.316 (Man.Q.B.) in Canada is such that the relationship between a typical franchisor and a typical franchisee is not one of utmost good faith. Rather, it is that of parties to a commercial agreement, which, as in every relationship governed by contract, generates a duty to act in simple good faith.” (para.190)

20 SUBJECT

CASE LAW

Indicia of a duty to act in good faith.

1117304 Ontario Inc. (c.o.b. Harvey’s Restaurant) v Cara Operations Ltd., [2008] O.J. No.4370 (Ont.S.C.J.)

The Duty of good faith in a franchise relationship requires the parties to act in the following manner: 1. A party may act self-interestedly, however in doing so the party must also have regard to the legitimate interests of the other party. 2. If A owes a duty of good faith to B, so long as A deals honestly and reasonably with B, B’s interests are not necessarily paramount. 3. Good faith is a minimal standard, in the sense that the duty to act in good faith is only breached when a party acts in bad faith. Bad faith is conduct that is contrary to community standards of honesty, reasonableness or fairness (e.g. serious misrepresentations of material facts). 4. Good faith is a two way street. Whether a party under a duty of good faith has breach that duty will depend, in part, on whether the other party conducted itself fairly.

Indicia of breach of duty to act in good faith.

TSP-Intl Ltd. v. Mills et al. (2005), 74 O.R. (3d) 461 (Ont. S.C.J.); rev’d on other grounds, [2006] O.J. No.2707 (Ont.CA)

A breach of duty of good faith may be found: 1. if one party, by their actions eviscerates or defeats the objectives of the contract they have entered into; 2. if the parties’ conduct fails to meet objective legitimate expectations and community standards of honesty, reasonableness and fairness; 3. if one party unilaterally nullifies the contractual objectives, or causes significant harm to the other

21 SUBJECT

CASE LAW contrary to the original expectations of the parties; and 4. if one party benefits from a conflict of interest.

Implied duty of good faith/fair dealing; punitive damages awarded.

Katotikidis v. Mr. Submarine Ltd., [2002] O.J. No. 1959 (Ont.S.C.J.)

Although events leading to litigation occurred prior to Arthur Wishart Act, court implied a duty of good faith and fair dealing; punitive damages awarded against franchisor for opening new competing franchise within 1500 feet of plaintiff’s store.

Definition of franchisee; Arthur Wishart Act.

Bekah v. 3 For 1 Pizza & Wings (Canada) Inc., [2003] O.J. No. 4002 (Ont.S.C.J.)

The court held that an agreement of purchase and sale is a franchise agreement under the Arthur Wishart Act and that the parties to it were franchisees and thus entitled to the full protection of a franchisee under the Act. The franchise transaction need not have closed for the parties to it to be considered franchisees and thus entitled to the Acts protection.

*****

*****

136871 Ontario Inc. v. Triple Pizza (Holdings) Inc., [2004] O.J. No. 3562 (Ont.CA.)

Franchisor argued that the franchisee was not entitled to rescind the franchise agreement on the grounds that the franchisees never closed the purchase agreement and thus were not “franchisees” as defined in the Act. The OCA disagreed citing Bekah v. 3 For 1 Pizza as standing for the proposition that the franchise transaction need not have closed for the parties to it to be considered franchisees and thus entitled to the Acts protection.

2. Duties of a Franchisee Protect and promote the

Kentucky Fried Chicken of

The most precious possessions of a franchisor are its trademarks

22 SUBJECT

CASE LAW

fundamental business interests of the franchisor.

Canada v. Scott’s Foods Services Inc and Scott’s Hospitality Inc.,(1997), 35 B.L.R. (2d) 21 (Ont.G.D.); rev’d on other grounds (1998), 41 B.L.R. (2d) 42 (Ont.CA.)

and system.

1017933 Ontario Ltd. v. Robin’s Foods Inc., [1998] O.J. No. 1110 at para. 41 (Ont.G.D.)

The franchisee is required to comply in good faith with the franchise agreement.

Compliance with franchise agreement; Duty to act in good faith.

***** 2 For 1 Subs Ltd. V Ventresca, [2006] O.J. No. 1528 (Ont.S.C.J.)

It is the responsibility of the franchisee to protect and promote the fundamental business interests of the franchisor; the most valuable assets of the franchisor being its trade-marks, system, goodwill, and reputation.

***** Franchisees are obligated to act in good faith and to report sales figures accurately.

23 SUBJECT

CASE LAW

Interpretation of the franchise agreement.

a) 1017933 Ontario Ltd. v. Robin’s Foods Inc., [1998] O.J. No. 1110 at para. 41 (Ont.Gen.Div.)

The franchise agreement will be interpreted to conform with business sense and to achieve a commercially efficacious result.

b) Consolidated Bathurst v. Mutual Boiler, [1980] 1 S.C.R. 888 (S.C.C.) ***** Ahmed v. 3 For 1 Pizza & Wings (Canada) Inc., [2004] O.J. No. 144 (Ont.S.C.J.)

***** The definition of franchise in the Arthur Wishart Act must be given a contextual interpretation in order to ensure that the intent and purpose of the Act is carried out and to grant protection to subfranchisees investing in a franchise operation. In the context of an agreement between a sub-franchisor and subfranchisee, the reference to “franchisor’s, or franchisor’s associates’ trademark” in Arthur Wishart Act interpreted to mean the sub-franchisor’s interest in trademarks licensed to it from the top franchisor.

Franchisee is responsible for reviewing the franchise agreement.

Timothy’s Coffees of the World Inc. v. Switt (1996), 8 O.T.C. 193 (Ont.Gen.Div.)

The franchisee has an obligation to review the franchise agreement to ensure that it contains the terms that the franchisee thought it did.

Failure by the Franchisee to make payments to the Franchisor; Termination.

1017933 Ontario Ltd. v. Robin’s Foods Inc., [1998] O.J. No. 1110 (Ont.Gen.Div.)

The franchisee is normally required to make payments to the franchisor. The failure to make payments may or may not justify termination of the franchise agreement. The right to terminate for failure to make payments depends upon the seriousness of the breach and the provisions contained with the franchise agreement.

24 SUBJECT

CASE LAW

Non-reliance by Franchisor of its contractual rights; Waiver.

Leader Window Fashions Ltd. The fact that the franchisor has not relied on its contractual rights v. Home Products Inc.(1993), in the past is not evidence that it has waived those rights. 8 B.L.R. (2d) 272 (B.C.S.C.); aff’d [1993] B.C.W.L.D. 1589 (B.C.C.A.)

Reporting sales; Fundamental breach; Termination.

1017933 Ontario Ltd. v. Robin’s Foods Inc., [1998] O.J. No. 1110 (Ont.Gen.Div.)

The franchisee is required to accurately report sales. The failure to report sales constitutes a serious and fundamental breach of the franchise agreement, justifying termination.

2 For 1 Subs Ltd v. Ventresca, Refusal of franchisee to provide requested financial information [2006] O.J. No. 1528 and selling assets in breach of franchise agreement were breaches (Ont.S.C.J.) of the franchise agreement and the “duty of fair dealing” in s. 3 of the Arthur Wishart Act.

3.(a) Duties of a Franchisor – Good Faith Franchise agreement; Duty to assist the Franchisee.

Duty to deal in good faith.

Country Style Food Services Inc. v. Hotoyan, 2001 CarswellOnt 2566 (Ont.S.C.J.)

Generally speaking, the duties of a franchisor are determined by the franchise agreement.

Country Style Food Services Inc. v. 1304271 Ontario Ltd., [2003] O.J. No.362 (Ont. S.C.J.); aff’d [2005] O.J.No.2730 (Ont.C.A.)

The franchisor’s duty to act in good faith, while not elevated to the status of a fiduciary, speaks to concepts of loyalty, respect, and fair dealing.

The duty to assist the franchisee will be determined in light of the express provisions of the franchise agreement.

Misrepresentations pertaining to a site plan, whether innocent or negligently made, may entitle a franchisee to rescission, where the site plan represents an essential term of the franchise and sublease agreements. Note: On appeal, the Court of Appeal dismissed the franchisor’s

25 SUBJECT

CASE LAW appeal, however granted the appeal brought by the landlord regarding indemnifying the franchisor.

Duty to deal in good faith; punitive damages awarded against franchisor.

Khachikian v. Williams et al., [2003] O.J. No. 5876 (Ont. S.C.J)

Court awarded punitive damages against franchisor on grounds it had taken advantage of the franchisee’s vulnerability, induced them to enter into an agreement and made sure that the agreement was not reduced to writing in attempt to ensure that its terms could not be conclusively proven by evidence.

***** See also Triple 3 Holdings v. Jan (2004), 48 B.L.R. (3d) 296 (Ont. S.C.J.), where the conduct of the franchisor was held to be planned and deliberate, high-handed and abusive behaviour motivated by profit.

Negligent misrepresentation; Duty Bagai v. Sure Corp. (2000), to deal in utmost good faith; 275 A.R. 370 (Alt.Q.B.) Inaccurate or misleading sales projections provided by Franchisor.

Notwithstanding an exclusionary clause contained within the agreement, and without citing Jirna, the Court recognized that a “special relationship” existed between the parties which required them to deal in utmost good faith (para. 18, supra.). At trial, the franchisor was unable to support the sales projections provided to the franchisee prior to the execution of the franchise agreement. The franchisor was held liable for the inaccurate projections, and for not taking into account its own inexperience in

26 SUBJECT

CASE LAW the market and the incidental traveling and housing costs to be incurred by the franchisee at the time the agreement was entered (para. 21, supra.). A standard form exclusion clause contained within the contract to be of no consequence where there is no consideration of either the franchisor or franchisee of the clause.

***** Ismail v. Treats Inc., [2004] N.S.J. No. 21 (N.S.S.C.)

***** The plaintiff franchisees claim damages against the franchisor, its principal, and the parent company for misrepresenting the likely income of a Treats cafe franchise. In holding all three defendants liable to the franchisee for negligent misrepresentation, the court stated that franchisor had an obligation to deal fairly and in good faith in preparing accurate pro-forma statements and, generally, to disclose accurate financial information and facts to a prospective franchisee.

No pre-contractual duty to negotiate in good faith.

Walford v. Miles, [1992] 2 W.L.R. 174 (H.L.)

Although not a franchise case, in Walford v. Miles, supra, stands for the proposition that there is no pre-contractual duty to negotiate in good faith. Specifically, the House of Lords held that “[a] duty to negotiate in good faith is as unworkable in practice as it is inherently inconsistent with the position of a negotiating party” (at p. 181, supra.).

27 SUBJECT

CASE LAW

3.(b) Duties of a Franchisor – Disclosure & Recission Duty to disclose under the Arthur Wishart Act;

MAA Diners Inc. v. 3 for 1 Pizza & Wings (Canada) Inc., [2003] O.J. No.430 (Ont.S.C.J.), aff’d , [2004]O.J.No.297 (Ont.C.A.)

Franchisors are expected to very carefully keep records of their disclosure documentation, and to be able to produce such records when called upon to do so (para. 38, supra.). Inability to produce disclosure materials at trial due to “sloppy paperwork” will not be accepted by the court (para. 33, supra).

*****

*****

1490664 Ontario Ltd. v. Dig This Garden Retailers Ltd., [2004] O.J. No. 3008 (Ont. S.C.J.), aff’d [2005] O.J. No.3040 (Ont.C.A.)

Disclosure cannot be satisfied by several documents or orally. AWA is clear that disclosure obligation only satisfied by delivery of a single document at one time containing all relevant information. S. 6(1) of the Act presupposes the existence of a single “disclosure document”. Serving a notice of rescission does not affirm the existence of a franchise agreement. A right to statutory rescission is different from equitable rescission and the principles of the latter do not apply to the former.

*****

*****

1518628 Ontario Inc. v. Tutor Time Learning Centres LLC, [2006] O.J. No. 3011 (Ont.S.C.J.)

Provision of the U.S. UFOC does not meet the disclosure requirements under the Act, where it was simply being provided for “information” purposes and was provided only a few days before the transaction was completed and where the U.S. UFOC did not provide the material facts pertinent to a franchise. This nondisclosure of material facts in itself meant there was noncompliance with the Act as to the required disclosure.

28 SUBJECT

CASE LAW Even though the U.S. UFOC would provide some of the information required by an Ontario UFOC, in the court’s view, given the circumstances of the case, the franchisor “never provided the disclosure document”. *****

4287975 Canada Inc. v Imvescor Restaurants Inc., [2008] O.J. No. 3197 (Ont.S.C.J.)

*****

Section 5 of the Arthur Wishart Act provides that a disclosure document should be provided at least 14 days prior to the signing of a franchise agreement or the payment of any consideration relating to it. The legislature has determined that 14 days is sufficient time for a prospective franchisee to review a disclosure document. If a disclosure document is not provided within that time period but is provided at a later date, a person who signed a franchise agreement is then given 60 days after receiving the disclosure document rather than just 14 days to decide whether to recind. This extension is explained by the rationale that someone trying to decide whether to get out of a franchise agreement may have a more complex decision to make than one trying to decide to go into a franchise agreement in the first place.

In Imvescor, the plaintiff franchisee tried to argue that because they were given the franchise documents six months prior to signing the franchise agreement, that a two year window for recission as per section 6(2) of the Arthur Wishart Act should be applied. The court did not agree.

***** Sovereignty Investment Holdings Inc. v 9127-6907 Quebec Inc., [2008] O.J. No.

***** Section 6(1) of the Arthur Wishart Act is directed to the situation where the franchisee is unable to make a fully informed decision as a result of inadequate time for consideration or inadequate

29 SUBJECT

CASE LAW 4450 (Ont.S.C.J.)

disclosure of the material facts. Section 6(2) of the Arthur Wishart Act is directed to the situation where the franchisee is unable to make an informed decision at all because of fundamental deficiencies in the disclosure provided to it. (para 25) Treatment of an assignee of a franchise agreement as a “franchisor” for the purposes of the Arthur Wishart Act.

*****

*****

6862829 Canada Limited v Dollar It Limited, [2008] O.J. No.4687 (Ont.S.C.J.)

A disclosure document, which meets all the formal requirements of section 5 of the Arthur Wishart Act (i.e. one document served at one time, and served within the correct time frame) can be considered a nullity (and as such not disclosure) if it is “materially deficient in its substantive content in breach of the requirements of s.5” (para 57). The court came to this conclusion based on: 1. The Arthur Wishart Act is intended to level the playing field between franchisors and franchisees. 2. A principal mechanism to accomplish this objective was to establish rigorous disclosure requirements and strict penalties for non-compliance. 3. The Arthur Wishart Act and regulations puts a significantly heavy onus on the franchisor as to information is “material” 4. The disclosure provisions are to be purposefully and contextually construed.

Recission

MAA Diners Inc. v. 3 for 1 Pizza & Wings (Canada) Inc., [2003] O.J. No.430 (Ont.S.C.J.), aff’d, [2004] O.J.No.297 (Ont.C.A.)

Under s. 6(2) of the Arthur Wishart Act a franchisee may rescind the franchise agreement if disclosure was never provided.

30 SUBJECT

CASE LAW

1490664 Ontario Ltd. v. Dig This Garden Retailers Ltd., [2004] O.J. No. 3008 (Ont. S.C.J.), aff’d [2005] O.J. No.3040 (Ont.C.A.)

Serving a notice of rescission does not affirm the existence of a franchise agreement. A right to statutory rescission is different from equitable rescission and the principles of the latter do not apply to the former.

Beer v. Personal Service Coffee Corp, 2005 CarswellOnt 3099, 2000. A.C. 282, 256 D.L.R. (4th) 466 (Ont.C.A.)

Once rescinded, the franchisor must fulfill the reimbursement obligation set out in s. 6(6) of the Act. There is nothing in the language of s.6(2) suggesting that a franchisee’s right to rescind is any way conditional. Where there is non-disclosure, the franchisee’s statutory right to rescind is automatic. The payments by the franchisor required by s. 6(6) must be within 60 days of the date of rescission. A franchisor may make a claim against a franchisee for breach of the duty of good faith occurring during the period prior to notice of rescission the effective date of the notice. Post-rescission, the franchisee may have continuing duties to the franchisor at common law, such as the duty not to wrongfully take confidential information or operations manuals.

Payne Environmental Inc. v. Lord and Partners Ltd., [2006] O.J. No. 273 (Ont.S.C.J.)

Subsections 6(6)(a), (b), and (c) set out specific refund and payment obligations on the franchisor in the event of rescission. Pursuant to these subsections, the franchisor must (a) refund franchise fees, (b) purchase inventory from the franchisee at a price equal to the purchase price, and (c) purchase from the franchisee supplies and equipment purchased pursuant to the franchise agreement at a price equal to the purchase price paid by the franchisee.

31 SUBJECT

CASE LAW Subsection 6(6)(d) of the Act is designed to compensate the franchisee for all losses that franchisee incurred in acquiring, setting up and operating the franchise. The calculations of “all losses incurred” under s. 6(6)(d), at least initially, may include the amounts which have been identified in s. 6(6)(a), (b) and (c). It is precisely because “all losses incurred may include the amounts identified by s. 6(6)(a), (b) and (c) that those amounts are deducted from “all losses” in order to insure there is no duplication in the calculation of compensation to be paid pursuant to that subsection. Section 6(6)(d) is not the only section that is relevant to the computation of compensation payable by the franchisor to the franchisee in cases of rescission. Clearly, if the franchisee was compensated only on the basis of s. 6(6)(d), the overall purpose of s. 6 would be defeated. The purpose and object of these subsections of the Arthur Wishart Act are to put the franchisee in the position that it was prior to entering into the franchise agreement. Subsections 6(6)(a) – (d) are to be read conjunctively.

Sovereignty Investment Holdings Inc. v 9127-6907 Quebec Inc., [2008] O.J. No. 4450 (Ont.S.C.J.)

Treatment of an assignee of a franchise agreement as a “franchisor” for the purposes of recission and the obligations of a franchiser on a recission.

MDG Kingston Inc v MDG Computers Canada Inc. (2008), 92 O.R. (3d) 4 (Ont.C.A.)

Failure to provide proper disclosure renders an agreement subject to recission, but Arbitration clause can survive.

4. Renewal of a Franchise Agreement No good faith obligation to renew;

a) TDL Group Ltd. v.

The franchisor does not have a good faith obligation to renew an

32 SUBJECT

CASE LAW

Cannot renew in bad faith.

1060284 Ontario Ltd., [2000] O.J. No. 1239 (S.C.J.)

expired franchise agreement even where no reason exists not to do so.

b) Esmail v. Petro-Canada, [1995] O.J. No. 924 (Ont. Gen. Div.); aff’d (1995), 86 O.A.C. 385 (Ont.Div.Ct.)

Renewal provisions cannot be exercised by the franchisor in bad faith.

Renewal requires ascertainable terms.

Sultani v. Blenz The Canadian Coffee Co., [2005] B.C.W.L.D. 3022 (B.C.S.C.J.); aff’d [2005] No.2560 (B.C.C.A.)

When there is no right to renew or option to renew on ascertainable terms, no renewal is enforceable by the court.

*****

*****

See also 1259286 Ontario Ltd. v. Kardish Food Franchising Corp., [2007] O.J. No.5429 (Ont.S.C.J.)

The court dismissed an application to extend the renewal of a franchise agreement, where a plain and ordinary meaning of the agreement did not accord the franchisee that right.

33 SUBJECT

CASE LAW

5. Termination of a Franchise Agreement Fundamental breach; Repudiation; Non-performance of contractual obligations; Termination.

Keneric Tractor Sales v. Langille, [1987] 2 S.C.R. 440 (S.C.C.)

Where there is a fundamental breach of the franchise agreement, the innocent party has the right to treat the contract as terminated and consider himself discharged from any future obligations A party is said to have repudiated the contract where he indicates to the other side, by words or conduct, that he does not intend to perform his contractual obligations.

Right to terminate at common law; Contractual right to terminate.

Norwood Construction Ltd. v. Post 83 Co-operative Housing Assn. (1988), 30 C.L.R. 231 (B.C.C.A.)

The right to terminate a contract at common law stands independent of the specific rights of termination granted by a contract. One does not negate the other, particularly where the contract includes a reference to the common law of contract.

34 SUBJECT

CASE LAW

6. Examples of Termination by Franchisor (Just Cause) Failure to meet quota or performance requirements in franchise agreements.

Imperial Oil Ltd. v. C&G Holdings Limited (1985), 55 Nfld & P.E.I.R. 32 (Nfld.S.C.)

This case concerns breach of a dealer sales agreement, but is relevant to franchisors who insert quota or performance requirements in franchise agreements. If the quota or performance requirements are readily determinable by a formula, then the failure of the franchisee to meet such requirements would appear to constitute just cause for termination, depending upon the other termination provisions of the agreement. However, where such requirements are subjective in nature (e.g., “best efforts”), it would be difficult for a franchisor to rely on an alleged breach of such provisions for termination. In any case, a franchisor would have to demonstrate, by clear evidence, a continuing series of complaints and failures by the franchisee to rectify such complaints.14 (Zaid: 2-664D)

Termination provision in contract; Inadequate performance; Inadequate promotion; Reasonable notice.

Edward Kondra and Forte Pacific Services Ltd. v. Forte Oils Ltd., [1986] B.C.J. No.2400 (B.C.S.C.)

The termination provision of the distributorship agreement allowed the manufacturer to terminate where, in the opinion of the manufacturer, the distributor has failed to adequately promote the sale of the manufacturer’s products. In this case, the court held that such a provision must be considered on objective grounds, thereby requiring that the manufacturer give adequate and clear notice of an intention to terminate on the ground of inadequate performance, and further that the manufacturer cannot rely on such a provision except after reasonable notice (Zaid: 2-664H.1)

14

Frank Zaid, Canadian Franchise Guide, (Toronto: Carswell, 2000), Looseleaf. (Hereinafter Zaid)

35 SUBJECT

CASE LAW

Franchisee not reporting sales; Failing to pay royalties; Use of unauthorized food products; Estoppel.

LMR Holdings Ltd. v. 222 Pizza Inc. (1993), 52 C.P.R. (3d) 330 (B.C.S.C.)

In this case, the franchisee did not record or report walk-in sales and therefore did not pay to the franchisor the royalties owing, which was a clear breach of the franchise agreement. The franchisee also breached the agreement by the use of unauthorized food products (Zaid: 2-664X, X.1). Moreover, the franchisor was not estopped from terminating the agreement on the basis of past failure to deal with these defaults. The fat that the franchisor gave the franchisee further opportunity to correct the defaults (i.e., by providing warnings) did not act as estoppel.

Franchisee not providing requested financial information and selling assets.

241 Subs Ltd v. Ventresca, [2006] O.J. No. 1528 (Ont.S.C.J.)

Refusal of franchisee to provide requested financial information and selling assets in breach of franchise agreement were not only breaches of the franchise agreement but also contravene the “duty of fair dealing” as set out in s. 3 of the Arthur Wishart Act. Where franchisor loses franchise to a competitor the measure of damage should be the monetary loss sustained by the franchisor for the period of time that it would need to mitigate its loss by establishing another franchise in the same territory. The case law suggests that a reasonable period of time for the franchisor to open a new franchise in the same area is in the range of 18 – 24 months.

Franchisee’s breach of the franchise Enco Seat Covers Ltd. v. agreement; Non-competition Enco Auto Trim and Glass clauses; Reasonableness. (Newmarket) Ltd. (1993), 46 C.P.R. (3d) 467 (Ont.Gen.Div.)

The courts will not hesitate to find against franchisees that directly or indirectly violate the terms of the franchise agreement, including non-competition clauses that are unambiguous and are reasonable both as to scope and duration (Zaid: 2-664U)

36 SUBJECT

CASE LAW

7. Franchisee Defaulting in Payments Service and Advertising Fees.

Uniglobe Travel (Canada) Inc. v. Uniglobe Aatco Travel Oak Ltd. (1984), 29 A.C.W.S. (2d) 323; aff’d (1985), 32 A.C.W.S. (2d) 240 (B.C.S.C.)

Franchisee fell into arrears with regards to service and advertising fees.

Trade Debts; Termination; Damages.

Vital Car & Truck Rustproofing Ltd. v. Brian G. Cullingford (unreported) (Country Court of the Judicial District of York, December 15, 1982)

Franchisee had defaulted on his obligations to pay trade debts. Franchisor had a right to terminate, but failed to terminate properly (i.e., pursuant to the franchise agreement). Damages awarded against franchisor. (Zaid: 2-655).

Rental and Service Payments; Termination without notice.

Living Lighting of Canada Inc. v. Trenholm, [1987] C.L.D. 1387 (Ont.Dist.Crt.)

Franchisee had consistently been in arrears on rental and service payments, and also failed to make reasonable payment to trade creditors. Franchisor terminated without notice, contrary to the franchise agreement.

The franchisor was entitled to amounts owing together with interest. (Zaid: 2-654).

Court upheld the termination; franchisor was entitled to amounts owing. Service and Franchise Fees.

Pepsi Cola Canada Inc. and Pizza Hut Inc. v. PM Foods Ltd. (1985), 6 C.P.R. (3d) 330 (Alta.Q.B.)

Franchisor terminated for unpaid service and franchise fees. Entitled to amounts owed. (Zaid: 2-657).

Royalties and Service Fees; Transferring assets without Franchisor’s consent; Damages.

Pizza Delight Corporation v. White Rock Pizza take Out Ltd., [1985] B.C.W.L.D. 3946; (1986), 9 C.P.R. (2d) 282 (B.C.S.C.)

Franchisee fell behind in the payment of royalties and service fees and the shareholders transferred the assets to a new company without the franchisor’s consent. Franchisor entitled to damages.

37 SUBJECT

CASE LAW

Payments for supplies; Arrears; No written contract; Termination.

New West Diesel v. Gunter Diesel Ltd., [1980] B.C.J. No.2224 (County Court of B.C.)

No written dealership agreement, but the manufacturer was found to have just cause to terminate the dealership agreement based on dealer’s arrears in paying for supplies.

Late payment of invoices; Termination pursuant to contract provision.

Hardware Agencies Ltd. v. Medeco Security Locks Canada (1995), 39 C.P.C. (3d) 297; add’l reasons (1995), 39 C.P.C. (3d) 297 at 311 (Ont.Gen.Div.)

The manufacturer acted within its rights by terminating for late payment of invoices in accordance with a specific and clear provision of a distribution agreement (Zaid: 2-664).

Monthly sales reports; Nonpayment of royalties.

387071 Ontario Ltd. v. 526700 Ontario Ltd., [1988] C.L.D. 2098 (Ont. H.C.)

Franchisee ceased providing monthly sales reports and paying royalties.

8. Non-Compliance with Franchisor Policies Refusing to provide inventory; No expansion of business; Termination; Just cause.

Geoff Coleman Yacht Sales Ltd. v. C&C Yachts Ltd. (1983), 45 B.C.L.R. 66 (B.C.S.C.)

In this case, there was just cause for termination. The dealer refused to comply with the basic policies of the manufacturer: i.e., refusing to provide inventory for prospective purchasers, not expanding its business, and conduct generally incompatible with the policies of the defendant (Zaid: 2-659).

38 SUBJECT

CASE LAW

9. Unauthorized Business and Diversion of Funds Termination.

T. Chiasson Shine Systems Ltd. v. Island Shine Specialists Ltd., [1988] C.L.D. 1635 (N.S.T.D.); aff’d [1988] N.S.J. No.406.(NSCA)

The franchisor was entitled to terminate the agreement as the franchisee had been conducting an unauthorized business (i.e., began providing rust-proofing service) and was diverting funds from the franchise system to underwrite the debts of the unauthorized business.

Implied agreement; Failure to report brokerage activity; Fraudulent conversion; Termination.

Imasco Retail Inc. v. Blanaru,, [1995] 9W.W.R. 44, 104 Man. R. (2d) 286 (Q.B.); aff’d [1996] M.J. No. 606 (ManCA)

When the original franchise agreement expired, the franchisor sent the franchisee another form of agreement, which neither party did sign. Regardless, the relationship continued on as it had previously. Then the franchisee started to broker the buying and selling of drugs, but did not inform the franchisee of his brokerage activity. Franchisor was entitled to terminate. Although the first agreement had technically expired, it was held that the parties continued under an implied agreement. Accordingly, the failure of the franchisee to report the brokerage activity and to share in the profits constituted a breach of contract. The concealment of the activity reflected a deceitful purpose and amounted to fraudulent conversion. (Zaid: 2-664X.14).

10. Examples of Termination by Franchisee Misrepresentation inducing Franchisee to enter into franchise agreement; Negligent misrepresentation; Unpaid arrears; Damages.

Zippy Print Enterprises Ltd. v. Pawliuk (1994), 100 B.C.L.R. (2d) 55, [1995] 3 W.W.R. 324, 20 B.L.R. (2d) 17 (B.C.C.A.)

The franchisor was found liable for negligently misrepresenting the franchise’s projected earnings and the assistance that was to be provided to the franchisees. Damages, however, were also awarded against the franchisees for an amount equal to the unpaid arrears of royalties and marketing services fund payments which had accumulated (Zaid: 2-664X.12).

39 SUBJECT

CASE LAW

Misrepresentation; Promotional package; Franchisor support.

1005633 Ontario Inc. v. Winchester Arms Ltd. (2000), 8 B.L.R. (3d) 176 (Ont. S.C.J.), aff’d (2000), 2000 CarswellOnt 4748 (Ont.C.A.)

Franchisor’s promotional package stated that the franchisee would receive a fully equipped turnkey operation with training and extensive support, as well as assistance in acquiring a liquor licence. The franchisor did not fulfil these promises. Court declared that the franchise agreements were void as a result of the breach and misrepresentations (Zaid: 2-664Z.4).

Abandonment of the Franchise program; Fundamental breach; Termination; Representations contained in promotional material.

Capital Placement of Canada (C.P.C.) Ltd. v. Wilson (1987) 80 N.S.R. (2d) 72 (N.S.T.D.); var’d [1988] N.S.J. No.116 (N.S.C.A)

Where, in appropriate circumstances, a franchisor has effectively abandoned the franchise program contracted to be made available to the franchisee, such an abandonment will be considered a fundamental breach of the agreement, allowing the franchisee to terminate and even to recover all or part of the initial franchise fee. However, in such a case, the franchisee must elect to terminate on the breach and not remain in the franchise relationship. Further, in circumstances where representations are made through promotional literature, such representations will be considered to constitute part of the representations contained in the agreement itself. (Zaid: 2-664I).

11. Interlocutory Injunctions Terminate a franchise agreement prior to trial.

RJR-MacDonald v. Canada (A.G.), [1994] 1 S.C.R. 311

The party seeking to terminate the franchise agreement prior to trial must demonstrate that there is a serious issue to be tried; that irreparable harm will result if the injunction is not granted (i.e., damages are inadequate); and that the balance of convenience favours the granting an injunction.

40 SUBJECT

CASE LAW

Mandatory orders

a) RJR-MacDonald v. Canada To require a party to renew or enter into a new franchise (A.G.), [1994] 1 S.C.R. 311 agreement, after expiry of that agreement, amounts to a mandatory order.

Restrictive Covenant; Good Faith.

*****

*****

b) TDL Group Ltd. v. 1060284 Ontario Ltd., (2001) 150 O.A.C. 354 (Ont.Div.Crt.)

The party seeking such an order is required to demonstrate it has a strong prima facie case.

*****

*****

Erinwood Ford Sales Ltd. v. Ford Motor Co. of Canada, [2005] O.J. No. 1970 (Ont.S.C.J.)

Motion for an interim injunction to enjoin the defendant franchisor Ford Motor from terminating Erinwoods’ Car dealership agreement franchise was granted. TDL Group Ltd. v. 1060284 Ontario Ltd. was applied rather than other mandatory injunction authorities. Spies, J. agrees with the TDL decision that distinguishing between positive and negative orders is not always clear cut, but there is no question that granting the injunction creates no new rights.

We Care Health Services Inc. v. Barter, [2001] O.J. No. 935 (Ont.S.C.J.)

Motion for interlocutory injunction to enforce non-competition clause found in franchise agreement; Plaintiff required to demonstrate the following: injunction is in public interest; plaintiff has strong prime facie case; plaintiff will suffer irreparable harm if injunction is denied; and balance of convenience favours granting injunction.

41 SUBJECT

CASE LAW

12. Examples of Interlocutory Injunctions obtained by the Franchisor Trademark infringement by the Franchisee; Corporate name; Negative covenants; Passing off.

a) Brownies Holding Ltd. v. Franchisee continued to use a variation of the franchise name (i.e., Chance Dean Enterprises Ltd. new restaurant was named “Brownies Foods Haney.”) after the (1992), 39 C.P.R. (3d) 410 franchise agreement was terminated. (B.C.C.A.) Franchisor obtained injunction to restrain the ex-franchisee’s use of all marks similar to the franchisor’s trademarks, pursuant to the negative covenant in the franchise agreement. Regardless of when or from whom the name was acquired, this did not permit the franchisee to act in breach of the negative covenant in the franchise agreement (Zaid: 2-648F.2). ***** b) Cappucino Affair Ltd. v. 782433 Alberta Ltd. (2000), 2000 CarswellAlta 1216 (Alta.Q.B.)

***** Franchisor obtained an injunction to restrain the franchisee from continuing to use the franchise trademark after notice of termination was provided. Harm is considered irreparable if it cannot be quantified in monetary terms or if it cannot be cured. The question of whether a party has suffered irreparable harm is a question of the harm suffered, not the magnitude of the harm (Zaid: 2-648X.3).

***** c) Century 21 Real Estate Canada Ltd. v. Century 21 Best Choice Realty Ltd. (1991), 36 C.P.R. (3d) 164 (B.C.S.C.)

***** Franchisor obtained an injunction to restrain the franchisee from using the words “Century 21” in its corporate name after notice of termination was delivered (franchisee in default for payments owing). The court determined that the appearance of integrity and honesty was essential to the franchise name and, by its nature, the franchisor could only project that appearance through its

42 SUBJECT

CASE LAW franchisees (Zaid: 2-658F). Franchisors must act expeditiously and affirmatively in taking all the necessary steps to notify the franchisee of its default, terminate the relationship, and apply for court relief (Zaid: 2-658F).

Restraining Franchisee from holding itself out as a franchisee.

Fortune King Inc v. Burger King Canada Inc. [1983] O.J. No. 342 (Ont.H.C.)

In most cases, where there has not been evidence of default by the franchisor, the franchisee will be restrained by the court from holding itself out as a franchisee (following termination of the agreement by reason of franchisee default).

Extending the interim injunction through trial; Procedural irregularities.

Rust Check Canada Inc. v. Buckowski (1994), 58 C.P.R. (3d) 324 (Ont.Gen.Div.)

Where a franchisee has deliberately chosen to engage in conduct clearly contrary to the post-termination provisions of a franchise (and where such conduct will be detrimental to a franchisor’s trade-marks and reputation), a court will, in the appropriate circumstances, not only order an interim injunction, but will continue the interim injunction though trial (Zaid: 2-648V.4).

See also: Sask-Workwear Inc. v. Ollinik (1983), 1 W.W.R. 631 (Sask.Q.B.)

In Rust Check, supra, procedural irregularities (i.e., imperfect disclosure on the ex parte application) were insufficient to set aside the injunction (Zaid: 2-648V.3). Trade-mark infringement; Telephone listings; Passing off; Irreparable harm; Drafting.

Goliger’s Travel v. Gilway Maritimes Ltd. (1987), 6 A.C.W.S. (3d) 222 (N.S.S.C.)

This case ties franchisee use of a telephone listing to the franchisor’s trade-mark. The continued use of the franchise telephone number by the franchisee (after termination of the agreement) amounted to trade-mark infringement and passing off.

See also: [Zaid: 2-645 to 7] Dailey Leasing Co. v. De Graw (1976), 28 C.P.R. (2d) 241 (Ont. H.C.) Texaco Canada Inc. v. Keith (1983), 115 A.P.R. 247

Franchisors should ensure that agreements are carefully drafted in respect of the rights and obligations of franchisees to discontinue use of telephone numbers upon termination.

43 SUBJECT

CASE LAW (P.E.I.S.C.) Allbram Taxi Inc. v. Sandhu (1988) 38 B.L.R. 205, 24 C.P.R. (3d) 334 (Ont.Dist. Ct.) Nu-Vista International v. NuVista Professionals Inc. (1990), 36 C.P.R. (3d) 171 (Fed. T.D.) Firstline Trust Co. v. Centreline Capital Corp., [1994] B.C.J. No. 1520 (B.C.S.C.) Sports Rent Franchise Inc. v. Weber (1990), B.C.J. No. 2220, Vancouver Registry No. C904355, October 23, 1990

It would be wise that the agreement acknowledge that the continuing use of telephone numbers listed under the franchisor’s trade-marks could cause irreparable harm to the franchisor (Zaid: 2-645).

44 SUBJECT

CASE LAW

Enforcement of Non-Competition Covenants; Reasonableness.

Uniglobe Travel (Atlantic) Inc. v. Fundy Travel Ltd. (1991), 113 N.S.R. (2d) 240 (N.S.T.D.) See also: Color Your World Inc. v. Schaus (1987), 9 W.D.C.P. 268 (Ont.H.C.) TMI Turf Management Ltd. v. R. De Noble Enterprises Ltd. (1994), 52 C.P.R. (3d) 129 (B.C.S.C.), in obiter

NOTE: Application dismissed. Re: Acknowledgement of reasonableness in contract, the judge stated, in obiter: “I have great reservations as to the extent to which a court should consider clauses which purport to be agreement on available remedies at law which exist in the event of a reach of contract, particularly when there is unequal bargaining power such as that which exists in most franchise agreements…” (cited by Zaid: 2648K).

Yesac Creative Foods Inc. v. Hohnjec (1985), 6 C.P.R. (3d) 398 (Ont.S.C.J.) Restraining the Franchisee from Terminating the Agreement; Franchisee engaging in competitive business; Damages.

Kardish Food Franchising Corp. v. 874073 Ontario Inc. [1995] O.J. No. 2849 (Ont.Gen.Div.)

Franchisor obtained an interlocutory injunction restraining the franchisee from unilaterally terminating the franchise agreement in order to continue an identical business independent of the franchisor. In appropriate circumstances, an Ontario court will grant an interlocutory injunction in effect restraining a franchisee from breaching its agreement by terminating the franchised operations continuing such operations in a competitive business. To allow franchisees to benefit from the franchisor’s goodwill, and then unilaterally terminate the agreement in complete disregard to their obligations to the franchisor, is unfair. Under the circumstances of this case, it was held that the franchisor should not be confined to a remedy in damages (Zaid: 2-648V).

45 SUBJECT

CASE LAW

Compelling payment by Franchisee (preserving status quo); Royalty payments; Lack of Franchisor assistance.

Knutsen v. Pastel Food Corp. Franchisee was claiming for lack of service and assistance. (unreported, June 6, 1988) Notwithstanding this, the franchisor was able to obtain an (B.C.S.C.) injunction requiring the franchisee to pay and continue paying royalty fees. The judge determined that the status quo should be preserved until the issue was resolved at trial. The status quo, in this case, being the continuation of the agreement between the parties (Zaid: 2648).

Compelling payment by Franchisee (preserving status quo); No express contractual covenant to withhold payment.

U.T.A. Florists Inc. v. Standard Wholesale Florists Ltd., [1989] B.C.J. No. 2452 (B.C.S.C.)

Franchisor obtained injunction compelling royalty payments by the franchisee.

Mandatory injunctions; Prohibitory injunctions; Motions.

Kwik-Kopy Printing Canada Corp. v. Schryburt (1993), 46 C.P.R.(3d) 378 (Ont. Gen. Div.)

NOTE: injunction application dismissed.

“[T]his court has usually ordered payments under a franchise agreement be continued during a dispute between the franchisor and franchisees, preserving the status quo as it was before the franchisees stopped the income stream to the franchisor, the very income stream that permits the franchisor to fulfil its obligations under the agreement. It has done so when the franchise agreement does not contain the express covenant not to withhold payments on the ground of alleged performance…” (cited at Zaid: 2-648C, emphasis added).

The court concluded that on a motion, as contrasted with a trial, the court is more reluctant to grant a mandatory injunction than it would be to grant a comparable prohibitory injunction. An unfortunate decision, Kwik Kopy does not appear to take into account the commercial realities of the franchise relationship (Zaid: 2-648C).

46 SUBJECT

CASE LAW

Restraining Franchisee use of confidential information; Information in the public domain.

Stenada Marketing Ltd. v. Nazareno (1991), 33 C.P.R. (3rd) 367 (B.C.S.C.)

Note: Application dismissed. Franchisor had no right to confidentiality over the information it was attempting to regulate. Can’t take information that is otherwise in the public domain (i.e., in brochures) and convert it into information over which a party has rights of confidentiality.

13. Interlocutory injunctions obtained by Franchisee Restraining Franchisor from enforcing security agreement.

1003183 Ontario Ltd. v. Baker’s Dozen Donuts Corp., Ont. Gen. Div., Doc. 17318/94, September 16, 1994 (unreported)

NOTE: Application dismissed. Franchisees applied for an interim interlocutory and permanent injunction to enjoin the franchisor from enforcing a security agreement. Generally speaking, the right of a franchisor to exercise its interests under a properly executed and enforceable security agreement will not be suppressed, despite allegations of fundamental breach. Franchisors would be well advised, wherever practical, to obtain security agreements securing all obligations of their franchisees under their franchise agreements and related documents on an ongoing basis. Gen. Rule, followed: Arnold v. Bronstein [cited at Zaid: 2-648R].

47 SUBJECT

CASE LAW

Restraining Franchisor from breaching or terminating the agreement (preservation of the status quo).

a) Yule Inc. v. Atlantic Pizza Delight Franchise (1968) Ltd. et al. (1977), 17 O.R. (2d) 505 (Ont. Div. Crt.)

Franchisee obtained injunction to restrain a franchisor from doing or refusing to do any act with a view to breaching the franchise agreement. In applying the tests for injunctive relief, the sympathy of the courts has more often than not been with the franchisees, resulting generally in a granting of interlocutory injunctions where the franchisee seeks to prevent the franchisor from terminating the agreements and a denial of such applications where the franchisor seeks an injunction to prevent the franchisee from continuing to carry on the business (Zaid: 2-631).

***** b) Candy Express Franchising Inc. v. John Candy Co. (1992), 42 C.P.R. (3d) 496 (B.C.S.C.)

***** Franchisee obtained an injunction restraining the franchisor from operating or conferring upon anyone the right to operate the franchise. The injunction was granted on the basis that the status quo should be preserved (Zaid: 2-648O).

*****

*****

c) RML Investments Ltd. v. Rust Check Canada Inc. (1993), 18 C.P.C. (3d) 1 (N.S.S.C)

In considering other interlocutory applications, the Court noted a general pragmatic tendency to take measures to preserve the status quo until trial (Zaid: 2-648S; relied upon in Candy Express).

***** d) 236570 Rentals Ltd. v. Budget Rent-A-Car of Canada Ltd. and Budget Rent-A-Car Corp., [1988] O.J. No. 2026 (Ont.High

***** Note: Application dismissed. It will be difficult for a franchisee to obtain relief where operations have been effectively terminated by a franchisor pursuant to valid and enforceable remedies in a franchise agreement (Zaid: 2-648).

48 SUBJECT

CASE LAW Court) This case also illustrates the difficulty a franchisee will encounter in a termination situation where the franchisee does not respond to valid complaint and default notices from the franchisor. ***** e) North West Beverages Ltd. v. Pepsi-Cola Canada Ltd. (1971), 20 D.L.R. (3d) 341 (Man.Q.B.) See also: Yule Inc. v. Atlantic Pizza Delight Franchise (1968) Ltd. et al. (1977), 17 O.R. (2d) 505 (Ont.Div.Crt.)

***** Franchisee obtained an interim injunction which enjoined the franchisor from terminating the agreement and from servicing the franchisee’s territory. The court said that the contract was not simply a contract for personal services, and it was therefore susceptible to being specifically enforced.

American Cyanamid Co. v. Ethicon Ltd., [1975] 1 All E.R. 504 (H.L.) Kingsway Datsun Ltd. v. Nissan Automobile Company (Canada) Ltd. (1981), 55 C.P.R. (2d) 78 (B.C.S.C.) ***** Note: Franchisee’s application failed because the franchisee was f) Peleshok Motors of Canada himself in breach of the franchise agreement. v. General Motors of Canada Franchisee obtained an injunction primarily because there was an Ltd. (1977), 2 B.L.R. 56 existing right of renewal to the franchise agreement. The court (Ont. H.C.J.) held that where a party seeks to prevent early termination of a dealer agreement, the party does not ask the court to create a new g) Erinwood Ford Sales Ltd. v. Ford motor Co. of Canada right, but rather to preserve the status quo and leave the issue of *****

49 SUBJECT

CASE LAW Ltd., [2005] O.J. No. 1970 (Ont. S.C.J.)

whether or not the termination is proper for trial.

See also: 838779 Ontario Ltd. v. Mac's Convenience Stores Inc., [2004] O.J. No. 5174 (Ont. S.C.J.), where the balance of convenience was held to favour the franchisee who otherwise would be put out of business. Restraining Franchisor from taking possession of the franchise; Conditions imposed on the injunction order; Franchisee in default.

646210 Ontario Ltd. v. Hasty Market Inc. (1992), 42 C.P.R. (3d) 431 (Ont. Gen. Div.)

Franchisee obtained an injunction, but conditions were imposed on franchisee. By imposing conditions on the part of the injunction granted, this case established rights in favour of a franchisor where a defaulting franchisee seeks to retain possession of the premises (Zaid: 2-648). Franchisors should seek such conditions against defaulting franchisees in interlocutory injunctive proceedings. (see also 731273 Ontario Ltd. in “Restraining Franchisor from Impairing Franchise Business.”).

Mandatory injunctions; Allegations that are not clearly sufficient to justify termination of the agreement.

Lee v. Soup it up Inc. (2000), 2000 CarswellOnt 3386 (Ont. S.C.J.) See also: 537431 Ontario Ltd. v. Rust Check Canada Inc. (1986), 5 W.D.C.P. 419 (Ont.S.C.)

Franchisees obtained a mandatory injunction reinstating them as franchisees, since to refuse the injunction would be to deny the franchisees the opportunity to carry on their business in the face of allegations that may or may not be sufficient to justify the termination of the franchise agreement (i.e., franchisors were alleging that the franchisees were incorrectly reporting sales) (Zaid: 2-648X.1).

50 SUBJECT

CASE LAW

Restraining Franchisor from impairing the franchise business; Conditions attached to injunction order; Franchisee in default.

731273 Ontario Ltd. v. Belamy’s Restaurant Systems Ltd., [1994] O.J. 1206 (Ont.Gen.Div.)

Franchisees attached.

Restraining Landlord from leasing premises adjoining to franchisee in breach of restrictive covenant in franchise agreement.

Jorobin Investments Ltd v. Lukosius, [2003] O.J. No. 3478 (Ont.S.C.J.)

Landlord covenanted not to allow the operation of a business similar to the protected uses and business of Jorobin. Nevertheless the landlord permitted Sam to carry on a general auto shop in the mall. The court held that this use of the space adjacent to Jorobin was a clear and unequivocal breach of the restrictive covenant.

obtained

injunction,

however

were

conditions

The conditions imposed on the injunction order were illustrative of the favourable conditions which a franchisor can obtain where the franchisee has been in default of royalties and rents (i.e., requiring the payment of all amounts owing), notwithstanding the fact that the franchisee is raising issues of default and fundamental breach by the franchisor.

Court awarded franchisee a prohibitory injunction. Enforcement of franchise agreement; System change clauses

Park Place Centre Ltd. v. Ramada Canada Ltd. (1993), 48 C.P.R. (3d) 82 (N.S.S.C.); aff’d, [1994] N.S.J. No. 562 (N.S.C.A.)

Franchisors should not attempt to make fundamental or material changes to their franchise systems by relying on system change clauses or similar provisions in their franchise agreement. Any such fundamental or material changes can only be made with the approval of the franchisees affected (Zaid: 2-648H). The franchisee was granted a prohibitive and mandatory injunction to prevent the withdrawal of the use of the franchisor’s trade-mark names as granted in the license agreement, where the franchisor attempted to invoke a required name change.

51 SUBJECT

CASE LAW

Where the Franchisee applicant does not have “Clean Hands”; Conditions attached to injunction order

a) 646210 Ontario Ltd. v. Hasty Market Inc. (1992), 42 C.P.R. (3d) 431 (Ont.Gen.Div)

In both cases, the franchisees obtained injunctions (restraining the franchisor from seizing the business and from attempting to impair the franchisee’s ability to carry on its business, respectively), but conditions were attached to the order.

b) 731273 Ontario Ltd. v. Belamy’s Restaurant Systems Ltd., [1994] O.J. 1206 (Ont. Gen.Div.)

646210 Ontario Ltd.: Upon any further default in the payment of amounts due by the franchisee, the franchisor would be entitled to move immediately to regain possession of the franchised premises and to terminate the agreements. 731273 Ontario Ltd.: Given the conditions imposed on the franchisee, the franchisor effectively obtained an order requiring payment of all amounts owing, notwithstanding the issues raised by the franchisee as to default and fundamental breach by the franchisor. *****

***** c) Brash Developments Ltd. v. Kits Cameras Ltd. (1986), 10 C.P.R. (3d) 403 (B.C.S.C.)

Note: Application dismissed. Franchisees, who were seeking an injunction, alleged various breaches by the franchisor, but they themselves had also withheld payments. An injunctive remedy is an equitable remedy that comes ahead of the basic principles for interlocutory injunctive relief. The withholding of fees constituted a fundamental breach which entitled the franchisor to accept such breaches as a repudiation of the agreement (Zaid: 2-639).

52 SUBJECT

CASE LAW

14. Reasonable Commercial Standards Beaucage v. Grand & Toy Ltd., [2001] O.J. No. 5128 (Ont.S.C.J.) Implied duties of good faith and fair dealing; punitive damages awarded.

The duty of fair dealing includes the duty to act in good faith and in accordance with reasonable commercial standards.

Katotikidis v. Mr. Submarine Ltd., [2002] O.J. No. 1959 (Ont.S.C.J.)

15. Class Actions Certification of plaintiffs for class action proceedings.

1176560 Ontario Ltd. v. Great Atlantic & Pacific Co. of Canada, [2002] O.J. No. 4781 (Ont.S.C.J.) *****

A group of franchisees were certified for a class action proceeding.

*****

1176560 Ontario Ltd. v. Great Atlantic & Pacific Co. of Canada, [2004] O.J. No. 865 (Ont.(Div.Ct.))

Franchisee operated stores allege A&P withheld rebates owing to them in breach of their franchise agreements. Divisional Court upholds the common issue that all franchisees are governed by the same franchise agreement. Certification upheld.

MacKinnon v. National Money Mart Co., [2005] B.C.J. No. 399 (B.C. S.C.J.)

Certification denied for class of customers of franchisees because individual issues overwhelmed the common issues.

*****

*****

2038724 Ontario Ltd. v. Quizno’s Canada Restaurant Corp. (2008), 89 O.R. (3d) 252 (Ont.S.C.J.)

Certification denied because the individual issues overwhelmed the common issues. Court noted that “assuming that they all have been wronged by their franchisor, their suffering is individual…” (para 104)

53 SUBJECT

CASE LAW

Class Action against both franchisor and franchisee by a third party

Dean v Mister Transmission, 2008 CanLII 56706 (On.S.C.J.)

Consumer sues both franchisor and franchisee for improper charges. Certification motion for class action. Court raises analogy of piercing the “corporate veil” and, while not applying directly, leaves open. While the claim against the franchisor may be difficult, it is not plain and obvious that it will not succeed.

16. Jury Trials in Franchise Disputes Striking out the jury notice

Kawkaban Corp. v. Second Cup Ltd., [2003] O.J. No. 5169 (Ont. S.C.J.)

Defendants argued that the issues in this case were of sufficient complexity to conclude that it should not go before the jury. In dismissing the motion to strike out the jury notice, the court held that neither the termination of the franchise agreement nor the concept of misrepresentation were of such a complexity.

NOTE: Update to Table of Cases compiled December 2008 by Paul J. Bates, R. David House, and Jeffery Childs, Bates Barristers, 34 King Street East, 12th floor, Toronto, Ontario M5C 2X8