CANADIAN FRANCHISE DISPUTES

Paul J. BatesR. David HouseJeffery P. ChildsBates 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

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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 aduty 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 actionfor damages against another party to the franchise agreementwho breaches the duty of fair dealing in the performance orenforcement of the franchise agreement. 2000, c. 3, s. 3 (2).

Interpretation

(3) For the purpose of this section, the duty of fairdealing includes the duty to act in good faith and in

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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

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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. Pre-

emptory 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

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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 atpara 57.

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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 ofcourse to act self-interestedly in his actions towards the other.Yet in deference to that other’s interests, it then proscribesexcessively self-interested or exploitative conduct. “Goodfaith,” while permitting a party to act self-interestedly,nonetheless qualifies this by positively requiring that party, inhis decision and action, to have regard to the legitimate intereststherein of the other. The “fiduciary” standard for its partenjoins one party to act in the interests of the other - to actselflessly and with undivided loyalty. There is, in other words,a progression from the first to the third: from selfish behaviourto selfless behaviour. Much the most contentious of the trio isthe second, “good faith.” It often goes unacknowledged. It doesembody 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. 1446.3 P. Finn, “The Fiduciary Principle” in T.G. Youdan, ed.,Equity, Fiduciaries and Trust (Toronto: The CarswellCompany, 1989), p. 4.

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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 Cornell, supra note 2, at para 34.5 Finn, supra note 3, at 11.6 [2003] O.J. No. 1919.

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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.)8 [2006] O.J. No. 1528 (Ont.S.C.J.)9 Hunter Engineering Co. v. Syncrude Canada Ltd., [1989] 1 S.C.R. 426.

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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

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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.)

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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

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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.

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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 non-

disclosure 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 non-

disclosure 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

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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. The franchisee expects

support from the franchisor: 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.)12 [2008] O.J. No. 4450 (Ont.S.C.J.)13 (2008), 92 O.R.(3d) 4 (Ont.C.A.)

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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

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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. BatesR. David HouseJeffery P. ChildsBates BarristersToronto

December 2008

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BIBLIOGRAPHY OF FRANCHISE LAW CASES

SUBJECT CASE LAW

1. Franchise Relationship

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

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

Not a fiduciary relationship.

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

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

Duty of fair dealing; ArthurWishart Act.

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

*****

b) Shelanu Inc. v. Print ThreeFranchising 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 Arthur Wishart Act imposes a duty of fair dealing oneach party to a franchise agreement. Fair dealingincludes the duty to act in good faith and in accordancewith reasonable commercial standards. (Note Walford v.Miles, below).

*****

The fair dealing provision of the Arthur Wishart Actcodifies the existing common law of good faith incontractual dealings.

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

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

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

Duty to act in good faith;Termination.

Shelanu Inc. v. Print Three FranchisingCorp., (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 eachother in the utmost of good faith (at para. 25, supra).

Conduct by a franchisor or franchisee whichdemonstrates bad faith or manifests an intention not toconduct itself fairly in its dealings with the other willgive rise to a claim for damages.

For serious misconduct, the innocent party may have theright to terminate the franchise agreement (at para. 27,supra).

Duty to act in good faith isreciprocal.

Gerami v. W.W. Pizza Chicken Ltd.,[2005] O.J. No. 5252 (Ont.S.C.J.)

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

Pre-contractual duty to negotiate ingood faith.

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

Franchisor sought leave to appeal a decision refusing tostrike out portions of a statement of claim alleging a pre-contractual duty to negotiate in good faith. The courtheld that the case law was clear that there is no pre-contractual duty to bargain or negotiate in good faith.Motion for leave to appeal dismissed.

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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.)

*****

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

Motion by franchisor to strike out various parts of thestatement of claim as failing to disclose a reasonable ortenable cause of action. Portion of claim regarding dutyof good faith to proceed to trial.

*****

In this Manitoba case, the court noted that “the authorityin Canada is such that the relationship between a typicalfranchisor and a typical franchisee is not one of utmostgood faith. Rather, it is that of parties to a commercialagreement, which, as in every relationship governed bycontract, generates a duty to act in simple good faith.”(para.190)

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Indicia of a duty to act in goodfaith.

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

The Duty of good faith in a franchise relationshiprequires the parties to act in the following manner:

1. A party may act self-interestedly, however indoing so the party must also have regard to thelegitimate interests of the other party.

2. If A owes a duty of good faith to B, so long as Adeals honestly and reasonably with B, B’s interestsare not necessarily paramount.

3. Good faith is a minimal standard, in the sense thatthe duty to act in good faith is only breached when aparty acts in bad faith. Bad faith is conduct that iscontrary to community standards of honesty,reasonableness or fairness (e.g. seriousmisrepresentations of material facts).

4. Good faith is a two way street. Whether a partyunder a duty of good faith has breach that duty willdepend, in part, on whether the other party conducteditself fairly.

Indicia of breach of duty to act ingood faith.

TSP-Intl Ltd. v. Mills et al. (2005), 74O.R. (3d) 461 (Ont. S.C.J.); rev’d onother 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 theobjectives of the contract they have entered into;

2. if the parties’ conduct fails to meet objectivelegitimate expectations and community standards ofhonesty, reasonableness and fairness;

3. if one party unilaterally nullifies the contractualobjectives, or causes significant harm to the other

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contrary to the original expectations of the parties;and

4. if one party benefits from a conflict of interest.

Implied duty of good faith/fairdealing; punitive damages awarded.

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

Although events leading to litigation occurred prior toArthur Wishart Act, court implied a duty of good faithand fair dealing; punitive damages awarded againstfranchisor for opening new competing franchise within1500 feet of plaintiff’s store.

Definition of franchisee; ArthurWishart Act.

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

*****

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

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

*****

Franchisor argued that the franchisee was not entitled torescind the franchise agreement on the grounds that thefranchisees never closed the purchase agreement and thuswere not “franchisees” as defined in the Act.The OCA disagreed citing Bekah v. 3 For 1 Pizza asstanding for the proposition that the franchise transactionneed not have closed for the parties to it to be consideredfranchisees 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

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fundamental business interests ofthe franchisor.

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

and system.

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

Compliance with franchiseagreement; Duty to act in goodfaith.

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

*****

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

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

*****

Franchisees are obligated to act in good faith and to report salesfigures accurately.

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Interpretation of the franchiseagreement.

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

b) Consolidated Bathurst v.Mutual Boiler, [1980] 1S.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 franchise agreement will be interpreted to conform withbusiness sense and to achieve a commercially efficacious result.

*****

The definition of franchise in the Arthur Wishart Act must be givena contextual interpretation in order to ensure that the intent andpurpose of the Act is carried out and to grant protection to sub-franchisees investing in a franchise operation.

In the context of an agreement between a sub-franchisor and sub-franchisee, the reference to “franchisor’s, or franchisor’sassociates’ trademark” in Arthur Wishart Act interpreted to meanthe sub-franchisor’s interest in trademarks licensed to it from thetop franchisor.

Franchisee is responsible forreviewing the franchise agreement.

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

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

Failure by the Franchisee to makepayments 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 thefranchisor.

The failure to make payments may or may not justify terminationof the franchise agreement. The right to terminate for failure tomake payments depends upon the seriousness of the breach and theprovisions contained with the franchise agreement.

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Non-reliance by Franchisor of itscontractual rights; Waiver.

Leader Window Fashions Ltd.v. Home Products Inc.(1993),8 B.L.R. (2d) 272 (B.C.S.C.);aff’d [1993] B.C.W.L.D.1589 (B.C.C.A.)

The fact that the franchisor has not relied on its contractual rightsin the past is not evidence that it has waived those rights.

Reporting sales; Fundamentalbreach; 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 fundamentalbreach of the franchise agreement, justifying termination.

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

Refusal of franchisee to provide requested financial informationand selling assets in breach of franchise agreement were breachesof the franchise agreement and the “duty of fair dealing” in s. 3 ofthe Arthur Wishart Act.

3.(a) Duties of a Franchisor – Good Faith

Franchise agreement; Duty to assistthe Franchisee.

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

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

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

Duty to deal in good faith.Country Style Food ServicesInc. 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 thestatus of a fiduciary, speaks to concepts of loyalty, respect, and fairdealing.

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

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appeal, however granted the appeal brought by the landlordregarding indemnifying the franchisor.

Duty to deal in good faith; punitivedamages awarded againstfranchisor.

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

*****See also Triple 3 Holdings v.Jan (2004), 48 B.L.R. (3d)296 (Ont. S.C.J.), where theconduct of the franchisor washeld to be planned anddeliberate, high-handed andabusive behaviour motivatedby profit.

Court awarded punitive damages against franchisor on grounds ithad taken advantage of the franchisee’s vulnerability, induced themto enter into an agreement and made sure that the agreement wasnot reduced to writing in attempt to ensure that its terms could notbe conclusively proven by evidence.

Negligent misrepresentation; Dutyto deal in utmost good faith;Inaccurate or misleading salesprojections provided by Franchisor.

Bagai v. Sure Corp. (2000),275 A.R. 370 (Alt.Q.B.)

Notwithstanding an exclusionary clause contained within theagreement, and without citing Jirna, the Court recognized that a“special relationship” existed between the parties which requiredthem to deal in utmost good faith (para. 18, supra.).

At trial, the franchisor was unable to support the sales projectionsprovided to the franchisee prior to the execution of the franchiseagreement. The franchisor was held liable for the inaccurateprojections, and for not taking into account its own inexperience in

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*****

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

the market and the incidental traveling and housing costs to beincurred by the franchisee at the time the agreement was entered(para. 21, supra.).

A standard form exclusion clause contained within the contract tobe of no consequence where there is no consideration of either thefranchisor or franchisee of the clause.

*****

The plaintiff franchisees claim damages against the franchisor, itsprincipal, and the parent company for misrepresenting the likelyincome of a Treats cafe franchise.

In holding all three defendants liable to the franchisee for negligentmisrepresentation, the court stated that franchisor had an obligationto deal fairly and in good faith in preparing accurate pro-formastatements and, generally, to disclose accurate financialinformation and facts to a prospective franchisee.

No pre-contractual duty tonegotiate in good faith.

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

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

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3.(b) Duties of a Franchisor– Disclosure & Recission

Duty to disclose under the ArthurWishart Act;

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

*****

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

*****

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

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

*****

Disclosure cannot be satisfied by several documents or orally.AWA is clear that disclosure obligation only satisfied by delivery ofa single document at one time containing all relevant information.

S. 6(1) of the Act presupposes the existence of a single “disclosuredocument”.

Serving a notice of rescission does not affirm the existence of afranchise agreement. A right to statutory rescission is differentfrom equitable rescission and the principles of the latter do notapply to the former.

*****

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

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*****

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

*****

Sovereignty InvestmentHoldings Inc. v 9127-6907Quebec Inc., [2008] O.J. No.

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

*****

Section 5 of the Arthur Wishart Act provides that a disclosuredocument should be provided at least 14 days prior to the signingof a franchise agreement or the payment of any considerationrelating to it. The legislature has determined that 14 days issufficient time for a prospective franchisee to review a disclosuredocument. If a disclosure document is not provided within thattime period but is provided at a later date, a person who signed afranchise agreement is then given 60 days after receiving thedisclosure document rather than just 14 days to decide whether torecind. This extension is explained by the rationale that someonetrying to decide whether to get out of a franchise agreement mayhave a more complex decision to make than one trying to decide togo into a franchise agreement in the first place.

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

*****

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

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4450 (Ont.S.C.J.)

*****

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

disclosure of the material facts. Section 6(2) of the Arthur WishartAct is directed to the situation where the franchisee is unable tomake an informed decision at all because of fundamentaldeficiencies 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.

*****

A disclosure document, which meets all the formal requirements ofsection 5 of the Arthur Wishart Act (i.e. one document served atone time, and served within the correct time frame) can beconsidered a nullity (and as such not disclosure) if it is “materiallydeficient in its substantive content in breach of the requirements ofs.5” (para 57).

The court came to this conclusion based on:

1. The Arthur Wishart Act is intended to level the playingfield between franchisors and franchisees.

2. A principal mechanism to accomplish this objective was toestablish rigorous disclosure requirements and strictpenalties for non-compliance.

3. The Arthur Wishart Act and regulations puts a significantlyheavy onus on the franchisor as to information is “material”

4. The disclosure provisions are to be purposefully andcontextually construed.

Recission MAA Diners Inc. v. 3 for 1Pizza & 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 rescindthe franchise agreement if disclosure was never provided.

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

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

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

Serving a notice of rescission does not affirm the existence of afranchise agreement. A right to statutory rescission is differentfrom equitable rescission and the principles of the latter do notapply to the former.

Once rescinded, the franchisor must fulfill the reimbursementobligation set out in s. 6(6) of the Act. There is nothing in thelanguage of s.6(2) suggesting that a franchisee’s right to rescind isany way conditional. Where there is non-disclosure, thefranchisee’s statutory right to rescind is automatic. The paymentsby the franchisor required by s. 6(6) must be within 60 days of thedate of rescission.

A franchisor may make a claim against a franchisee for breach ofthe duty of good faith occurring during the period prior to notice ofrescission the effective date of the notice. Post-rescission, thefranchisee may have continuing duties to the franchisor at commonlaw, such as the duty not to wrongfully take confidentialinformation or operations manuals.

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

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

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

Subsection 6(6)(d) of the Act is designed to compensate thefranchisee for all losses that franchisee incurred in acquiring,setting up and operating the franchise. The calculations of “alllosses incurred” under s. 6(6)(d), at least initially, may include theamounts which have been identified in s. 6(6)(a), (b) and (c). It isprecisely because “all losses incurred may include the amountsidentified by s. 6(6)(a), (b) and (c) that those amounts are deductedfrom “all losses” in order to insure there is no duplication in thecalculation of compensation to be paid pursuant to that subsection.

Section 6(6)(d) is not the only section that is relevant to thecomputation of compensation payable by the franchisor to thefranchisee in cases of rescission. Clearly, if the franchisee wascompensated only on the basis of s. 6(6)(d), the overall purpose ofs. 6 would be defeated. The purpose and object of thesesubsections of the Arthur Wishart Act are to put the franchisee inthe position that it was prior to entering into the franchiseagreement. Subsections 6(6)(a) – (d) are to be read conjunctively.

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

Failure to provide proper disclosure renders an agreement subjectto 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

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Cannot renew in bad faith. 1060284 Ontario Ltd., [2000]O.J. No. 1239 (S.C.J.)

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

expired franchise agreement even where no reason exists not to doso.

Renewal provisions cannot be exercised by the franchisor in badfaith.

Renewal requires ascertainableterms.

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

*****

See also 1259286 OntarioLtd. v. Kardish FoodFranchising Corp., [2007]O.J. No.5429 (Ont.S.C.J.)

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

*****

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

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5. Termination of a Franchise Agreement

Fundamental breach; Repudiation;Non-performance of contractualobligations; 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 terminatedand consider himself discharged from any future obligations

A party is said to have repudiated the contract where he indicatesto the other side, by words or conduct, that he does not intend toperform his contractual obligations.

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

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

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

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6. Examples of Termination by Franchisor (Just Cause)

Failure to meet quota orperformance requirements infranchise agreements.

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

This case concerns breach of a dealer sales agreement, but isrelevant to franchisors who insert quota or performancerequirements in franchise agreements.

If the quota or performance requirements are readily determinableby a formula, then the failure of the franchisee to meet suchrequirements 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 analleged breach of such provisions for termination. In any case, afranchisor would have to demonstrate, by clear evidence, acontinuing series of complaints and failures by the franchisee torectify such complaints.14 (Zaid: 2-664D)

Termination provision in contract;Inadequate performance;Inadequate promotion; Reasonablenotice.

Edward Kondra and FortePacific Services Ltd. v. ForteOils Ltd., [1986] B.C.J.No.2400 (B.C.S.C.)

The termination provision of the distributorship agreement allowedthe manufacturer to terminate where, in the opinion of themanufacturer, the distributor has failed to adequately promote thesale of the manufacturer’s products.

In this case, the court held that such a provision must be consideredon objective grounds, thereby requiring that the manufacturer giveadequate and clear notice of an intention to terminate on the groundof inadequate performance, and further that the manufacturercannot 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)

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

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

In this case, the franchisee did not record or report walk-in salesand 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 ofunauthorized food products (Zaid: 2-664X, X.1).

Moreover, the franchisor was not estopped from terminating theagreement on the basis of past failure to deal with these defaults.The fat that the franchisor gave the franchisee further opportunityto correct the defaults (i.e., by providing warnings) did not act asestoppel.

Franchisee not providing requestedfinancial information and sellingassets.

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

Refusal of franchisee to provide requested financial informationand selling assets in breach of franchise agreement were not onlybreaches of the franchise agreement but also contravene the “dutyof fair dealing” as set out in s. 3 of the Arthur Wishart Act.

Where franchisor loses franchise to a competitor the measure ofdamage should be the monetary loss sustained by the franchisor forthe period of time that it would need to mitigate its loss byestablishing another franchise in the same territory. The case lawsuggests that a reasonable period of time for the franchisor to opena new franchise in the same area is in the range of 18 – 24 months.

Franchisee’s breach of the franchiseagreement; Non-competitionclauses; Reasonableness.

Enco Seat Covers Ltd. v.Enco Auto Trim and Glass(Newmarket) Ltd. (1993), 46C.P.R. (3d) 467(Ont.Gen.Div.)

The courts will not hesitate to find against franchisees that directlyor indirectly violate the terms of the franchise agreement, includingnon-competition clauses that are unambiguous and are reasonableboth as to scope and duration (Zaid: 2-664U)

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7. Franchisee Defaulting in Payments

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

Franchisee fell into arrears with regards to service and advertisingfees.

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

Trade Debts; Termination;Damages.

Vital Car & TruckRustproofing Ltd. v. Brian G.Cullingford (unreported)(Country Court of the JudicialDistrict of York, December15, 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 awardedagainst franchisor. (Zaid: 2-655).

Rental and Service Payments;Termination without notice.

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

Franchisee had consistently been in arrears on rental and servicepayments, and also failed to make reasonable payment to tradecreditors. Franchisor terminated without notice, contrary to thefranchise agreement.

Court upheld the termination; franchisor was entitled to amountsowing.

Service and Franchise Fees. Pepsi Cola Canada Inc. andPizza Hut Inc. v. PM FoodsLtd. (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 withoutFranchisor’s consent; Damages.

Pizza Delight Corporation v.White Rock Pizza take OutLtd., [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 feesand the shareholders transferred the assets to a new companywithout the franchisor’s consent.

Franchisor entitled to damages.

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Payments for supplies; Arrears; Nowritten contract; Termination.

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

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

Late payment of invoices;Termination pursuant to contractprovision.

Hardware Agencies Ltd. v.Medeco Security LocksCanada (1995), 39 C.P.C.(3d) 297; add’l reasons(1995), 39 C.P.C. (3d) 297 at311 (Ont.Gen.Div.)

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

Monthly sales reports; Non-payment of royalties.

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

Franchisee ceased providing monthly sales reports and payingroyalties.

8. Non-Compliance with Franchisor Policies

Refusing to provide inventory; Noexpansion of business;Termination; Just cause.

Geoff Coleman Yacht SalesLtd. 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 themanufacturer: i.e., refusing to provide inventory for prospectivepurchasers, not expanding its business, and conduct generallyincompatible with the policies of the defendant (Zaid: 2-659).

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9. Unauthorized Business and Diversion of Funds

Termination. T. Chiasson Shine SystemsLtd. v. Island ShineSpecialists 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 thefranchisee had been conducting an unauthorized business (i.e.,began providing rust-proofing service) and was diverting fundsfrom the franchise system to underwrite the debts of theunauthorized business.

Implied agreement; Failure toreport 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 sentthe franchisee another form of agreement, which neither party didsign. Regardless, the relationship continued on as it hadpreviously.

Then the franchisee started to broker the buying and selling ofdrugs, but did not inform the franchisee of his brokerage activity.Franchisor was entitled to terminate.

Although the first agreement had technically expired, it was heldthat the parties continued under an implied agreement.Accordingly, the failure of the franchisee to report the brokerageactivity and to share in the profits constituted a breach of contract.The concealment of the activity reflected a deceitful purpose andamounted to fraudulent conversion. (Zaid: 2-664X.14).

10. Examples of Termination by Franchisee

Misrepresentation inducingFranchisee to enter into franchiseagreement; Negligentmisrepresentation; Unpaid arrears;Damages.

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

The franchisor was found liable for negligently misrepresenting thefranchise’s projected earnings and the assistance that was to beprovided to the franchisees. Damages, however, were also awardedagainst the franchisees for an amount equal to the unpaid arrears ofroyalties and marketing services fund payments which hadaccumulated (Zaid: 2-664X.12).

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SUBJECT CASE LAW

Misrepresentation; Promotionalpackage; Franchisor support.

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

Franchisor’s promotional package stated that the franchisee wouldreceive a fully equipped turnkey operation with training andextensive support, as well as assistance in acquiring a liquorlicence.

The franchisor did not fulfil these promises. Court declared thatthe franchise agreements were void as a result of the breach andmisrepresentations (Zaid: 2-664Z.4).

Abandonment of the Franchiseprogram; Fundamental breach;Termination; Representationscontained 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 effectivelyabandoned the franchise program contracted to be made availableto the franchisee, such an abandonment will be considered afundamental breach of the agreement, allowing the franchisee toterminate and even to recover all or part of the initial franchise fee.However, in such a case, the franchisee must elect to terminate onthe breach and not remain in the franchise relationship.

Further, in circumstances where representations are made throughpromotional literature, such representations will be considered toconstitute part of the representations contained in the agreementitself. (Zaid: 2-664I).

11. Interlocutory Injunctions

Terminate a franchise agreementprior to trial.

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

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

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SUBJECT CASE LAW

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

*****

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

*****

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

To require a party to renew or enter into a new franchiseagreement, after expiry of that agreement, amounts to a mandatoryorder.

*****

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

*****

Motion for an interim injunction to enjoin the defendant franchisorFord Motor from terminating Erinwoods’ Car dealership agreementfranchise 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 betweenpositive and negative orders is not always clear cut, but there is noquestion that granting the injunction creates no new rights.

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

Motion for interlocutory injunction to enforce non-competitionclause found in franchise agreement; Plaintiff required todemonstrate the following: injunction is in public interest; plaintiffhas strong prime facie case; plaintiff will suffer irreparable harm ifinjunction is denied; and balance of convenience favours grantinginjunction.

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12. Examples of Interlocutory Injunctions obtained by the Franchisor

Trademark infringement by theFranchisee; Corporate name;Negative covenants; Passing off.

a) Brownies Holding Ltd. v.Chance Dean Enterprises Ltd.(1992), 39 C.P.R. (3d) 410(B.C.C.A.)

*****b) Cappucino Affair Ltd. v.782433 Alberta Ltd. (2000),2000 CarswellAlta 1216(Alta.Q.B.)

*****

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

Franchisee continued to use a variation of the franchise name (i.e.,new restaurant was named “Brownies Foods Haney.”) after thefranchise agreement was terminated.

Franchisor obtained injunction to restrain the ex-franchisee’s use ofall marks similar to the franchisor’s trademarks, pursuant to thenegative covenant in the franchise agreement.

Regardless of when or from whom the name was acquired, this didnot permit the franchisee to act in breach of the negative covenantin the franchise agreement (Zaid: 2-648F.2).

*****Franchisor obtained an injunction to restrain the franchisee fromcontinuing to use the franchise trademark after notice oftermination was provided.

Harm is considered irreparable if it cannot be quantified inmonetary terms or if it cannot be cured. The question of whether aparty has suffered irreparable harm is a question of the harmsuffered, not the magnitude of the harm (Zaid: 2-648X.3).

*****

Franchisor obtained an injunction to restrain the franchisee fromusing the words “Century 21” in its corporate name after notice oftermination was delivered (franchisee in default for paymentsowing).

The court determined that the appearance of integrity and honestywas essential to the franchise name and, by its nature, thefranchisor could only project that appearance through its

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SUBJECT CASE LAW

franchisees (Zaid: 2-658F).

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

Restraining Franchisee fromholding itself out as a franchisee.

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

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

Extending the interim injunctionthrough trial; Proceduralirregularities.

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

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

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

In Rust Check, supra, procedural irregularities (i.e., imperfectdisclosure on the ex parte application) were insufficient to set asidethe injunction (Zaid: 2-648V.3).

Trade-mark infringement;Telephone listings; Passing off;Irreparable harm; Drafting.

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

See also: [Zaid: 2-645 to 7]

Dailey Leasing Co. v. DeGraw (1976), 28 C.P.R. (2d)241 (Ont. H.C.)

Texaco Canada Inc. v. Keith(1983), 115 A.P.R. 247

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

Franchisors should ensure that agreements are carefully drafted inrespect of the rights and obligations of franchisees to discontinueuse of telephone numbers upon termination.

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(P.E.I.S.C.)

Allbram Taxi Inc. v. Sandhu(1988) 38 B.L.R. 205, 24C.P.R. (3d) 334 (Ont.Dist.Ct.)

Nu-Vista International v. Nu-Vista 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 RegistryNo. C904355, October 23,1990

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

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SUBJECT CASE LAW

Enforcement of Non-CompetitionCovenants; Reasonableness.

Uniglobe Travel (Atlantic)Inc. v. Fundy Travel Ltd.(1991), 113 N.S.R. (2d) 240(N.S.T.D.)

See also: Color Your WorldInc. v. Schaus (1987), 9W.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

Yesac Creative Foods Inc. v.Hohnjec (1985), 6 C.P.R. (3d)398 (Ont.S.C.J.)

NOTE: Application dismissed.

Re: Acknowledgement of reasonableness in contract, the judgestated, in obiter:“I have great reservations as to the extent to which a court shouldconsider clauses which purport to be agreement on availableremedies at law which exist in the event of a reach of contract,particularly when there is unequal bargaining power such as thatwhich exists in most franchise agreements…” (cited by Zaid: 2-648K).

Restraining the Franchisee fromTerminating the Agreement;Franchisee engaging in competitivebusiness; Damages.

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

Franchisor obtained an interlocutory injunction restraining thefranchisee from unilaterally terminating the franchise agreement inorder to continue an identical business independent of thefranchisor.

In appropriate circumstances, an Ontario court will grant aninterlocutory injunction in effect restraining a franchisee frombreaching its agreement by terminating the franchised operationscontinuing such operations in a competitive business.

To allow franchisees to benefit from the franchisor’s goodwill, andthen unilaterally terminate the agreement in complete disregard totheir obligations to the franchisor, is unfair. Under thecircumstances of this case, it was held that the franchisor shouldnot be confined to a remedy in damages (Zaid: 2-648V).

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SUBJECT CASE LAW

Compelling payment by Franchisee(preserving status quo); Royaltypayments; Lack of Franchisorassistance.

Knutsen v. Pastel Food Corp.(unreported, June 6, 1988)(B.C.S.C.)

Franchisee was claiming for lack of service and assistance.Notwithstanding this, the franchisor was able to obtain aninjunction requiring the franchisee to pay and continue payingroyalty fees.

The judge determined that the status quo should be preserved untilthe issue was resolved at trial. The status quo, in this case, beingthe continuation of the agreement between the parties (Zaid: 2-648).

Compelling payment by Franchisee(preserving status quo); No expresscontractual covenant to withholdpayment.

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

Franchisor obtained injunction compelling royalty payments by thefranchisee.

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

Mandatory injunctions; Prohibitoryinjunctions; Motions.

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

NOTE: injunction application dismissed.

The court concluded that on a motion, as contrasted with a trial, thecourt is more reluctant to grant a mandatory injunction than itwould be to grant a comparable prohibitory injunction.

An unfortunate decision, Kwik Kopy does not appear to take intoaccount the commercial realities of the franchise relationship (Zaid:2-648C).

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SUBJECT CASE LAW

Restraining Franchisee use ofconfidential 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 itwas 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 partyhas rights of confidentiality.

13. Interlocutory injunctions obtained by Franchisee

Restraining Franchisor fromenforcing 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 permanentinjunction to enjoin the franchisor from enforcing a securityagreement.

Generally speaking, the right of a franchisor to exercise its interestsunder a properly executed and enforceable security agreement willnot be suppressed, despite allegations of fundamental breach.

Franchisors would be well advised, wherever practical, to obtainsecurity agreements securing all obligations of their franchiseesunder their franchise agreements and related documents on anongoing basis.

Gen. Rule, followed: Arnold v. Bronstein [cited at Zaid: 2-648R].

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SUBJECT CASE LAW

Restraining Franchisor frombreaching or terminating theagreement (preservation of thestatus quo).

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

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

*****

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

*****

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

Franchisee obtained injunction to restrain a franchisor from doingor refusing to do any act with a view to breaching the franchiseagreement.

In applying the tests for injunctive relief, the sympathy of thecourts has more often than not been with the franchisees, resultinggenerally in a granting of interlocutory injunctions where thefranchisee seeks to prevent the franchisor from terminating theagreements and a denial of such applications where the franchisorseeks an injunction to prevent the franchisee from continuing tocarry on the business (Zaid: 2-631).

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

*****

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

*****

Note: Application dismissed.

It will be difficult for a franchisee to obtain relief where operationshave been effectively terminated by a franchisor pursuant to validand enforceable remedies in a franchise agreement (Zaid: 2-648).

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SUBJECT CASE LAW

Court)

*****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. AtlanticPizza Delight Franchise(1968) Ltd. et al. (1977), 17O.R. (2d) 505 (Ont.Div.Crt.)

American Cyanamid Co. v.Ethicon Ltd., [1975] 1 AllE.R. 504 (H.L.)

Kingsway Datsun Ltd. v.Nissan Automobile Company(Canada) Ltd. (1981), 55C.P.R. (2d) 78 (B.C.S.C.)

*****

f) Peleshok Motors of Canadav. General Motors of CanadaLtd. (1977), 2 B.L.R. 56(Ont. H.C.J.)

g) Erinwood Ford Sales Ltd.v. Ford motor Co. of Canada

This case also illustrates the difficulty a franchisee will encounterin a termination situation where the franchisee does not respond tovalid complaint and default notices from the franchisor.

*****Franchisee obtained an interim injunction which enjoined thefranchisor from terminating the agreement and from servicing thefranchisee’s territory.

The court said that the contract was not simply a contract forpersonal services, and it was therefore susceptible to beingspecifically enforced.

*****Note: Franchisee’s application failed because the franchisee washimself in breach of the franchise agreement.

Franchisee obtained an injunction primarily because there was anexisting right of renewal to the franchise agreement. The courtheld that where a party seeks to prevent early termination of adealer agreement, the party does not ask the court to create a newright, but rather to preserve the status quo and leave the issue of

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SUBJECT CASE LAW

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

See also: 838779 OntarioLtd. v. Mac's ConvenienceStores Inc., [2004] O.J. No.5174 (Ont. S.C.J.), where thebalance of convenience washeld to favour the franchiseewho otherwise would be putout of business.

whether or not the termination is proper for trial.

Restraining Franchisor from takingpossession of the franchise;Conditions imposed on theinjunction order; Franchisee indefault.

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

Franchisee obtained an injunction, but conditions were imposed onfranchisee.

By imposing conditions on the part of the injunction granted, thiscase established rights in favour of a franchisor where a defaultingfranchisee seeks to retain possession of the premises (Zaid: 2-648).

Franchisors should seek such conditions against defaultingfranchisees in interlocutory injunctive proceedings. (see also731273 Ontario Ltd. in “Restraining Franchisor from ImpairingFranchise Business.”).

Mandatory injunctions; Allegationsthat are not clearly sufficient tojustify termination of theagreement.

Lee v. Soup it up Inc. (2000),2000 CarswellOnt 3386 (Ont.S.C.J.)

See also:537431 Ontario Ltd. v. RustCheck Canada Inc. (1986), 5W.D.C.P. 419 (Ont.S.C.)

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

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SUBJECT CASE LAW

Restraining Franchisor fromimpairing the franchise business;Conditions attached to injunctionorder; Franchisee in default.

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

Franchisees obtained injunction, however were conditionsattached.

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

Restraining Landlord from leasingpremises adjoining to franchisee inbreach of restrictive covenant infranchise agreement.

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

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

Court awarded franchisee a prohibitory injunction.

Enforcement of franchiseagreement; 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 materialchanges to their franchise systems by relying on system changeclauses or similar provisions in their franchise agreement. Anysuch fundamental or material changes can only be made with theapproval of the franchisees affected (Zaid: 2-648H).

The franchisee was granted a prohibitive and mandatory injunctionto prevent the withdrawal of the use of the franchisor’s trade-marknames as granted in the license agreement, where the franchisorattempted to invoke a required name change.

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SUBJECT CASE LAW

Where the Franchisee applicantdoes not have “Clean Hands”;Conditions attached to injunctionorder

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

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

*****

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

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

646210 Ontario Ltd.: Upon any further default in the payment ofamounts due by the franchisee, the franchisor would be entitled tomove immediately to regain possession of the franchised premisesand to terminate the agreements.

731273 Ontario Ltd.: Given the conditions imposed on thefranchisee, the franchisor effectively obtained an order requiringpayment of all amounts owing, notwithstanding the issues raisedby the franchisee as to default and fundamental breach by thefranchisor.

*****

Note: Application dismissed.

Franchisees, who were seeking an injunction, alleged variousbreaches by the franchisor, but they themselves had also withheldpayments.

An injunctive remedy is an equitable remedy that comes ahead ofthe basic principles for interlocutory injunctive relief.

The withholding of fees constituted a fundamental breach whichentitled the franchisor to accept such breaches as a repudiation ofthe agreement (Zaid: 2-639).

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SUBJECT CASE LAW

14. Reasonable Commercial Standards

Beaucage v. Grand & ToyLtd., [2001] O.J. No. 5128(Ont.S.C.J.)

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

Implied duties of good faith andfair dealing; punitive damagesawarded.

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

15. Class Actions

Certification of plaintiffs for classaction proceedings.

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

*****

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

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

*****

Franchisee operated stores allege A&P withheld rebates owing tothem in breach of their franchise agreements. Divisional Courtupholds the common issue that all franchisees are governed by thesame franchise agreement. Certification upheld.

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

*****

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

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

*****

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

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SUBJECT CASE LAW

Class Action against bothfranchisor and franchisee by a thirdparty

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

Consumer sues both franchisor and franchisee for impropercharges. Certification motion for class action.

Court raises analogy of piercing the “corporate veil” and, while notapplying directly, leaves open. While the claim against thefranchisor may be difficult, it is not plain and obvious that it willnot succeed.

16. Jury Trials in Franchise Disputes

Striking out the jury notice Kawkaban Corp. v. SecondCup Ltd., [2003] O.J. No.5169 (Ont. S.C.J.)

Defendants argued that the issues in this case were of sufficientcomplexity to conclude that it should not go before the jury. Indismissing the motion to strike out the jury notice, the court heldthat neither the termination of the franchise agreement nor theconcept 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, BatesBarristers, 34 King Street East, 12th floor, Toronto, Ontario M5C 2X8