Before seeking injunctive relief, consider time left in franchise term
By Kirsten McMahon, Associate Editor
A recent case dismissing a franchisee’s motion seeking injunctive relief prohibiting the franchisor from acting on a termination notice shows that a relief application may be dependent on when it's being exercised, Toronto franchise lawyer Joseph Adler tells AdvocateDaily.com.
“If a franchisee was seeking injunctive relief at the beginning of a term, it might have been a different scenario — the length of time remaining would have given more of a return,” says Adler, a partner with Hoffer Adler LLP.
The parties entered into a 10-year franchise agreement in April 2000 — with two options to renew for additional five-year terms. The first renewal was exercised while the second and final renewal was for a period until May 21, 2021, the decision states.
The franchisee’s right to renew was subject to a number of conditions, and it was required to undertake, at its own expense, renovations necessary to comply with the franchisor’s “then-current standards and image.”
When the franchisee elected to renew the franchise agreement for the final term, the franchisor said it was in default of a number of provisions of the agreement and that any renewal was conditional on the completion of substantial renovations. Over the next six months, the parties engaged in extensive discussions over the renovations as a condition of renewal, the decision states.
With the franchise agreement about to expire, the parties agreed to extend on a month-to-month basis as they continued to attempt to find a resolution to the renovation issue. Eventually, the franchisor provided 30 days' notice of termination of the franchise agreement.
The notice cited the franchisee’s failure to undertake required renovations and to satisfy the local advertising requirement as the basis for the termination.
The plaintiff sought injunctive relief prohibiting the franchisor from acting on the notice terminating the franchise, and argued that it should be permitted to continue to operate the franchise until the validity of the termination can be determined. The franchisor argued that the plaintiff did not meet the test for an interlocutory injunction and the motion should be denied.
Adler says a franchisee seeking injunctive relief must be prepared to satisfy the established three-part test as set out by the Supreme Court of Canada in a 1994 decision. The franchisee needs to show there is a serious issue to be tried, that
it will suffer irreparable harm if the injunction is not granted, and the balance of convenience favours the granting of the injunction.
In dismissing the motion, the court found the franchisee established that there is a serious issue to be tried but failed to show that it would suffer irreparable harm if the injunction were not granted, or that the balance of convenience favoured the granting of the injunction.
Adler, who did not act in the matter and comments generally, says that what is interesting is how the three-part test was applied.
“Given that the franchise agreement
was to expire in three years, the court found that any loss of goodwill is limited and could be adequately compensated in damages if its claim is ultimately upheld,” he says.
“It's one thing if you're a franchisee in your 30s and you get no notice of the termination and all of a sudden, you're facing a non-compete and can't earn a livelihood for a period of time,” Adler says. “It’s quite another when you're nearing retirement and have attempted to try to sell the franchise for some time. It's not like you didn't have any notice or understanding of the issue.
Adler says the bottom line is that if you're seeking injunctive relief, you better be prepared to satisfy the three-part test.
“The argument is that the value of the franchise is somewhat contingent on where the franchisee is in the term. As far as the court is concerned, it's less likely to provide relief for somebody who has already gained the benefit of the franchise for 18 years,” he says. “And if the franchisor is offering some kind of settlement, a franchisee should think where they are in a term before rejecting it.”