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Remaining franchise term plays role in injunction cases

In determining whether to grant an injunction involving the termination of a franchise agreement, the courts will look at the length of the term remaining and whether any claims of damages can be quantified, says Toronto franchise lawyer Idan Erez.

Idan, a lawyer with Hoffer Adler LLP, says parties in a franchise relationship may consider using injunctions if things turn sour and talks fail.

“It’s something that I do in my practice, and it’s an interesting area because everything moves really quickly,” he tells AdvocateDaily.com. “Injunctions are typically brought on an urgent and short-term basis, usually at a point where the franchise relationship has irreparably deteriorated.”

He points to a recent decision from the Supreme Court of British Columbia where a telecommunications franchisor terminated dealer agreements with a multi-unit franchisee on the basis of what it called “rampant misconduct.”

“The franchisee moved for earlier interim injunctions which were granted, but a longer-term injunction was denied on the basis that the plaintiff’s damages arising from the loss of business were quantifiable, while the franchisor’s reputational damage was not,” Erez says.

He notes it’s not unusual for a party to have one or more interim injunctions granted before ultimately being denied a more permanent one.

“If you’re a franchisee and you receive a notice of default or termination, you need to get in front of the court immediately or else the business could take a large financial hit,” he says. “The other side doesn’t really have a chance to respond at the first appearance because they were served at the last minute and can be left scrambling.

“In those instances, the responding party may consent to an interim injunction, and in exchange, the court imposes a strict timetable for the parties to file their materials and come back for a hearing on a more fulsome evidentiary record,” Erez adds.

In the B.C. matter, he says an important factor was that many of the dealer agreements were approaching the end of term, with some already expired and proceeding on a month-to-month basis.

“That fact played an important role in this decision,” says Erez, who was not involved in the matter and comments generally. “If there is a long term remaining, it becomes hard to forecast what those damages are going to be if you terminate an agreement.”

He says in these types of disputes, the court will focus on what the harm is going to be if an injunction is granted or denied.

“In the franchise context, the irreparable harm discussion tends to centre on what happens if the franchise business is shut down. How will the franchisee be compensated if it turns out that the injunction ought not to have been issued?” Erez says.

In this matter — because the agreements were mature and the terms were nearing their end or had already expired — Justice Elaine J. Adair was not persuaded that the plaintiffs would suffer irreparable harm if the injunction was refused. 

“Damages from the loss of a business can be quantified. In my view, the plaintiffs can be adequately compensated by an award of damages, and [the defendant] is in a position to pay any reasonable amount of damages to which the plaintiffs might be entitled arising from the asserted wrongful termination of the dealer agreements,” she wrote in her decision.

On the other hand, the judge found the franchisor’s losses — for example, damage to its goodwill and to the integrity of its relationships with its other dealers — harder to quantify. 

Erez says the judge distinguished this matter from previous case law involving longer-term agreements.

“The courts have not been entirely consistent about that approach,” he says. 

He notes that while the decision doesn’t delve into the particulars of the alleged misconduct, the franchisor was concerned that if the franchisees were allowed to continue it was going to impair goodwill to its customers, other franchisees, and the public at large.

“The courts have been sympathetic to that argument, and there’s been a recognition that a franchisor has an obligation to protect its franchise system,” Erez says. “I think that puts the franchisor at an advantage on the irreparable harm and balance of convenience prongs of the injunction test.”

That said, he notes it’s not always easy to prove that a franchisor’s reputation is going to be imperilled.

“It’s a common sense argument, but it can be hard to quantify,” he says.

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