In Garcha Bros Meat Shop Ltd. v. Singh, 2022 BCCA 36, a January 31, 2022, decision of the Court of Appeal for British Columbia, the court upheld the chamber judge’s decision that granted an injunction against the sister of the former franchisee’s principal, restraining her from operating a competing meat shop.
On Sep 24, 2020, the franchisor, Garcha Bros Meat Shop Ltd., terminated the franchise agreement with the franchisee, SJP Enterprises Ltd., which operated a “Garcha Bros Meat Shop & Poultry” butcher shop in Burnaby, BC.
After the termination, the franchisee assigned its lease for the location to 11270058 BC Ltd. (“1127”) – one of the principals of 1127 was the sister of the former franchisee. After the lease assignment, 1127 started operating a similar meat shop to the franchised business, out of the same location.
The franchise agreement contains a non-competition covenant, prohibiting the franchisee from operating a competing business within a 10 km radius from the franchised location during the period of 30 months from the date of termination.
On an application the chambers judge ordered an injunction restraining 1127 and its principals from operating its meat shop from that location.
The chamber judge held there was a strong prima facie case that all the defendants had engaged in a civil conspiracy to circumvent the restrictive covenant.
The judge relied on the family ties between the franchisee’s principal and 1127’s director (his sister), and the absence of documents that normally ought to be associated with an arm’s length sale of a business, such as, an agreement of purchase and sale, bill of sale, statement of adjustment etc. The court concluded that the transaction was not at arm’s length and 1127 and its principals were the alter ego of the former franchisee and its principals.
As a result, the court lifted the corporate veil. Any remedy available to the franchisor based on the Franchise Agreement was available as against 1127 and its principals. In addition, the court found that the protection afforded by the franchise agreement could be extended to a successor company if it was incorporated for the purpose of defeating the non-competition obligations.
The chamber judge also concluded that it was not necessary to conduct an analysis of reasonableness of the non-competition clause. There was little merit to suggest the scope of the restrictive covenant was ambiguous, since 1127 was operating a retail meat shop from the franchise location and the products sold were exactly same as the franchisor’s product.
1127 and its principals appealed the decision.
The Court of Appeal’s decision
The Court of Appeal upheld the chamber judge’s decision. It found that the chambers judge was driven by the apparent collusion between 1127 and its principals and the former franchisee, in an attempt to avoid the non-competition covenants. This made 1127 a “sham”.
1127 and its principals argued that the term ‘franchised business” was ambiguous as it was not defined in the franchise agreement. They also took the position that the 10 km geographical radius was too broad and unreasonable.
The Court of Appeal upheld the chamber judge’s finding that there was a strong prima facie case on the basis of the evidence that the retail meat shop that 1127 operated from the franchise location. The Court of Appeal held that this was sufficient to establish that the words were not ambiguous.
As to the geographic scope of the non-competition covenant, the Court of Appeal noted that there was no other Garcha Bros Meat location in the 10 km radius of the location. This supported the reasonableness of the geographic scope of the restriction, as the franchise location was the only one within that territory. As a result, the radius was reasonable for the protection of the franchisor’s interests.
About irreparable harm, the Court of Appeal found that 1127 and its principals were not in possession of proprietary recipes or marketing techniques exclusive to the franchisor. However, the franchisor provided evidence from other franchisees who complained that they may follow suit if one franchisee was allowed to take the benefit of the franchise, change its name and continue operating as before. There was also evidence that the former franchisee was fomenting dissent among other franchisees. The Court of Appeal held that a loss of goodwill may constitute irreparable harm if it cannot be quantified.
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