British Columbia Court Issues Injunction to Prevent Disposal of Franchise Assets

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In New Beginnings Early Learning (White Rock) Ltd. v. CEFA Systems Inc., a December 21, 2018, decision of the Supreme Court of British Columbia, the court granted an interlocutory (temporary) injunction to a private school franchisor to prevent its franchisees from disposing of, or encumbering, the school assets, and from changing the corporate control of the company.

Key facts

The defendant, CEFA Systems Inc. (“CEFA”), is the franchisor of an early childhood education school system.  The defendant, Natacha Beim, is the founder of CEFA.

The plaintiffs, New Beginnings Early Learning (Richmond) Ltd. and New Beginnings Early Learning (White Rock) Ltd. (collectively, “New Beginnings”), were the franchisees of two CEFA private schools. The plaintiffs, Mark and Jackie Leslie, were personal guarantors.

The parties signed the franchise agreements in 2015, which contained the following key terms:

1. CEFA had the option to purchase the assets of the schools on termination of the franchise agreements;
2. New Beginnings was prohibited from effecting any change of control or any assignment of the franchise agreements without CEFA’s consent; and
3. the covenants of New Beginnings and the Leslies survived termination.

The Underlying Action

New Beginnings sued CEFA and Beim for equitable rescission of the franchise agreements.  CEFA counterclaimed for unpaid royalties and for unauthorized use of proprietary information.

In May 2018, the Leslies began taking steps to de-brand and establish competitive schools under the banner of “Rothewood Academy”.

On August 24, 2018, the Leslies and New Beginnings gave CEFA a notice of civil claim for equitable rescission.  They originally relied on alleged misrepresentations about finances and pending litigation.  They eventually largely abandoned that position.  They alleged that Beim and CEFA representatives made fraudulent misrepresentations to them about Beim’s university and academic credentials, to induce them to sign the franchise agreements and personal guarantees.

On August 28, 2018, CEFA sent to New Beginnings a notice of termination of the franchise agreements.  CEFA then invoked its right to purchase the assets of the schools.

The Leslies escalated their activities to de-brand and convert the schools.  They replaced the signage and informed the staff and parents about the change.  They also continued using CEFA’s proprietary curriculum.

CEFA sought interim injunction orders to prevent the Leslies from disposing of or encumbering the assets of the schools, and from effecting a change of control in the corporations.  CEFA did not seek to prevent the Leslies from operating the schools in the interim.

CEFA Raised Serious Issues to be Tried

 The Supreme Court of British Columbia concluded that CEFA raised many serious issues to be tried about the Leslies and New Beginnings’ equitable rescission claim and about its counterclaim.

CEFA submitted reliable evidence that the Leslies and New Beginnings breached the franchise agreements and misused its proprietary curriculum.  If correct, this would give CEFA the right to terminate the agreements and to purchase the school assets.

CEFA also raised a serious contractual interpretation issue about whether its right under the franchise agreement to prohibit a change of corporate control of New Beginnings survived the termination of the franchise agreements.

The court found that CEFA raised significant concerns about the equitable rescission claim.  Based on the record, it was unclear if the misrepresentations about Ms. Beim’s academic credentials were ever made, when they were made, to whom they were made, and if they were material and were relied on.  Also, the misrepresentation claims may potentially be barred under the Limitations Act, and the Leslies and New Beginnings may have affirmed the contracts.  Finally, the remedy of equitable rescission may be unavailable because of a lack of ‘clean hands’ on their part.

CEFA would Suffer Irreparable Harm if the Injunction was Refused

 In contrast to the recent B.C. Supreme Court decision in Dairy Queen (see our blog post here), the court held that proof of irreparable harm is not required on an injunction application.  Rather, doubt concerning the adequacy of damages as a remedy meets the irreparable harm test.

The court found that it was impossible to quantify the potential reputational harm that CEFA would suffer from the continued unauthorized use of its proprietary curriculum.  This risk was compounded by evidence that the Leslies may seek to franchise Rothewood Academy.

The Balance of Convenience Favoured Granting the Injunction to CEFA

 The court concluded that the balance of convenience favoured granting the injunction to CEFA.  CEFA took clear steps to enforce its right to purchase the school assets.  Unless the injunction was granted, there was no guarantee that the Leslies and New Beginnings would not dispose of or encumber the school assets until the trial concluded.

Similarly, if the Leslies and New Beginnings effected a change of corporate control in the interim, it would be impossible for CEFA to enforce its rights after trial.  An injunction was necessary to preserve the subject matter of the litigation until the trial could take place.

The court found that there was no evidence that the Leslies and New Beginnings would suffer irreparable harm if CEFA’s injunction was granted.  The trial of the underlying action was proceeding on an expedited basis.  Also of importance, CEFA did not seek to prevent the Leslies from continuing to operate the schools in the ordinary course of business.

Finally, New Beginnings did not provide an undertaking that they would not dispose of their assets and that there would be no change of control.  Without this assurance, they could not give a proper undertaking of damages to compensate CEFA in the future, should an injunction be set aside at a later time.  By contrast, CEFA showed that it had adequate resources to satisfy any judgment in favour of the plaintiffs.