Author: Robert Jones, Law Works P.C.
Editor: Ben Hanuka, Law Works P.C.

In Azmoon Trading Inc. v. Caffe Demetre Franchising Corp., a May 15, 2018, decision of the Ontario Superior Court, the court refused to grant the franchisee’s application for an injunction to restrain the franchisor from acting on its notice of termination of the franchise agreement. It found that the franchisee, Azmoon, would not suffer irreparable harm if the injunction was not granted, and that the balance of convenience favoured allowing the franchisor, Caffe Demetre, to take over the restaurant.

Key facts

The defendant, Caffe Demetre Franchising Corp, is a franchisor of desert restaurants in the Greater Toronto Area. The plaintiff, Azmoon Trading Inc., operated a Caffe Demetre franchise in Mississauga.

In April 2000, the parties signed a ten-year franchise agreement that contained two five-year renewal options. Renewal was subject to, amongst other things, the requirement for Azmoon to complete renovations to comply with Caffe Demetre’s standards and image.

In May 2011, Azmoon exercised its first five-year option to renew. Caffe Demetre did not require Azmoon to renovate its restaurant at that time.

In November 2015, Azmoon notified Caffe Demetre of its election to renew for the final five-year term. Caffe Demetre requested that Azmoon complete renovations for a total cost of $350,00 – $450,000 and comply with its obligation to make local marketing expenditures.

The parties began negotiating and Azmoon continued to operate on a month-to-month basis. In January 2017, Caffe Demetre provided Azmoon with its notice of termination of the franchise agreement, citing Azmoon’s failure to complete the required renovations and to make the necessary expenditures on local marketing.

In February 2017, Azmoon issued a statement of claim against Caffe Demetre, alleging breaches of contract and the Arthur Wishart Act (Franchise Disclosure), 2000. Azmoon also sought an injunction restraining Caffe Demetre from acting on its Notice of Termination until the issues in its statement of claim could be resolved.

There was a “serious issue” to be tried

Based on the RJR-MacDonald Inc. interlocutory injunction test, the court found that Azmoon’s statement of claim raised serious issues to be tried about Caffe Demetre’s alleged breaches of the franchise agreement.

Azmoon failed to show that it would suffer irreparable harm

The court distinguished the facts of this case from other known franchise injunction decisions because of the following case-specific factors:

1. there was no right of renewal beyond the current period which expires in 2021; Caffe Demetre would soon obtain possession of the restaurant from Azmoon in any event (suggesting a limited amount of damages);
2. Azmoon was actively trying to sell its restaurant, and even signed a conditional offer to purchase (showing efforts to exit the business);
3. Caffe Demetre was in a position to take over the operation of the restaurant (suggesting that the business itself would continue operating as-is); and
4. there were accurate financial records for the past two decades of operations (suggesting that loss of income would be easily quantifiable).

Because of these factors, the court concluded that Azmoon failed to prove that it would suffer irreparable harm if Caffe Demetre was allowed to take over the restaurant.

The balance of convenience favoured allowing Caffe Demetre to take over the restaurant

The court held that, even if Azmoon was able to show irreparable harm, it would still dismiss the injunction motion because the balance of convenience favoured Caffe Demetre. It relied on the following key factors unique to this case:

1. Azmoon failed to provide an undertaking of damages as required by the Rules of Civil Procedure, and did not provide evidence of its ability to satisfy a damages award;
2. Caffe Demetre serviced its notice of termination over a year ago, giving Azmoon an opportunity to sell its restaurant; Azmoon failed to take advantage of the opportunity;
3. Azmoon already had the benefit of an earlier interlocutory injunction which was granted specifically to allow it to sell its restaurant to a prospective purchaser;
4. because of the complexity of Azmoon’s claim, and Caffe Demetre’s counterclaim, the trial was not expected to be completed until the following year. That would take the parties halfway through the final extension that Azmoon was seeking. The court was concerned that an injunction would give Azmoon a de facto extension of the franchise agreement; and
5. Azmoon did not respond to the allegation that it was in breach of its obligation to make the necessary expenditures on local marketing.

Conclusion

This decision shows how fact-specific that interlocutory injunction cases typically are, particularly in franchise disputes, with careful consideration of all the relevant factors to the RJR-MacDonald interlocutory injunction legal test and equitable concerns.

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