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

In 526901 B.C. Ltd. v. Dairy Queen Canada Inc., a June 29, 2018, decision of the Supreme Court of British Columbia, the court dismissed a franchisee’s application for an injunction to prevent the franchisor from terminating or cancelling the franchise agreement. It found that the franchisee would not suffer irreparable harm and that the balance of convenience favoured allowing the franchisor to terminate the franchise agreement.

The court also dismissed the franchisor’s application for an injunction to restrain the franchisee’s “anticipated breach” of the Mutual Cancellation Agreement as premature.

Key facts

In 1999, the plaintiffs, 526901 B.C. Ltd. (“526”) and Daniel Baker, entered into a franchise agreement with Dairy Queen Canada Inc. (“Dairy Queen”). Mr. Baker was a guarantor.

From June to September 2017, Dairy Queen issued three notices of default under the franchise agreement to 526 for noncompliance with signage requirements, failure to modernize and failure to provide financial records.

In November 2017, the parties entered into a “Mutual Cancellation and Release Agreement”, under which:

a. 526 was given until December 31, 2017, to cure all defaults to Dairy Queen’s satisfaction;

b. Failing curing of the defaults, 526 would have until June 30, 2018, to sell the assets of the franchised business; and

c. Failing sale of the assets, the franchise agreement would be cancelled and terminated on June 30, 2018.

None of the defaults was cured to Dairy Queen’s satisfaction by December 31, 2017. The modernization of the restaurant was partially completed, but 526 made no effort to supply its financial statements and tax returns.

On June 12, 2018, 526 and Mr. Baker commenced an action against Dairy Queen for a declaration that Dairy Queen had no right to terminate the franchise agreement, or alternatively, an order for relief against forfeiture of the franchise agreement under the British Columbia Law and Equity Act. They also sought an injunction restraining Dairy Queen from terminating or cancelling the franchise agreement until a trial of their action.

On June 19, 2018, Dairy Queen sought an injunction restraining 526’s anticipated breach of the Mutual Cancellation and Release Agreement.

As of the date of the hearing, on June 25, 2018, 526 had not sold the restaurant’s assets as contemplated by the Mutual Cancellation and Release Agreement.

526 and Mr. Baker barely raised a serious issue to be tried

In the underlying action, 526 and Mr. Baker argued that, because they had substantially completed the modernization requirement, Dairy Queen lacked “good cause” to terminate the franchise agreement. They also argued that the duty of fair dealing prevented Dairy Queen from relying on the Mutual Cancellation and Release Agreement. Finally, 526 and Mr. Baker sought relief against termination under the British Columbia Law and Equity Act.

The court found it significant that the Supreme Court of British Columbia had earlier upheld the validity of a similar “Mutual Cancellation and Release Agreement” in Dairy Queen Canada Inc. v. M.Y. Sundae Inc.  526 and Mr. Baker did not dispute the enforceability of the Mutual Cancellation and Release Agreement. They also did not contest the essential facts underlying the notices of default of the franchise agreement.

The concept of “good cause” was irrelevant in the circumstances. About the duty of fair dealing, Dairy Queen was not exercising any right under the Mutual Cancellation and Release Agreement. The court also held that Dairy Queen was not acting in bad faith by refusing to agree to any extensions to the agreed-upon termination date.

It was unclear as a matter of law if the British Columbia Law and Equity Act even applied to the Mutual Cancellation and Release Agreement. Dairy Queen was not taking unilateral termination action. Instead, the parties mutually agreed that the franchise agreement would come to an end unless certain conditions were performed by a set date.

Because the injunction sought by 526 and Mr. Baker would be dispositive of the underlying action, the more onerous “strong prima facie case” standard arguably applied. The court concluded that 526 and Mr. Baker could not satisfy the strong prima facie case standard, and that their claim “barely scrapes across” the serious issue to be tried threshold.

No irreparable harm to 526 and Mr. Baker

526 and Mr. Baker would not suffer irreparable harm if the injunction was refused.  Dairy Queen did not dispute that Mr. Baker would lose his livelihood and capital investments in the franchised restaurant.

Any damages that 526 and Mr. Baker would suffer from the termination of the franchise agreement could be adequately compensated by damages.

The balance of convenience favoured termination of the franchise agreement

In assessing the balance of convenience, the court reiterated its finding that 526 and Mr. Baker’s case was weak on an evidentiary and legal basis. It held that the weakness of the underlying action “is a factor that strongly militates against granting the plaintiffs the injunction they seek”.

526 and Mr. Baker’s offer to make an undertaking as to damages was undermined by their failure to deliver financial disclosure to Dairy Queen.

526 and Mr. Baker were partially responsible for the urgency of their situation.  Dairy Queen stated its position in January that it would not agree to any further extensions. 526 and Mr. Baker offered no explanation about why they waited until June to bring the present motion. The court concluded that the balance of convenience favoured allowing Dairy Queen to terminate the franchise agreement.

Dairy Queen’s injunction application was premature

The court refused to grant to Dairy Queen an injunction to restrain 526 and Mr. Baker’s anticipated breaches of the Mutual Termination and Cancellation Agreement, without prejudice to reapply in the future as necessary. It concluded that Dairy Queen’s evidence about this issue was speculative and that the desired relief was premature because the franchise agreement had not yet terminated on the date of the hearing.

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