In the case of 244674 Ontario Inc. v. Home Instead, Inc., 2015 ONSC 8004, a judge of the Ontario Superior Court of Justice found two sets of franchisees in contempt of an earlier injunction order. The injunction restrained them from operating their franchised businesses.
The case involved a US-based homecare franchisor, Home Instead. The franchise system provides non-medical home care assistance to seniors. The franchisees were comprised of two companies in the Toronto regions of North York and Scarborough, and the respective individual principal of each company.
Released only about two weeks earlier, the injunction order required the franchisees to shut down their business immediately. It was based on the post-termination restrictive covenants of the franchise agreements. The covenants prohibited the franchisees from, among other things, being engaged in any competing home care business within a 75 km of any franchised outlet.
A short while after the injunction was issued, the franchisor brought a contempt motion against the franchisees on the basis that they breached the injunction order.
The Contempt Decision
In the days following the issuance of the injunction order, a key employee of both franchisees advised all their caregiver employees by a series of emails that the franchisees were staying in business, and that businesses would continue to operate as usual.
Similarly, one of the individual principals sent an email to customers of one of the two locations disregarding the injunction order, asking customers to stay with their franchise, and offering to discount their fees. He described the litigation as a “back and forth game that will play out until trial”.
The court found these emails as clear evidence that the franchisees not only remained in the business, but intended to continue to operate it, and that both aspects were in breach of the injunction order.
At a case conference several days before the hearing of the contempt motion, Mr. Justice Myers, who presided over both the injunction and contempt hearings, made an interim order in addition to the injunction order, again requiring the franchisees and their two principals to, among other things, cease operating the two franchised business and transfer control to the franchisor.
However, the franchisor had asked the franchisees to assist in a wind-up process which involved notifying customers and transitioning gradual control to other franchisees. The franchisor requested this help even though it was supposed to immediately take over the businesses. The court found that the franchisees merely complied with the franchisor’s request. This amounted to a partial explanation of the franchisees’ breach of the injunction order.
By the time of the contempt hearing, with the exception of producing a list of customers, the franchisees had almost fully complied with the injunction order. Their businesses had ceased to operate.
In addition, one of the two principals provided an apology to the court in his responding affidavit for breaching the injunction order. The other principal also apologized, although she denied knowledge of the others’ emails and letters, and tried to explain away her actions.
Still, there was evidence on the record that was consistent with the franchisees’ intention at the time to remain in business. This included their continued communications with caregivers about future shifts; updates to their Facebook page; failure to assign the telephone lines to the franchisor; continued use of their franchised email addresses; continued use of the franchise computer system, and holding themselves out as existing franchisees.
Myers J. ruled that the franchisor proved beyond a reasonable doubt that the franchisees “intentionally committed acts that violated the letter and the spirit” of the injunction order. He concluded that the franchisees committed civil contempt of court.
Recognizing the status quo of essential compliance, and given the principals’ apologies to the court, Myers J. ultimately urged the parties to find a resolution to what consequences, if any, should flow from the finding of contempt.
Analysis and Observations – Ulterior Motives and Collusion Drive the Decision
There is no question about the strength of evidence of breaches, even after the court excluded all hearsay evidence from the franchisor’s allegations (an example of hearsay evidence that the court excluded was caregivers’ reports about calls with other franchisees or the franchisees in this case about supposedly staying in business).
While on the face of the record the franchisees were in breach of the injunction order as evidenced by their own emails to caregivers, it is less than clear why the court felt it was necessary to officially find them in contempt. As noted earlier, the franchisees had almost fully complied with the injunction order by the time of the second hearing – which was only about two weeks after the injunction order was issued in the first place.
Furthermore, the franchisees’ conduct was mitigated by the fact that the franchisor invited the franchisees to assist in the gradual transition, and did not require them to immediately cease and desist from operating the business. On top of it, the franchisees’ principals provided apologies in their responding affidavits.
It appears that the franchisees’ ulterior motives, their collusion and their series lack of credibility drove the case in both the injunction and the present contempt hearings.
In both decisions, Myers J. referred in detail to the franchisees’ deceitful conduct about hiding their business relationship in the context of at least two factors – their credibility and the all-important ‘balance of convenience’ factor in the injunction test:
- One of them originally advised the franchisor about their business relationship, yet both later denied it in the litigation.
- The two individual principals held themselves out to suppliers as partners or co-owners.
- One demanded of the other to appear in corporate documents, yet they refused to produced their minute books.
- They admitted that only one of the corporate franchisees had a business account, yet they refused to produce their banking records.
This finding led the court to conclude in the injunction application that the franchisor had a strong prima facie case that the franchisee deliberately violated their contractual prohibitions. The court was much more prepared to hold them strictly to the terms of the contract and leave out from the analysis their pleas of equity.
In the contempt analysis, this key element continued dominating the court’s impressions. It accentuated the franchisees’ breaches of the order.
Further aggravating the situation, the court noted that the key employee who sent the three main emails to caregivers had a criminal record. This was prohibited in this franchise system given the nature of the elderly care involved. While not directly relevant to the merits of the issues, it had an apparent impact on the court’s sensitivity to the equities in the case.
Another element of credibility and ulterior motives related to customer lists. The franchisees were required to produce a list of Scarborough customers whom they had contacted after the injunction order. At the hearing of the contempt motion, their counsel submitted that the franchisees had not contacted any Scarborough customers and therefore produced no list. Yet, the franchisees’ own affidavit material contained evidence that they had sent letters to customers after the injunction order.
To make matters worse, counsel for the franchisees submitted that the customer files that were turned over – 17 for Scarborough and 45 for North York – comprised all clients. The court found it incredible that the Scarborough business had only 17 customers. This was contrary to available customer records which showed much higher customer counts for both locations.
An additional credibility problem related to contacting customers. The franchisees’ counsel submitted that one of the two principals was contacting a client merely to help smooth the transition process. Yet, the principal’s own affidavit denied contacting that client at all.
With respect to the email from the key Scarborough employee, the court found the Scarborough corporate franchisee liable for contempt, and by implication its individual principal as well. Myers J. wrote: “In my view she is and ought to be liable for [the corporate franchisee’s] act of contempt.”
It could be open for debate whether the individual principal knew beyond a reasonable doubt about the email that her key employee sent out to the caregiver employees. No direct evidence appears to have been adduced, other than that the principal was the company’s controlling mind. In fact, the principal’s evidence was that she did not know of the email.
On the other hand, Myers J. chose to look at the underlining decision of the corporate franchisee. He wrote at para. 46:
…I do not think that she can insulate herself from liability…by denying knowledge of a specific communication when what underpins that communication is a corporate management decision to continue operating in breach of the court’s order.
Analysis and Observations – Tone and Style
In terms of tone and style, both the presiding judge and the parties’ counsel resorted to animated language and colourful analogies. At times, these techniques seem to overshadow the substance of the court’s findings.
The reasons for decision appear to be part of a growing trend in the Toronto judiciary of writing through colourful language, using a plethora of spirited commentary about the parties’ conduct and their counsel’s submissions.
For their part, counsel did not pull any punches when it came to the use of analogies. In one instance, the franchisees’ counsel drew an unfair and sharp analogy comparing the franchisor to a “big American bully” and describing its enforcement actions as “un-Canadian”. The court rejected these analogies flat-out, and implicitly sided with the franchisor.
In another vivid response to what appear to be unsubstantiated submissions from franchisor’s counsel, Myers J. refused counsel’s request to “send a message” to franchisors in response to alleged “concerns among franchisors and the franchisors’ bar” that “their business is safe in Canada”. Myers J. wrote in response:
37. I am honestly not spending much time worrying about franchisors’ views of their ability to protect themselves. I have never seen evidence suggesting that franchisors lack market power in Ontario. Nor is there any evidence before the court to suggest that the franchise sector is at all at risk because franchise agreements are not enforced by our courts.
This article is provided for information purposes only. Law Works’ Franchise Law Blog does not provide legal advice.