By: Anthony Pugh, Law Works
Editor: Ben Hanuka, Law Works
In 2659953 Ontario Inc. v. Druxy’s Franchising Inc., a November 10, 2022, decision of the Ontario Superior Court of Justice, the court refused to grant a franchisee’s motion for an interlocutory injunction restraining a franchisor from terminating its franchise agreement and sublease. The franchise agreement was operating on a month-to-month basis. In addition, the franchisee did not intend to continue operating the business, and rather intended to sell it.
The franchisee operated two franchised Williams Fresh Café locations in Brampton; one on Queen Street (which was the subject matter of the proceeding), and the other on Central Park Drive.
The franchisor, Druxy’s, alleged that the Queen St. location was in breach of the franchise agreement in numerous respects. This included health and safety obligations. The franchisor had given the restaurant very low audit scores. It gave notice that it would not renew the franchise agreement, and the term of the franchise agreement and sublease expired.
The franchisee continued operating the franchise on a month-to-month basis, to allow discussion with the franchisor about changes that the franchisor would require to grant a renewal. The franchisee refused to implement the changes and instead sought to have the franchisor purchase the business.
After a couple of months, the franchisor found out that the franchisee was not paying its employees, and that the restaurant had closed. The franchisee alleged that it had short term cash flow problems that would be remedied with new financing. The franchisor terminated the month-to-month arrangement and took over the restaurant.
The franchisor declined to purchase the restaurant due to its significant debts, including $235,000 in unpaid HST to the CRA.
The franchise agreement with respect to Central Park was not terminated and continued in force at the time of the hearing of the motion.
The franchisee did not have a strong prima facie case
The franchisee sought a wide range of relief, including relief from forfeiture of the franchise agreement, relief from forfeiture of the sublease, an order reinstating the Queen St. location franchise agreement, and order enjoining Druxy’s from interfering with the franchise business pending the determination of the issues.
The court applied the higher threshold of the first leg of the interlocutory injunction test – strong prima facie case, rather than lower threshold of serious issue to be tried. This was because the franchisee was seeking to in essence compel the franchisor to remain in the franchise agreement beyond the term of the franchise agreement. The court distinguished this from previous cases where there were still years left on the term – in those cases, the serious issue to be tried threshold applied.
Given the month-to-month term, the court held that the franchisee failed to establish a strong prima facie case.
The franchisee also claimed that the franchisor’s notice of termination was invalid – alleging that it was entitled to 10 days notice under the franchise agreement and referencing another section of the franchise agreement. The court rejected this argument, holding that the particular default – i.e., failing to operate the restaurant – was fundamental and required no notice.
The plaintiff also alleged that the termination of the franchise somehow put the other location in jeopardy but produced no evidence in support of that. The court rejected this argument.
There was no irreparable harm and the balance of convenience favoured the franchisor
The court held that the franchisee would not suffer any irreparable harm if the injunction was not granted. The evidence was that the franchisee intended to attempt to sell the restaurant to the franchisor or a third party and had no intention to continue operating it, which the court held was not in the spirit of the franchise agreement.
The franchisee also did not produce adequate evidence about its financial circumstances and ability to operate the restaurant.
On the issue of the balance of convenience, the court held that the franchisor would suffer more inconvenience if the injunction in favour of the franchisee was granted, since the franchisor was already in the process of selling the restaurant to a replacement franchisee. The franchisor had repaired and refurbished the restaurant with a demonstrated plan to have a new operator take over the franchise location. Further, the court did not believe the franchisee’s damages undertaking, as it had not produced evidence about its current financial situation.
As a result, the court ruled that the plaintiff franchisee had failed to establish an entitlement to relief from forfeiture or injunction relief and dismissed the motion.