Franchise Agreements May Be Assigned to Another Franchisee Without Consent Upon Bankruptcy

A recent Alberta appellate decision establishes that a trustee in bankruptcy may sell a franchise agreement to a third party, in spite of objections by the franchisor, under the Bankruptcy and Insolvency Act (BIA). The Alberta Court of Appeal’s decision in Ford Motor Company of Canada Ltd v Welcome Ford Sales Ltd contains three important messages for franchisors:

  1. If a franchisee goes bankrupt, there is a risk that the trustee in bankruptcy will be able to assign the franchise agreement to a new franchisee without the franchisor’s consent.
  2. Even if a franchise agreement is expressly referred to as a contract for "personal service," it may be deemed a standard commercial agreement capable of assignment.
  3. Franchisors wishing to oppose the assignment should be prepared to marshal strong evidence to establish that the proposed assignee is not capable of performing under the franchise agreement.

In January 2010, Ford Motor Company discovered that funds had been misappropriated at one of its franchisees. On the application of one of the franchisee’s creditors, a court ordered the franchisee into receivership and held that no agreements then in place (including the franchise agreement) could be terminated without consent of the court. Ford made clear early on that it would not consent to the assignment or sale of the dealership agreement to any party. A few months later, however, a judge ordered that the trustee may nevertheless market the dealership agreement and postponed Ford’s request to terminate the dealership agreement.

The franchisee was later assigned into bankruptcy. BIA section 84.1 allows a court to assign a bankrupt’s rights and obligations under an agreement to any person specified by the court who agrees to the assignment — even without the consent of the other party to the agreement. The Bankruptcy Court later approved the trustee’s application to assign the dealership agreement to an existing Ford dealer, pursuant to section 84.1 of the BIA, over Ford’s objection. The decision was affirmed by the Alberta Court of Appeal.

The courts rejected Ford’s argument that the agreement was not assignable because it was personal in nature. Although section 84.1(3) of the BIA excludes some agreements from assignment on the basis that they "are not be assignable by reason of their nature", the courts held that parties cannot insulate a contract from assignment simply by including a clause describing the agreement as "personal." The courts found that the dealership agreement was actually a commercial one rather than a personal one that could be performed by many others. This may have implications beyond the BIA, as the contractual remedy of specific performance has also been historically denied for contracts of "personal service."

Section 84.1(4) of the BIA also required the courts to consider whether the assignee was capable of performing its obligations under the franchise agreement. In this case, Ford did not adduce any of its own evidence on this issue but, instead, attempted to argue that the there was insufficient evidence in the record to conclude the proposed assignee would be able to perform the obligations of the agreement. The courts rejected this argument. The proposed assignee had an excellent track record of operating a profitable Ford dealership elsewhere.