Ontario Court Declines to Enjoin Termination of Franchise Agreement

Ontario Court Declines to Enjoin Termination of Franchise Agreement

In the recent decision Azmoon Trading Inc. v. Caffe Demetre Franchising Corp., 2018 ONSC 2868 (“Azmoon”), the Ontario Superior Court of Justice dismissed a Franchisee’s motion for injunctive relief prohibiting the Franchisor from terminating the franchise agreement (the “Agreement”). While courts have frequently found that a Franchisee’s loss of the franchise constitutes irreparable harm, the Court in Azmoon emphasized that this franchise agreement was set to expire in three years and that damages were an adequate remedy.

Background

The Franchisor entered into the Agreement with the Franchisee which provided for two options to renew for subsequent five-year terms. Upon receiving the Franchisee’s notice to exercise the second renewal for the period of May 22, 2016, until May 21, 2021, the Franchisor took the position that the Franchisee was in default of numerous provisions of the Agreement. The Franchisor further indicated that renewal would be conditional on the Franchisee completing necessary renovations in order to meet image standards, the cost of which the Franchisee regarded as unreasonable.

Following months of unsuccessful negotiation the Franchisor served a notice of termination to the Franchisee.

The Franchisee commenced litigation alleging breach of contract and breach of the duty to act in good faith per section 3 of the Arthur Wishart Act (Ontario) (the “Act”). The Franchisee also sought a prohibitive injunction preventing the Franchisor from acting on its notice of termination.

Termination of a Franchise and the Demonstration of Irreparable Harm

A number of past decisions of the Ontario Superior Court of Justice have aided in determining when the denial of injunctive relief will lead to irreparable harm. In 1323257 Ontario Ltd. (c.o.b. Hyundai of Thornhill) v. Hyundai Auto Canada Corp., 2009 CanLII 494 (ON SC), the Court held that a franchisee forced to close its doors in the absence of injunctive relief constitutes “the most extreme example of loss of market share” and, thus, suffers irreparable harm. Later, in 1318214 Ontario Ltd. v. Sobey’s Capital Inc., 2010 ONSC 4141 (CanLII), the Court held that the lost opportunity to operate and develop one’s own business constitutes irreparable harm. 

In Azmoon, the Court found that the Franchisee would not suffer irreparable harm for the following reasons:

  • the Franchisee only had the benefit of three more years of the Agreement as there was no right of renewal beyond May 21, 2021;
  • the Franchisee had been attempting to sell the franchise for the past three years;
  • the continuity of the franchise would continue as the Franchisor was positioned to operate the franchise upon termination; and
  • the Franchisee’s financial records, coupled with the Franchisor’s intention to operate the franchise, would facilitate a simple calculation of losses if the Franchisor were ultimately found in breach of the Agreement and the Act.

In light of these factors, the Court concluded that no irreparable harm would be suffered if the injunction were denied. Subsequent damages, if any, owed to the Franchisee would be readily quantifiable in monetary terms.

The Court’s decision is a noteworthy demarcation of its past jurisprudence which will help franchisees and franchisors alike in determining when the denial of injunctive relief will not lead to irreparable harm.

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