In franchise terminations, franchisees may seek to rely on equitable relief such as relief from forfeiture or injunctions to prevent the termination of their franchise agreements and subleases. A recent decision of the Ontario Superior Court of Justice provides some helpful guidance on the limitations of such attempts to affect the parties’ contractual rights.
Specifically, in 2659953 Ontario Inc. v. Druxy’s Franchising Inc. et al, 2022 ONSC 6356, the Ontario Superior Court of Justice dismissed a plaintiff franchisee’s motion for relief from forfeiture and interlocutory injunctive relief seeking to reinstate a terminated franchise agreement for a Williams Fresh Café in Brampton, Ontario.
The Court found that the franchisee had failed to meet any of the three branches of the test for interlocutory injunctive relief. The Court considered the franchisee’s rights in the context of the franchise being in an overholding position on an expired month-to-month franchise agreement. When it was within the franchisee’s power to renew the expired franchise agreement, the franchisee had chosen not to renew. This, coupled with the fact that it was undisputed that the franchisee had no intention of continuing to operate the franchise as a going concern post-reinstatement, ultimately led the Court to decide that reinstating the franchise would not keep “with the purpose and spirit of the franchise agreement.”
Factual Background
The plaintiff franchisee originally entered into two franchise agreements with the defendant franchisor, Druxy’s Franchising Inc. (Druxy’s). Pursuant to the franchise agreements, the franchisee operated two Williams Fresh Café locations. The franchisee had also entered into a commercial sublease with Druxy’s as the sublessor of the business premises of one of the franchise locations (the First Franchise).
In the summer of 2022, Druxy’s terminated the First Franchise due to alleged franchise agreement breaches. The breaches included financial and operational breaches, health and safety breaches, and the franchisee’s failure to operate the franchise in accordance with the required hours of operation. At the time of the franchisee’s motion, the second franchise location was still in operation.
Druxy’s issued two notices of default to the franchisee in August and December of 2020 in respect of the First Franchise and then terminated the franchise agreement.
The Franchisee Cannot Meet the Test for Relief from Forfeiture or an Interlocutory Injunction
The franchisee sought relief from forfeiture and an interlocutory injunction by way of orders, to:
- reinstate the franchise agreement;
- enjoin Druxy’s from interfering with the plaintiff’s franchise business pending determination of the franchisee’s main action against Druxy’s in respect of the termination; and
- alternatively, provide relief to the franchisee against re-entry by the franchisor and granting relief against forfeiture with respect to the leased premises subject to the terminated franchise agreement.
Justice Daley declined to grant any of the relief sought by the franchisee and dismissed the motion for the following reasons.
Mandatory Injunction and Strong Prima Facie Case
In assessing the case, Justice Daley considered the well-established RJR-MacDonald Inc. v. Canada (Attorney General) test for an interlocutory injunction. At the first stage of the test, rather than applying the lower standard of “serious issue to be tried,” the Court applied the stricter “strong prima facie case” standard. The Court confirmed that where an interlocutory injunction has the effect of compelling a party to remain in a commercial agreement during trial, the injunction constitutes a mandatory injunction, thus justifying imposing a higher standard in the RJR test.
The Court noted that the franchisee had been operating the First Franchise location on a month-to-month basis since early 2022, having chosen not to engage its rights under the lease and franchise renewal provisions. The original franchise and lease agreements had long since expired at the time of the motion, and, therefore, in seeking renewal of the franchise agreement, the relief sought was not contemplated by the terms of the relevant contract. This weighed heavily in favour of the application of the stricter “strong prima facie case” standard.
The Purpose and Spirit of the Agreement
The Court considered the undisputed evidence that, should the First Franchise be reinstated and access to the premises returned, the franchisee had no intention of continuing operations of the Williams Fresh Café. The franchisee’s only intentions were to refurbish and sell the operation, either to the defendant or a third party.
This evidence, coupled with the sparse financial evidence demonstrating the ability of the franchisee to maintain the First Franchise as a going concern following any reinstatement, led the Court to find that the Franchisee’s case had failed the second stage of the RJR test. Allowing the First Franchise and lease agreements to be reinstated just for the operation to be sold directly thereafter was “not in keeping with the purpose and spirit of the franchise agreement.”
The Franchisee Could Not Meet The Injunction Test
In assessing the test in its entirety, Justice Daley held that (a) the franchisee had failed to demonstrate that it had a strong prima facie case in respect of reinstatement, (b) the franchisee could not establish irreparable harm, and (c) the balance of convenience favoured Druxy’s. In respect of the balance of convenience, the Court noted that following expiry of the original franchise agreement and termination, Druxy’s had retaken possession of the premises. Druxy’s proceeded to repair and refurbish the premises, and at the time of the motion, had plans to install a new operator.
In summary, the decision in this case provides some support for franchisors who seek to terminate defaulting franchisees. Where the franchisee is simply engaging in litigation for the purpose of improving its leverage or negotiating position (as opposed to truly seeking to reengage in the business), there may be judicial skepticism in granting relief from forfeiture or injunctive relief. Injunctions are inherently fact-dependent, but this case can serve as guidance for the test to be met for a franchisee to stall what appears to be a valid termination.