A recent decision of the Alberta Court of Queen’s Bench — 760437 Alberta Ltd. v. Fabutan Corporation (Fabutan) — provides an important reminder to franchisors: the court may well order specific performance of a franchisee’s right of renewal despite the existence of a bitter dispute between representatives of the franchisor and franchisee.
Three key lessons emerge from the Court’s decision in Fabutan:
- Fabutan is one of the few cases in Canada where the Court has awarded a final (permanent) injunction to enforce a right of renewal in a franchise agreement. The franchisor in this case was ordered to present the franchisee with a new franchise agreement with a term of 10 years.
- Fabutan provides a cautionary tale about personality conflicts with individuals representing the franchisor and franchisee. The Court held that, despite the personality conflict and bitter personal dispute between the individuals involved, the business aspects of the franchise relationship could nevertheless continue to function. For this Court, strong evidence — demonstrating that the business aspects of the relationship were incapable of functioning in the future — was required in order to allow the franchisor to terminate the agreement and disentitle the franchisee to specific performance.
- Fabutan provides an important reminder to franchisors about how to exercise contractual discretion in the context of a right of renewal. Franchisors must be careful to exercise their contractual discretion to renew franchise agreements judiciously and not be influenced by a personal dispute, even where the franchisee has acted poorly. In the end, the Court in Fabutan was strongly influenced by the clear words of the renewal clause granting the franchisee the right to renew absent good cause.
The franchisor and franchisee were brother and sister. In the decades preceding the dispute, the franchisee had from time to time operated various franchise locations, and the agreements relating to those locations had been renewed for 10-year periods without incident. The franchisee, in her personal capacity, had also loaned money to the franchisor on numerous occasions. At the time of the events in issue, approximately $450,000 was owed to the sister by the franchisor and related companies.
The dispute originated out of an email sent by the brother to the Fabutan franchisees implying that the sister had cheated in a recent franchise sales contest. This dispute quickly escalated between the parties. Both siblings attempted to retaliate against the perceived attacks against them: the sister by demanding payment of the outstanding loans, and the brother by threatening not to renew the sister’s franchise agreement. There was evidence that other franchisees became concerned about the effect that the dispute would have on the business.
Throughout the dispute, various renewal options were presented and withdrawn by the brother as franchisor. These renewal options included various conditions that were contained only in the renewal agreement offered to the sister and not in the standard form renewals offered to other franchisees, including a requirement that the franchisee post additional security and assign its leases to the franchisor. At one point, the sister stated in an email that she "will not sign any form of agreement that you or your legal [counsel] have or will prepare." Ultimately, the franchisor purported to terminate the lease on the basis that the franchisee had damaged or discredited the franchisor. The franchise was reinstated pending determination of the renewal rights by the Court.
The Court Orders Specific Performance of the Franchisee’s Right to Renew
The Court found that the clear words of the renewal clause gave the franchisee the right to renew the agreement in accordance with the terms of the standard form of renewal in existence at the time. This right could only be defeated if there was "good cause" to terminate the agreement. The issues before the court were therefore: (i) whether any of the franchisor’s reasons for refusing to renew the agreement constituted good cause for termination and (ii) whether the renewal options proposed by the franchisor met the requirement of being the standard form of renewal agreement at the time.
In regard to the good cause requirement, the Court rejected the franchisor’s argument that it terminated the agreement out of concern that the sister had or would cause damage to the franchise’s brand. The Court held that the dispute was a family "squabble" and that both siblings had acted without concern for the effect that their actions would have on the business’s reputation. Further, the Court found that although the personal relationship between brother and sister was clearly strained, the business relationship between franchisor and franchisee was capable of continuing. There was no "loss of trust and confidence" or deterioration of the franchise relationship sufficient to justify termination. The conduct of the sister as a creditor in validly exercising her right to call loans owed by the franchisor did not constitute good cause to terminate an unrelated franchise contract.
In regard to the second issue, the Court held that by imposing uniquely onerous terms in his sister’s renewal agreement, the franchisor had failed to offer the standard form renewal of the franchise, as it was required to do under the franchise agreement. Accordingly, the franchisee’s statement that she would "not sign any form of agreement" did not constitute a refusal to execute a standard form contract. Moreover, the Court made note of the franchisor’s duty of fair dealing under Section 7 of the Alberta Franchises Act and found that the franchisor had breached its obligation (set out in Shelanu Inc. v. Print Three Franchising Corp.) to act in good faith in performance of the agreement. The unsubstantiated justifications given by the franchisor for the non-renewal, the "flip-flopping" in making and withdrawing various renewal offers, and the onerous terms of renewal imposed uniquely on the sister were all examples of the franchisor’s bad faith in the course of the negotiating the renewal.
Accordingly, the Court ordered specific performance of the renewal option on the terms of the standard form renewal in existence at the time of the dispute, which was a 10-year renewal. The fact that the sister had also acted in an inappropriate fashion by engaging in destructive communications with her brother and involving other franchisees in the dispute did not disentitle her to the equitable remedy of specific performance.