In last year’s decision in Home Instead, Inc. v. 244674 Ontario Inc., 2015 ONSC 7630 (the Injunction Decision), Justice Myers of the Ontario Superior Court granted franchisor Home Instead’s injunction to terminate two “rogue” franchisees for their deliberate violation of the terms of their franchise agreements, and in his subsequent costs decision in Home Instead, Inc. v. 244674 Ontario Inc., 2016 ONSC 255 (the Costs Endorsement), fixed Home Instead’s costs on the motion at a substantial indemnity level. These decisions are significant in that they provide guidance on how a court may approach competing claims of irreparable harm in the context of the termination of a franchise agreement and reinforce a franchisor’s responsibility to take steps to maintain and protect the integrity of its franchise system.

Background

Home Instead is a franchised senior care business. In this case, two franchisees operated separate franchise units in common ownership, running a separate additional business from one of the franchisee’s offices. Home Instead’s franchise agreements and policies specifically precluded these activities, and the franchisees blatantly tried to conceal their common ownership from Home Instead. Home Instead brought an injunction to enforce its termination of the franchisees’ agreements, and the franchisees brought a reciprocal injunction in an attempt to prevent the termination.

The Injunction Decision and irreparable harm analysis

In the Injunction Decision, Justice Myers held that both sides had successfully shown that they would suffer irreparable harm if denied injunctive relief. He held that the franchisees would lose their livelihood and investment in the business as well as the “personal value of building one’s own enterprise” and “the dignity loss on termination for breach.” However, he further held that due to the inherent nature of the franchisor’s business it must protect its brand unremittingly in the age of digital communication and social media where “one’s business can be crippled by an otherwise seemingly small matter.”

In weighing irreparable harm, and in the face of the franchisees’ clear violation of the terms of the franchise agreement, Justice Myers granted the franchisor’s injunction finding that the prospective harm to the franchisor of the continued operation of these “rogue” franchisees outweighed any prospective harm that would be suffered by the franchisees in losing their businesses. Notably, in his consideration of irreparable harm, and relying on the decision of Justice Perrell in Quiznos v. 1450987 Ontario, 2009 CarswellOnt 2280, Justice Myers held that the franchisees’ lack of any meaningful ability to fulfill a damages award was a factor that weighed in favour of a finding for the franchisor.

Justice Myers held for the franchisor and ordered the franchisees to immediately cease all business operations.

The Costs Endorsement

In the Costs Endorsement, Justice Myers fixed Home Instead’s costs on the motion on a substantial indemnity basis in the amount of $200,000. In his analysis on costs, Justice Myers relied on an indemnity in favour of the franchisor in the franchise agreement, noting that, while franchise agreements are typically contracts of adhesion, “indemnity for costs is an industry standard,” and that such costs are “a normal incident of becoming a franchisee.”

Implications and practical considerations

The Injunction Decision demonstrates a franchisor’s obligation to its greater system and franchisee network to actively monitor franchisee performance, and enforce termination rights against those who fail to meet their obligations pursuant to the franchise agreement. The Court’s affirmation of this behaviour is shown in its generous costs award in the Costs Endorsement, which also provides some assurance that franchisors may be able to rely on indemnity clauses in their franchise agreements for the recoupment of their legal fees in enforced terminations.