In France v Kumon, 2014 ONSC 5890, the Ontario Superior Court determined on summary judgment that it was appropriate to imply a right of unilateral termination with reasonable notice into an oral franchise agreement between the plaintiff franchisee, Ms. France, and Kumon, the franchisor.
The circumstances giving rise to the dispute are as follows: Ms. France began as a Kumon franchisee in 1991, before Kumon required formal written franchise agreements. When Kumon introduced a standard franchise agreement in 1994, Ms. France refused to sign, believing the terms to be one-sided. Ms. France refused various further requests to sign a written franchise agreement in subsequent years; she primarily took issue with the financial terms and the location requirement. In 2009, Kumon advised it was unwilling to continue the arrangement unless Ms. France signed its standard franchise agreement, and gave Ms. France ten months to sign (after extending this deadline several times). When Ms. France continued to refuse to sign, Kumon provided 12 months’ notice of termination.
Ms. France commenced this action for breach of contract, alleging that Kumon had no right to terminate the parties’ perpetual contract.
The Court’s decision to dismiss the franchisee’s claim is notable for three main reasons:
- A provision for unilateral termination on reasonable notice can be read into a franchise agreement that is silent on term length and termination. Citing the Ontario Court of Appeal’s decision in 1397868 Ontario Ltd. v. Nordic Gaming Corp, 2010 ONCA 101, the Court noted that a contract without a fixed term or provisions for termination could be treated as either perpetual in nature, or an indefinite term contract with an implied provision for termination with reasonable notice, depending on the circumstances. Although the franchisee argued the contract was perpetual, the Court found no evidence that this was the parties’ intention. Rather, as a franchise arrangement depends on mutual trust between the contracting parties (much like an employment or partnership agreement), the Court concluded the agreement gave rise to an implied right to terminate upon reasonable notice.
- Franchisors are entitled to change their business model so long as they comply with the duty of good faith. By requiring all franchisees to operate under standard franchise agreements, Kumon was changing its business model. The Court considered this, stating:
The new business model may well have been less advantageous to Ms. France. A franchisor does not act in bad faith simply because it wants to change the business model. A franchisor does not act in bad faith simply because it insists on a uniform franchise agreement with its franchisees and will not negotiate individual agreements.
In fact, the Court noted, requiring franchisees to abide by certain common obligations “is the very nature of a franchise operation where uniformity, conformity, and standardization go to the heart of the operation, and where individuality plays no part” (citing Timothy’s Coffees of the World v. Switt,  O.J. No. 2398 (SCJ) at para 27).The Court concluded that Kumon went to great lengths to accommodate Ms. France. Kumon gave her several chances to sign the agreement over the course of several years. It assisted Ms. France in identifying a buyer when she tried (unsuccessfully) to sell her franchise after she received notice of termination. Kumon even offered to permit Ms. France to remain as a franchisee at the eleventh hour, several months after termination notice had been given, if she would sign the agreement. The Court concluded: “Kumon was not required to forbear endlessly”.
- A summary judgment motion was used to decide a novel question of law, but dismissal was subject to further submissions. The use of summary judgment continues to develop following the Supreme Court of Canada’s decision in Hryniak v. Mauldin, 2014 SCC 7. In this case, the franchisee plaintiff argued that a full trial was required for the Court to reach a decision on a novel question of law. The Court disagreed, holding that a judge should make a decision to settle a novel area of law on a summary judgment motion when it is fair and in the interests of justice to do so. The Court held there is no reason why parties’ resources and public resources should be devoted to a trial when the issue can be settled in a summary manner.
We are increasingly seeing franchise disputes resolved through summary judgment. Even if a voluminous record is required to put the necessary evidence before the court, summary judgment motions are a more expeditious and cost-efficient way to resolve disputes, where appropriate.
Notably, this case demonstrates that a summary judgment motion need not dispose of the action in one fell swoop. The Court concluded that it could imply a provision for termination with reasonable notice, but that it did not have enough information before it to determine whether 12 months – the notice period provided by Kumon – was reasonable in the circumstances (particularly given a long-standing franchise relationship with good-faith duties). As such, the Court requested further written submissions on the issue of a reasonable notice period from the parties, and dismissed the action subject to a disposition on that issue.