In two companion decisions, France v. Kumon, 2014 ONSC 5890 and France v. Kumon Canada Inc., 2014 ONSC 7181, the Ontario Superior Court implied a right of unilateral termination with reasonable notice into an oral franchise agreement and then drew on commercial and employment law principles to determine the length of that reasonable notice period. This is the first case in Ontario adjudicating on a reasonable common law notice period in a franchise context.
In France v Kumon the Court sets out a list of factors to be considered in determining a reasonable notice period on the termination of a franchise agreement in the absence of applicable contractual terms. While the Court drew on the approach to determining a reasonable notice period used in employment law cases, the Court clearly differentiated employment situations from franchise situations in holding that notice periods in franchise relationships must be discounted to reflect that a franchisee, unlike an employee, is an independent contractor and its relationship with the franchisor is not a fiduciary one.
Key Facts and Background
The defendant franchisor, Kumon Canada Inc. (Kumon) and its associated companies operate an after-school math and reading franchise. The plaintiff franchisee, Ms. France, was a long-time Kumon franchisee, who had operated her business for nearly 20 years pursuant to an oral franchise agreement. In 1994, Kumon decided to put all of its franchise agreements in writing. Ms. France did not like the proposed terms of the written agreements and refused to enter into one with Kumon. In 2009, and following a prolonged back and forth with Ms. France on this issue, Kumon gave 12 months’ notice that her franchise would be terminated. Kumon then terminated her franchise in December 2010, following the expiry of the notice period provided.
Ms. France sued Kumon for damages, arguing that Kumon’s purported termination breached the terms of their oral contract.
In its first decision, France v. Kumon, the Court held largely for Kumon, and implied a term into the parties’ oral franchise agreement which allowed Kumon to unilaterally terminate the agreement with reasonable notice. In its second decision,France v. Kumon Canada Inc.,the Court determined the reasonable notice period by drawing on both commercial and employment law principles. The Court awarded Ms. France an additional six months of notice, fixing the reasonable notice period at 18 months.
First Decision - Implied Termination Provisions in a Franchise Agreement
The Court found that this was an appropriate case in which to imply a right of unilateral termination with reasonable notice into the oral franchise agreement. The Court held that, generally, it must look to the specific terms of a contract, using basic contractual interpretation principles, to determine whether a termination right can be implied. However, the Court noted that a franchise agreement may attract a different reasonable notice period to give effect to the duty of good faith.
On the facts, the Court found that the oral franchise agreement was not a perpetual contract, as neither party acted as though it were. Moreover, in every version of its written franchise agreement Kumon sought to impose finite terms on its franchisees which evidence suggests that it never intended to enter into perpetual contracts.
Second Decision – Length of Reasonable Notice Period
The Court noted that the question of reasonable notice upon termination of a franchise agreement was a novel issue and turned to other areas of the law for guidance. The Court rejected Ms. France’s position that the notice period should be determined in reference to the proposed three-year term set out in Kumon’s written agreements on the basis that since Ms. France had declined to sign any written agreement, such agreements had no bearing on their franchise relationship. The Court instead held that the parties continued to be bound by the terms of their oral agreement.
In determining the applicable notice period for the termination of their oral agreement, the Court relied both on principles drawn from commercial law and from employment law and the reasonable notice given to employees upon termination of employment. On the one hand, the Court held that a franchisee is more like an employee than it is a distributor with significant commercial power. However, on the other hand, the Court held that it ought not provide the entire reasonable notice period that an employee might expect because a franchisee is in effect an independent contractor who bears a larger portion of any associated risk in the franchise. In attempting to define the applicable midway point between a reasonable notice period for an employee and a reasonable notice period for the termination of a commercial distribution agreement the Court set out the following factors for consideration:
(a) the length of the relationship;
(b) whether there was a history of oppressive conduct or bad faith on the part of the franchisor;
(c) whether there was a history of poor performance by the franchisee;
(d) whether the parties acted in good faith throughout the relationship;
(e) whether there were any violations of the Arthur Wishart Act; and
(f) the size and relative power of the franchisee.
In this case, the Court considered: 1) the 20-year span of the parties’ franchise relationship 2) the fact that Ms. France had performed her franchise duties faithfully throughout the relationship; and 3) the fact that Kumon had always acted in good faith towards the plaintiff, particularly so throughout its decision to terminate the franchise. On these facts, the Court held that Ms. France might have been entitled to somewhere between 20 and 24 months’ notice in the employment context. However, the Court then made it clear that such assessment had to be reduced in order to reflect the fact that a franchisee is not in a fiduciary relationship with its franchisor. It therefore discounted its notice period assessment to 18 months.
Although the Court in this case declined to provide a firm “rule of thumb” in respect of determining a reasonable notice period in the context of a franchise agreement, it does provide some guidance to franchisors and franchisees wrestling with this issue. While it is a relatively rare circumstance that a franchise agreement does not contain a specific provision with respect to notice, or process surrounding termination, the Court’s analysis is helpful where such situations may arise. These decisions also provide a useful tool or benchmark for a franchisor in assessing potential risk in certain exit situations and in negotiating exit terms with franchisees in situations where there is either no written franchise agreement, or where the terms of a franchise agreement are ambiguous or may be unenforceable.