In the recent Ontario Superior Court of Justice decision in Agribrands Purina Canada Inc. v. Kasamekas, the Court sanctioned a distributor for taking active steps to undermine the contractual territorial exclusivity of one of its dealers. Although the decision does not expressly involve franchises, it serves as a serious warning to franchisors to ensure that their franchisees’ territorial rights are respected.

In the case, the distributor, Agribrands Purina Canada (Purina), entered into a distribution agreement with one of its employees (Kasamekas). That employee set up a company called Raywalt in order to operate the dealership, which dealt in livestock and pet feed. Raywalt’s dealership was set up in order to fill the void left by Purina’s termination of a very successful supplier, Ren’s Feed. The Court found that it was Purina’s original intention to have Raywalt service the Purina customers in a territory that Ren’s Feed used to and continued to operate in.

The Court found that although the dealership agreement between Purina and Raywalt did not contain express language regarding exclusivity of territories, the Court found that the intentions of the parties coupled with contract’s language concerning a “primary market area” constituted a grant of exclusivity.

Despite this exclusivity, from the beginning of the relationship between Purina and Raywalt, Purina continued to supply feed to Ren’s Feed, either directly or indirectly. The indirect method of supply was through sales to another dealer, McGrath Farms, who in turn sold the feed to Ren’s Feed at a de facto wholesale price. The Court found that “[t]he evidence in its totality shows that Purina was going to do whatever it took to ensure the success of its primary objective [namely to maximize distribution of Purina feed products in the disputed area], whether those actions damaged Raywalt or not.” Raywalt’s dealership quickly failed, and the Court found not only that Purina breached the exclusivity provisions of the distribution agreement, but that Raywalt’s business would have succeeded had the agreement been respected. Raywalt was awarded significant damages resulting from the loss of its business. Further, Raywalt was awarded punitive damages against Purina. The Court expressly condemned Purina’s conduct, commenting that “an award of punitive damages ought to be made against Purina to serve the rational purpose of delivering the simple message that good faith, promises of good faith, and an underlying foundation of business efficacy continue to be what our law relies upon as the cornerstone of upholding and enforcing contractual promises.” The Court also declined to allow Purina to enforce security agreements against the principals of Raywalt, stating that “it would be unconscionable to permit to collect the amounts it seeks to recover,” as “our law does not allow someone to take advantage of his/her/its own wrongful conduct.”

Interestingly, the Court also found that there was a civil conspiracy between Purina, Ren’s Feeds and McGrath Farms and awarded damages against those parties. As such, both franchisors and franchisees should be careful of avoiding conduct that knowingly undermines the contractual exclusivity provided in other franchisees’ franchise agreements.