In Eggspectations Inc. & al. v. 9157-6561 Québec Inc. & al., Eggspectations Inc. (Eggspectations) brought a motion before the Québec Superior Court seeking a safeguard order – a discretionary and exceptional remedy at the disposal of the court in addition to its powers to issue injunctive relief - against 9157-6561 Québec Inc. (the franchisee). The franchisee operated a breakfast restaurant within Eggspectations’ franchise system. In the summer of 2008, the franchisee had stopped paying royalty fees, advertising contributions and rent arrears. It claimed that it was justified in doing so due to Eggspectations’ opening of another franchise restaurant nearby, allegedly within the franchisee’s market area, and due to Eggspectations’ alleged failure to provide the franchisee with the services contracted for under the franchise agreement. As for its failure to pay the rent arrears, the franchisee contended that it was suffering from financial difficulties as a result of the departure of two of its former shareholders.
Eggspectations filed suit seeking numerous remedies against the franchisee. It later brought this motion in light of the continuing deterioration of its relationship with the franchisee and concern over damage to its reputation and goodwill while the case was pending. The safeguard order requested by Eggspectations sought the following for the duration of the proceedings:
- the payment into court of arrears in rent, royalty fees and advertising contributions;
- the weekly payment into court of future amounts for such rent, royalty fees and advertising contributions on a weekly basis;
- the payment of all accounts of the franchisee's suppliers;
- the appointment of a third party to manage and operate the restaurant in lieu of the franchisee;
- the full compliance with the terms of the franchise agreement; and
- a declaration that any failure to deposit the sums in question in court in accordance with the above would result in the franchisee being foreclosed from contesting the merits of the main action and allowing Eggspectations to proceed by default thereunder.
To issue the order – and similar to the applicable test for a provisional injunction – the court had to be satisfied that Eggspectations had demonstrated an apparent right, irreparable damage and urgency. The franchise agreement and sub-lease agreement were, in and of themselves, deemed sufficient by the court to establish Eggspectations’ clear rights concerning essentially all the orders sought. The court held that Eggspectations’ allegations relating to “poor service, lack of cleanliness and generally unacceptable operational practices” were sufficient to support Eggspectations’ fear of irreparable harm, given the critical importance of reputation and goodwill for a restaurant chain. The court further pointed out that in disputes relating to the payment of amounts over time (such as rent and franchise-related fees), irreparable harm could also result from allowing the alleged debt to continue to grow over the duration of the lawsuit as the defendant could ultimately find the financial burden impossible to bear in the event that it were found liable. As to urgency, the court made an important distinction between the notion of urgency in the context of a safeguard order and in the context of a provisional or interim injunction. The court indicated that the issuance of a provisional or interim injunction required a more pressing and immediate form of urgency. In essence, the court pointed out, provisional and interim injunctive relief is meant to enable a party to react “quickly before an impending, irremediable act occurs.” To the contrary, the court continued, the presence of an emergency is not as crucial for the issuance of a safeguard order:
It appears to be more a question of whether it makes good sense, in the overall context of events, for the Court to intervene at this point in time, assuming that there has been no obvious negligence on the petitioner's part to act earlier.
In other words – and as is confirmed by Québec case law – the notion of “urgency” in the context of a safeguard order is tied to the necessity of such order being issued so as to preserve the rights of the parties while proceedings are ongoing.
That being said, and even if the urgency test is not as strict as in relation to the issuance of a provisional or interim injunction, a plaintiff must still act with dispatch in seeking such an order and may not sit on its rights. In the present case, filing for the issuance of a safeguard order almost two months after the start of the case was held to meet the urgency requirement. (It is doubtful that the urgency requirement for the issuance of a provisional or interim injunction would have been satisfied in this case, which may explain (in part) why a safeguard order – and not an injunction – was sought in the first place). The court also stated that urgency resulted, in and of itself, from the franchisee’s failure to meet the operational standards required by the franchise agreement, given the damage that such failures could cause to the whole franchise system and Eggspectations’ brand.
Once the court came to the conclusion that the three criteria for the issuance of a safeguard order – an apparent right, irreparable damage and urgency – had generally been met, it then applied them separately to each specific requested order sought. The court decided that the request to have a third party appointed to manage and operate the restaurant in lieu of the franchisee did not seem urgent enough at this stage, given that there was insufficient proof of actual problems or complaints in the recent past. The court reached the same conclusion concerning the request to force the franchisee to pay and stay current with its suppliers’ accounts, since all of the franchisee’s suppliers were on a COD basis. With respect to the requested order to force the franchisee to pay past royalty fees, advertising contributions and rent, they were (not surprisingly) denied; Québec case law consistently holds that safeguard orders are not meant to allow a plaintiff to execute a favourable judgement before it is even rendered.
The court, however, ruled in favour of Eggspectations concerning ongoing amounts coming due from time to time; it was important, in the court’s view, to re-establish a balance of interests between the parties so as to encourage them to resolve their dispute quickly. It ordered the franchisee to deposit, in court or in trust and on a weekly basis, fifty percent of amounts coming due from time to time. The court held – as had been requested by Eggspectations – that any failure to deposit such sums would result in the franchisee being foreclosed from contesting the merits of the main action and Eggspectations being allowed to proceed by default. The court further ordered the franchisee to pay all future monthly rent amounts as they became due.
In addition, the court ordered the franchisee to provide all financial information required by the franchise agreement on a weekly basis, as well as any and all notices of default or of any failure to comply with any law, by-law or regulation within two days of receipt thereof. It also ordered the franchisee to abide by the obligations stipulated in the franchise agreement pertaining to the operation of the franchise. Finally, the court decided that the orders should remain in force until February 9, 2009 – on which date a hearing was scheduled between the parties – and that the orders be executed notwithstanding any appeal.
In light of the above, franchisors should remember that in Québec, safeguard orders are a powerful tool to manage their damage exposure while legal proceedings are ongoing with a franchisee. Special attention should be placed on the fact that, in certain cases, a safeguard order may even be obtained where a provisional or interim injunction might not have been possible.