9144-5593 Québec Inc. v. Kia Canada Inc., J.E. 2010-552

In July 2004, Kia Canada Inc. (the "Franchisor") informed 9144-5593 Québec Inc. (the "Franchisee") that it would authorize the Franchisee to open a Kia dealership in Laval, subject to compliance with certain terms and conditions, notably the acquisition of a permanent site and the construction of the dealership building before October 2005 (the "Agreement"). However, no official dealership agreement was ever signed.

In May 2005, exclusive rights to operate in the territory of Laval were granted to the Franchisee from October 1, 2005 to September 30, 2007, so as to allow the construction of the new dealership, which was scheduled to be completed in October 2005. The deadline for the construction of the dealership was delayed three times. By mid-September 2005, the construction had not yet started and the transaction for the purchase of the land on which the dealership was supposed to be built was not yet been completed.

On September 30, 2005, the Franchisor requested the Franchisee to provide proof of unconditional financing of the dealership by no later than October 15, 2005, failing which the Franchisor would rescind the Agreement. On October 17, 2005, the Franchisor rescinded the Agreement since the Franchisee failed to fulfill its obligations under the said Agreement. The Franchisee sued the Franchisor for damages.

Decision

The exclusivity rights granted to the Franchisee by the Franchisor were in consideration of the cost of construction of the dealership building. In the Court’s opinion, when the Franchisor rescinded the Agreement, the Franchisee was unquestionably in default of its obligation under the Agreement and the Franchisee could not have cured his defaults within a reasonable delay. Considering the delays in the construction schedule, the exclusivity that had been granted was no longer justified.

The Court considered contract law which prevents the abuse of rights but does not render moot the exception for non- performance, nor does it allow a party to demand that the other respect its obligations while that party is itself in default of its own obligations. A person does therefore, not, abuse its rights when rescinding an agreement in the case of the non-performance of the contracting party’s obligations. However, at no time can a minor case of non-performance be used as a pretext to justify a unilateral rescission.

The Court concluded that when the Franchisor clearly warned the franchisee that the contract would be rescinded if the latter failed to respect its obligations, and given that the non-performance was nevertheless ongoing, the rescission result from the negligent behaviour of the Franchisee. The attitude of the Franchisee undermined the relationship of mutual trust and the spirit of collaboration that must prevail between a Franchisor and a Franchisee. This reasoning applies especially when the Franchisee is in default of its obligations, as in this case, and an exclusivity right was granted by the Franchisor in consideration of the said obligations.

Given the circumstances of this case, the Court concluded that the Franchisor did not abuse its right to rescind the Agreement nor did it exercise same in an inopportune way.