The Ontario Superior Court of Justice in 1318214 Ontario Limited et al v. Sobeys Capital Incorporated granted an interlocutory injunction, restraining Sobeys from terminating franchise agreements and taking possession of the franchisees’ stores; and requiring the franchisees to comply with the franchise agreements while the injunction is in effect and to not withdraw any further amounts from their “Price Chopper” businesses or bank accounts for legal and/or accounting fees without the prior order of the Court.

The Facts

The dispute arose in May 2009 when Sobeys delivered its 2010 pro formas and the franchisees formed the “Chopper Grocery Owners’ Alliance” to voice their concerns. There were some meetings but the issues remained unresolved. Sobeys meanwhile discovered that contrary to the terms of the operating agreements (the Operating Agreements), the franchisees were withdrawing in excess of $2,000 per year for legal fees. Prior to March 29, 2010, each of the franchisees had withdrawn approximately $27,000 for legal and accounting fees. On March 29, 2010, each of the franchisees transferred $55,000 for a total of $385,000 out of their accounts to their lawyers. Sobeys issued notices of default (the Notices) almost at the same time that the franchisees filed a Statement of Claim regarding the Price Chopper franchise system. Sobeys said that failure to pay all monies in excess of $2,000 by April 12, 2010 would result in termination of the Franchise Agreements and Sobeys’ repossessing the stores.

Interlocutory Injunction Test

The RJR-MacDonald Inc. v. Canada (Attorney General), [1994] 1 S.C.R. 311 test for an interlocutory injunction has three parts. A party seeking an injunction must satisfy the court that:

  1.  there is a serious issue to be tried;
  2.  they will suffer irreparable harm if the injunction is not granted; and
  3.  the balance of convenience lies in their favour.

Serious Issue to be Tried

This first stage of the test requires only a preliminary examination of the merits and is satisfied so long as the moving party shows that its claim is not frivolous or vexatious.

Madam Justice Conway found the following three serious issues relating to the validity of the Notices and Sobeys’ right to terminate the Franchise Agreements: (i) whether the franchisees were in default under the Operating Agreements by using funds, without Sobeys’ consent, to fund the litigation against Sobeys; (ii) whether Sobeys had breached its duty of good faith at common law and under the Arthur Wishart Act (Franchise Disclosure), S.O. 2000, Chap. 3 (the Act) in issuing notices of termination of the franchisees’ franchise agreements; and (iii) whether Sobeys was interfering with the right to associate under section 4 of the Act.

Regarding the Operating Agreements, the franchisees asserted that if the clause prohibiting the withdrawal of more than $2,000 a year for legal fees was interpreted as restricting them from retaining counsel to sue Sobeys, it would effectively preclude the franchisees from asserting or enforcing their rights against the franchisor and would grant Sobeys immunity from franchisee suits. Justice Conway concluded that there was a serious issue as to the proper interpretation of the clause, its scope and enforceability.

Further, Justice Conway found that the fact that the Notices were issued around the same time as the Statement of Claim and that there were previous instances of Sobeys permitting franchisees to incur legal fees in excess of $2,000 where the claims were not against Sobeys, raised a serious issue to be tried as to whether Sobeys was acting in good faith when it issued the Notices. The franchisees, relying on the recent Ontario Court of Appeal decision 40531 Ontario Limited v. Midas Canada Inc, 2010 ONCA 478 (Midas), submitted that by restricting their access to funds for legal fees and purporting to terminate the Franchise Agreements for the withdrawal of funds in excess of $2,000, Sobeys was interfering with their statutory right of association. Justice Conway noted that this case was a collective effort of the franchisees to enforce their rights against Sobeys and found that there was a serious issue to be tried as to whether, in breach of section 4 of the Act, the issuance of the Notices and proposed terminations amounted to an interference with the franchisees’ ability to pursue collective action.

Irreparable Harm

Irreparable harm means harm that cannot be quantified in monetary terms and where a termination of a franchise is concerned, can include loss of business, profits, reputation and goodwill.

Sobeys tried to argue that any damages suffered by the franchisees could be quantified in monetary terms on account of actual operating results being available when it took over the stores. Justice Conway, however, found that if an injunction was not granted, the franchisees would lose their family businesses they had purchased, operated and expected to develop over the franchise term. Even though Sobeys had offered to waive the non-competition clause in the Franchise Agreements and to forego enforcing its security on the franchisees’ homes, Justice Conway found that the franchisees would likely become employees of another store, rather than operating their own businesses, and that this change was not compensable in damages.

Balance of Convenience

This part of the injunction test requires a determination as to whether the moving party will suffer more if the injunction is not granted than the responding party will suffer if the injunction is granted. Justice Conway found that the balance of convenience clearly favoured the franchisees. Whereas the franchisees would lose their family businesses, their employment and future prospects for their stores, the main inconvenience to Sobeys was that funds had been withdrawn for legal fees when perhaps they should not have been. Such harm to Sobeys could be addressed by restricting the franchisees from withdrawing any more funds until the termination issue had been decided.

Costs

In a separate endorsement at 2010 ONSC 4984, Justice Conway awarded costs of $55,000 to each of the franchisees, payable by Sobeys within 30 days. Her Honour referred to the earlier decision of Erinwood Ford v. Ford Motor Company of Canada Limited, 2005 CanLII 23333 (ON. S.C.) in which costs were awarded to a car dealership who obtained an injunction to restrain termination of the dealership pending trial, and found that the same factors of inequality in strength of position, the lack of urgency in terminating the Franchise Agreements prior to a court ruling, and the inevitability of an injunction motion given what was at stake for the franchisees, were present.

Conclusion

Sobeys is a good example of how a court will react to what appears to be a tactical termination of a franchisee. Franchisors should be careful when exercising termination rights and ensure that termination is not capricious, arbitrary, or self-interested. Terminations that rely on the strict wording of an agreement but appear to have a collateral purpose will be strictly scrutinized by the courts. Even though Sobeys may limit tactical terminations, itshould not prevent franchisors from terminating franchisees for material breaches of franchise agreements.

Sobeys is also significant because it is a group franchise action. The franchisees’ collective action against Sobeys enabled them to effectively rely not just on the frequently pleaded common law and statutory duty of good faith and fair dealing but also on the statutory right of association. As a result of the recent appellate decision in Midas, as applied in Sobeys, franchisors should expect that section 4 of the Act will receive further traction in future franchise disputes. Section 4, like section 3, provides the franchisee with a right of action in damages against the franchisor or franchisor’s associate.