Franchisors who pursue interlocutory injunctions to protect their franchise systems should get some comfort from the Ontario Divisional Court’s dismissal of the franchisees’ motion for leave to appeal in Bark & Fitz Inc. v. 2139138 Ontario Inc et. al.
In Bark & Fitz, the franchisor sought to enjoin 17 franchisees from breaching their franchise agreements by refusing to accept core products, failing to pay advertising and marketing fund contributions and royalties, and from terminating their franchise agreements and continuing independent operations. The franchisees, on the other hand, claimed that the franchisor’s changes to products and inventory, alleged misuse of the advertising and marketing fund and alleged failure to remit rebates and imposition of delivery charges deprived them of the benefit of the franchise system and therefore amounted to a fundamental breach of their franchise agreements.
The motions judge granted the injunction in part, and in doing so made some important statements with respect to the franchise relationship between the parties. The motions judge held that the even if the franchisees’ could prove their claims related to the franchisor’s changes to core products, rebates and discounts, those claims did not amount to fundamental breach of the franchise agreement by the franchisor, and did not deprive the franchisees of substantially the whole benefit of the franchise relationship, because the franchisees continued to operate with the brand, logo, marketing recognition and exclusive territory. The motions judge also held that the franchisees’ failure to pay royalties required under the franchise agreement caused irreparable harm to the franchisor which depended heavily on revenue from royalties to sustain its operations. Additionally, the motions judge stated that the franchisor’s “inability to maintain the advertising, marketing and quality control through core products creates a risk to the good will and reputation” of the franchise.
The franchisees sought leave to appeal the order of the motions judge on the basis that the order was made against individuals – the principals of the franchise – who did not sign franchise agreements and that the order was made against certain franchisees who had rescinded their franchise agreement before the injunction motion was heard, who therefore should not be subject to the non-competition clause in the franchise agreement. Denying leave to appeal, the Divisional Court held that there was a fully executed franchise agreement between the franchisor and the corporate entities, and as principals of those corporate entities, the individuals were indeed bound by the non-competition clause of the franchise agreement.
Franchisors who pursue injunctions to enforce their franchise agreements should also take note of the costs endorsement in Bark & Fitz. The form of franchise agreement applicable to five of the franchisees provided for an award of substantial indemnity costs in the event of an injunction. The franchisor asked for its costs on a substantial indemnity basis, payable within 30 days. The court determined that although the franchisees’ conduct with respect to refusal to pay royalties was “egregious,” the amount claimed by the franchisor was not fair and reasonable. Among the factors cited by the court for its decision to award a significantly reduced amount of costs included the fact that the franchisor was not entirely successful in obtaining an injunction, and that the franchisor’s conduct in relation to alleged withholding of rebates and changes to core products raised serious issues to be tried and appeared to have been a significant cause of the breakdown in the franchise relationship. Additionally, the court expressed sympathy for the franchisees in exercising its discretion to order costs to ultimately be paid by the successful party at trial, rather than within 30 days as requested by the franchisor. The court stated that although the franchisor was required to seek an injunction, “serious issues outstanding affecting the financial viability of the franchisees and relating to the alleged breaches by the franchisor that contributed to the breakdown in the relationship,” made it unfair to require the franchisees to pay costs pending trial.