760437 Alberta Ltd. v Fabutan Corporation,  a decision of Romaine J. in the Court of Queen’s Bench of Alberta, is a cautionary case for franchisors seeking to deny a franchisee their right of renewal.  In this case, the Court ordered the franchisor to offer a renewal of a franchise agreement despite what would appear to be a complete breakdown in the franchisor-franchisee relationship.

Background

The franchise agreement in this case provided that so long as the agreement had not been terminated and the franchisee is not in default, the franchisee had the option to renew for a further five years, either on the terms of the existing agreement or the terms in the standard form of franchise agreement in use by the franchisor at that time.

In this case, the franchisor and franchisee corporations were controlled by a brother and sister, respectively.  The relationship between the siblings quickly deteriorated when the brother (the franchisor) sent a communication to its franchisees that was alleged to have been embarrassing to the sister (the franchisee).  Following the communication, the sister demanded repayment of a loan made to the franchisor, while the franchisor-brother intimated that his sister’s franchise agreement might not be renewed. 

During negotiations, the brother relied on the term of the franchise agreement which provided the new standard form of franchise agreement would apply to renewals.  On this basis he proposed various terms of renewal that were unique to his sister’s franchise.  In particular, he requested a bond be posted in lieu of a sublease of the premises.

Ultimately, the brother’s terms were rejected by the sister.  In one communication, the sister stated that she “will not sign any form of agreement that you or your legal [counsel] have or will prepare”.  On the basis of this statement, the brother gave notice of termination.

Decision

Romaine J. did not accept the brother’s characterization of the termination as having been made due to concerns about the damage to the corporate brand and ordered him to offer a renewal.  Fatal to the brother’s argument was his admission that his sister had never defaulted under her previous franchise agreements and that the franchisor had never before demanded an assignment of leases.

The brother argued that that various communications by his sister to the franchisee community had discredited the franchisor and the brand and were thus destructive of an ongoing trusting franchise relationship.  However, Romaine J. held that the argument was essentially a personal squabble and the business relationship between franchisor and franchisee could continue.

Comment

This decision illustrates the courts’ tendency to grant franchisees the right of renewal, even where relationships are strained.  An apparent breakdown in the relationship may not be sufficient to withhold renewal rights. Without a clear default under the franchise agreement, the franchisor will face an uphill battle convincing a court that the relationship should end.  These issues emphasize the importance of careful drafting of renewal provisions.