Overview

In the recent decision Dairy Queen Canada, Inc. v. M.Y. Sundae Inc., 2017 BCSC 358, the Supreme Court of British Columbia upheld a Mutual Cancellation and Release agreement in the context of a franchisor-franchisee relationship. The decision confirms that, absent evidence of duress or unconscionability, a franchisor is permitted to take advantage of a superior bargaining position, and obtain an enforceable release when a franchisee is in default. The decision only considered common law principles as opposed to franchise legislation. The Court also awarded damages for the tort of passing off against a franchisee who refused to cease operations after termination.

Background

The Franchisor entered into a standard franchising agreement with the defendant franchisees. Following several months of unpaid franchise fees, a long history of failed cleanliness inspections, and other breaches of the franchisor’s standards and specifications, the franchisor decided to terminate the franchising relationship.

Instead of terminating immediately, however, the franchisor offered the franchisee the opportunity to enter into a Mutual Cancellation and Release agreement. Under the agreement, the franchisee was provided with several months in which to sell its franchise to a new buyer. In exchange the franchisee agreed to continue adhering to the system standards, and released all claims past and future against the franchisor.

However, the franchisee did not find a new buyer in the allotted time and the franchisor proceeded with termination. Notwithstanding this termination, the franchisee continued to operate the branded store for several months before de-branding.

The franchisor commenced litigation, seeking, among other things, damages for the tort of passing off. The franchisee counterclaimed on the basis that, among other things, the franchisor’s termination of the franchise agreement constituted a breach of the duty of good faith and fair dealing, and that the Mutual Cancellation and Release agreement was signed under duress.

Duress, Unconscionability, and Enforcing Franchise Cancellation and Release Agreements

The Court held that the franchisee had validly released the franchisor from all prior claims against it, including the pleaded allegations in the counterclaim. So long as the Mutual Cancellation and Release Agreement was held to be valid, then all of the franchisee’s counterclaims were released. The Court held that there was no evidence that the franchisee signed the agreement under protest or sought additional time to seek legal advice. There was no evidence of duress or coercion.

Moreover, drawing on the Supreme Court’s test in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4 the Court noted that release and exclusion clauses will be enforced despite inequality of bargaining power, so long as there is no evidence of duress or unconscionability.

The agreement was not unconscionable at the time it was negotiated – not only was the franchisee’ evidence inconsistent, but that evidence did not establish duress or unconscionability. The Mutual Cancellation and Release Agreement actually provided the franchisee with an opportunity to sell its franchise, which put it in a better position than the underlying franchise agreement. In this sense the provisions were not substantively unfair.

The Tort of Passing Off – Be Careful About Ultimatums

The Court also granted the franchisor’s claim for passing off.

The tort of passing off occurs when (1) the trade name of one entity is distinctive, recognized, and enjoys reputation and goodwill in its relevant field; (2) when a second entity misrepresents itself so as to lead the public into confusion about whether the second entity is connected to the first entity; and (3) the first entity suffers damages regarding lost business opportunity due to the second entity’s misrepresentation.

In the Court’s view, factors 1 and 2 were a foregone conclusion. The franchisor had a recognizable brand and the franchisee had continued to operate using the distinctive features of the brand. Anyone entering the premises would have perceived the store to be part of the franchise system.

However, what is noteworthy is that the Court did not agree with the time period for which the franchisor claimed damages. It was undisputed that the franchisor terminated the franchise agreement a franchise on January 8, 2014 and that the franchisee continued to operate as such until April 8, 2014. However, because the franchisor sent a letter to the franchisee in early March, advising that the store must be “completely de-identified on or before March 10, 2014”, the court found that the franchisor could not seek damages for the earlier period.

In the Court’s opinion, this was a representation to the franchisee that March 10 was the last possible date for them to cease identifying themselves as a franchise.