In Quizno’s Canada Restaurant Corporation v. Davis, the British Columbia Supreme Court recently ruled that a franchisor would suffer irreparable harm to its business and system if forced to continue working with an uncooperative franchisee who resisted an inspection of his business for compliance with system standards. The case serves as a warning to franchisees who unilaterally attempt to place limitations or conditions on the franchisor’s exercise of its contractual rights.
The dispute began with the franchisee’s dissatisfaction with Quizno’s rebate programs. Quizno's notified the franchisee that it intended to inspect the restaurant to ensure compliance with system standards and specifications. The franchisee refused to agree to an inspection, claiming that his concerns regarding the rebate program should be addressed first. Quizno’s issued two notices of default, with an opportunity to cure, and finally a notice of termination. After receiving the notice of termination, the franchisee notified Quizno’s that he was now willing to agree to the inspection; but, Quizno’s refused on the basis that the franchisee had irreparably damaged the relationship.
The franchisee secured an ex-parte injunction restraining Quizno’s from enforcing the termination and the post-termination obligations. The issue came before the British Columbia Supreme Court when the franchisee sought to continue the ex-parte injunction. Quizno’s sought to terminate the ex-parte injunction and to secure its own injunction requiring the franchisee to cease operating the restaurant and abide by his post-term obligations.
Despite the franchisee’s statement to the court that he was willing to cooperate with Quizno’s, the court took the position that such cooperation “demonstrably does not and cannot exist” due to his actions. While this position is, of course, specific to the facts of this case, it serves as a worthwhile caution to any party to a franchise agreement to not play a game of brinkmanship, hoping to later recant and salvage the relationship if its initial position is unsuccessful.
In reviewing the test for granting interlocutory relief, the court noted that there is case law to support the proposition that no irreparable harm needs to be proven if the moving party is seeking to enforce a negative covenant. However, noting that there is case law to the contrary, the court settled on a “flexible approach” of reviewing the specific facts of the case, including the presence or absence of irreparable harm.
After reviewing the facts, the court stated that the right to conduct inspections was critical to the ongoing quality and brand of a franchise system, and that non-performance of the franchisor’s standards would be detrimental to the whole system. The court found that Quizno’s would suffer irreparable harm if forced to continue working with uncooperative franchisees or if unable to enforce the post-termination obligations. In considering this point, the court also found that the franchisee’s damages were quantifiable, whereas a negative impact on the Quizno’s brand and system, while potentially significant, could not be easily ascertained.
In this case, the franchisee’s first error was attempting to place limitations and conditions on Quizno’s inspection rights by denying entry for inspection until Quizno’s addressed the rebate issue. The court was clear that such an inspection right was fundamentally important to the maintenance of system standards and specifications, and that the franchisee could not be at liberty to pick and chose those policies and procedures with which he elected to comply and ignore the remainder. This ruling serves as a warning to franchisees – and provides comfort to franchisors – that franchisees cannot hold system standards ransom to advance their own issues.