Franchisors must be extremely careful when drafting franchise agreement provisions as any ambiguity in the franchise agreement could be interpreted in favour of franchisees. In the Ontario Superior Court of Justice’s decision in 1230995 Ontario Inc. v. Badger Daylighting, a franchisee brought a successful action against a franchisor for breach of contract based on the franchisor’s decision to take away territories that the franchisee believed it was entitled to under the terms of an apparently vague franchisee agreement.
In this case, the plaintiff franchisee (123 Inc.) owned a franchise involving specialized trucks used to dig holes and uncover underground utilities. 123 Inc. and the franchisor (Badger) entered into their initial franchise agreement in 1998. By the end of 2009, 123 Inc. had sales of over $4.3 million and was operating in nine counties within Southwestern Ontario. In 2002, the parties entered into an amending agreement to the franchise agreement which granted 123 Inc. the right to work in areas that were not part of its territory under the 1998 franchise agreement. In 2003, the parties entered into a new franchise agreement and both parties ultimately had a different understanding of what constituted 123 Inc.’s territorial rights under the new franchise agreement. 123 Inc. believed that it had the exclusive right to provide services in nine counties in Southwestern Ontario. Badger disagreed with this and took the position that it had the right to assign those counties to new franchisees. In fact, in 2005 Badger advised 123 Inc. that it was assigning four of the counties to other franchisees, which instigated 123 Inc.’s action against Badger.
The court found that the 2003 franchise agreement was a contract of adhesion that was drafted solely by Badger and presented to 123 Inc. on a take-it-or-leave-it basis. As such, any confusion or ambiguity in the terms of the agreement was to be resolved in favour of the franchisee. The court found that there was indeed confusion and ambiguity in the description of the territory in the 2003 franchise agreement. Accordingly, the court determined that the four counties that were reassigned by Badger were in fact part of 123 Inc.’s territory and that Badger did not have the right to effect such a reassignment.
Badger made the argument that 123 Inc. had breached the franchise agreement by failing to properly grow his business in London, Ontario, which gave Badger the right to reassign this territory to another franchisee. The court did not countenance this claim and determined that not only was there insufficient factual evidence to support this claim, but that the wording of the franchise agreement concerning the duty to develop market areas was drafted by Badger and vague, and as such “any franchisee would have difficulty knowing whether he had complied with that requirement.”
The court awarded damages to 123 Inc. for pre-trial and future loss in respect of these wrongly appropriated market areas, but refused to grant an injunction against Badger regarding the reassignment of the marketing rights in the remaining five counties, citing a view that there was no threat of reassignment and to enjoin such behaviour would be premature.
When drafting franchise agreements, franchisors should take steps to ensure that market areas and other key components of the franchise relationship are clearly and accurately defined. Courts may invoke the doctrine of contra proferentem, wherein an ambiguous term will be construed against the party that imposed its inclusion in the contract, in the franchise context where there has been little negotiation of the franchise agreement and the factual circumstances apply. However, this doctrine is only applicable where there is in fact ambiguity, so a well-drafted franchise agreement should remove any such potential problems.