Franchise Disputes on the Rise in British Columbia

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This article, written by Ben Hanuka, was originally published in The Lawyer’s Daily on November 13, 2019, under the same title.

Author: Ben Hanuka, Law Works

These past several years have seen an uptick in franchise court decisions coming out of British Columbia. While the decisions have not yet started to apply provisions of British Columbia’s new Franchises Act, which came into force in February 2017, they have otherwise started to gain steam.

The decisions show growing and vigorous disputes between franchisors and franchisees in increasingly complexity cases. They range widely. Some have dealt with procedural issues over pleadings and limitation periods. Others involve a mix of procedural and substantive issues in disputes, such as injunction applications about post-termination remedies. There are even a few trial decisions about alleged breaches of franchise agreement obligations and allegations of bad faith conduct.

By way of highlights, the following are short case notes about a few recent injunction applications, as well as the recent trial decisions that have come out of British Columbia.

• Injunction applications

In 526901 B.C. Ltd. v. Dairy Queen Canada Inc., the Supreme Court of British Columbia dismissed a franchisee’s injunction application to prevent the franchisor from terminating or cancelling the franchise agreement. The franchisor had issued three notices of default for noncompliance with signage requirements, failure to modernize the location and failure to provide financial records. After that, the parties entered into a mutual cancellation and release agreement.

The franchisee later sought to restrain the franchisor from terminating the franchise agreement. The court found that the case was weak on both evidentiary and legal grounds.

The court also dismissed the franchisor’s application for an injunction to restrain the franchisee’s “anticipated breach” of the mutual cancellation agreement between the parties as speculative and premature because the franchise agreement had not yet terminated.

In New Beginnings Early Learning (White Rock) Ltd. v. CEFA Systems Inc., the Supreme Court of British Columbia granted an interlocutory injunction application to a private school franchisor to prevent a franchisee from disposing of, or encumbering, the school assets, and from changing the corporate control of the company, after the franchisee sought to rescind the franchise agreement and de-branded its operation.

The franchisor submitted reliable evidence that the franchisee breached the franchise agreements and misused its proprietary curriculum. The franchisee’s allegations of fraudulent misrepresentation at the time of the sale of the franchise to them was weak and lacked evidence.

If the curriculum and trade secrets were allowed to be dissipated, the franchisor would suffer potential reputational harm, which could not be quantified. The balance of convenience favoured granting the injunction because there was no guarantee that the franchisee would not dispose of the school assets otherwise.

In One Touch Wireless Ltd. v. Bell Mobility Inc., the Supreme Court of British Columbia dismissed a franchisee’s application for an injunction to restrain the cancellation of its dealer agreements with Bell Mobility.

Bell Mobility had evidence about alleged misconduct against the franchisee and the franchisee was unable to provide that it would suffer irreparable harm if the injunction was not granted. It held that any losses could be easily quantified. Three of the dealer agreements were expired and could be terminated on sixty days’ notice, and the other ones were nearing the end of their terms. On the other hand, if the injunction was granted, Bell’s losses to its goodwill and the integrity of its relationship with other dealers would be harder to quantify.

• Breach of Franchise Agreement

In Meadow Enterprises Inc. v. Quizno’s Canada Restaurant Corporation, the Supreme Court of British Columbia awarded damages to a franchisee of Quizno’s Canada, for various breaches of their Franchise Agreement. The franchisee was self-represented and Quiznos did not attend the trial.

The court awarded damages for the elimination of an ocean freight subsidiary because it was a fundamental part of the franchise arrangement. The court also awarded damages for marketing fees, on the basis that the franchisee did not benefit from it. The court also found that Quizno’s did not have a basis to deny to the franchisee royalty and advertising fees reduction, which Quiznos offered to others. The court dismissed other claims, such as a claim based on the elimination of the area director and alleged failure to properly use the marketing fund.

In 0923063 B.C. Ltd. v. JM Food Services Ltd., a dispute involving the Freshslice franchise, the Supreme Court of British awarded damages to a franchisee for breach of duty of good faith by the franchisor. The franchisor and its affiliates were self-represented at the trial.

The franchisor halted deliveries of necessary food supplies to the franchisee. The franchisor was also liable for conversion of a deposit that its received from the franchisee on account of a second location. The court awarded punitive damages against JM.

However, the court also awarded damages to the franchisor on its counterclaim for the balance owing on a promissory note and unpaid food supplies and damages to alterations to the site.