Quebec Court Finds Franchisor Breached Exclusive Territory Rights & Awards Damages

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Author: Robert Jones, Law Works P.C.
Editor: Ben Hanuka, Law Works P.C.

In 9107-5382 Québec inc. c. Voyage Vasco inc., an August 23, 2018, decision of the Quebec Superior Court, the court found that the franchisor opened a franchised business in the franchisee’s exclusive territory in breach of the exclusive territory rights in the franchise agreement. The court quantified damages based on the profits that the competing business earned during the relevant time frame (in legal terms, an accounting for profits approach).

Key facts

The plaintiff, 9107-5382 Québec inc. (“9107”), operated a Voyage Vasco travel agency franchised business under a franchise agreement with the defendant franchisor, Voyage Vasco inc. (“Voyage Vasco”). The parties signed the franchise agreement in 2001. The franchise agreement had a four-year term and automatically renewed for the same term unless one of the parties sends a notice of nonrenewal at least one year before its expiry.

Voyage Vasco granted to 9107 an area of exclusive territory under the franchise agreement.  The exclusive territory rights prohibited the defendant from opening any other Voyage Vasco franchises in 9107’s territory without its consent.

In 2005, the parties signed a renewal franchise agreement expiring on April 30, 2011, with the same exclusive territory.

In 2009, Voyage Vasco signed an agreement with HBC, under which Voyage Vasco would open travel agencies inside Zellers stores. Two Zellers stores were inside 9107’s exclusive territory.

Negotiations between 9107 and Voyage Vasco ensued. Voyage Vasco offered to 9107 the right to purchase three recently abandoned franchised businesses at a discount rate in exchange for a reduction of 9107’s exclusive territory. Voyage Vasco sent to 9107 three draft franchise agreements and an addendum to its existing franchise agreement based on this proposal.

Nothing was formally signed by the deadline to send a notice of nonrenewal by April 30, 2010.

9107 decided not to acquire the additional franchises. It took the position that the franchise agreement was renewed for a period of four years from April 30, 2011.  Voyage Vasco took the position that 9107 acquiesced in the reduction of its territory and the acquisition of the proposed franchises since it never expressed disagreement with the proposal by April 30, 2010.

Voyage Vasco offered a related “Voyage Gama” franchise to 9225-8888 Quebec Inc. (“9225”) in a Zellers inside of 9107’s territory. 9225 would operate under the Voyage Gama banner until the expiry of 9107’s franchise agreement, and then operate as a Voyage Vasco franchise.

In November 2010, 9225 commenced operating a Voyage Gama franchise in the Zellers.  In fall 2011, 9225 changed its banner to a Voyage Vasco.

On September 30, 2014, 9107 sent a Notice of Termination to Voyage Vasco and brought an action for breach of the exclusive territory rights in the franchise agreement, alleging that it suffered loss of income and incurred increased operating costs.

9107 did not formally reject Voyage Vasco’s proposal, but that is not consent

The court found that 9107 never consented to the amendment of its franchise agreement. It accepted that 9107 did not formally reject the proposal because it feared that that Voyage Vasco would retaliate by sending a notice of nonrenewal.

The court held that 9107’s silence did not amount to implicit consent. 9107 never intended to waive its significant exclusive territory rights under the franchise agreement. The court found that Voyage Vasco should have given to 9107 an ultimatum to accept its proposal before April 30, 2011, the deadline for sending a notice of nonrenewal.

Voyage Vasco breached the exclusive territory rights

The court held that the opening of a Voyage Gama franchise by 9225 inside a Zellers in 9107’s exclusive territory breached the exclusive territory rights in 9107’s franchise agreement. It found that the franchised business was identical to a Voyage Vasco franchise apart from the name. The court was unpersuaded by Voyage Vasco’s “devious way of not contravening the agreement”.

It determined that Voyage Vasco was in breach of the franchise agreement with 9107 since November 1, 2010, when the Voyage Gama franchise opened in the Zellers, and that Voyage Vasco’s breach continued beyond April 30, 2011, because the franchise agreement was automatically renewed.

Damages quantified based on profits of competing franchised business

The court found that 9107 suffered losses because of Voyage Vasco’s breach of the exclusive territory rights. The premise of an exclusive territory is that the protected rights have value. It inferred from Voyage Vasco’s attempts to reduce 9107’s territory that 9107’s exclusive territory rights had commercial value.

The court concluded that 9107 suffered losses from 9225’s operation of a competitive franchised business in its exclusive territory, and that Voyage Vasco benefited from the royalty and other franchise fees that it received from 9225.

The parties each introduced expert evidence about damages. The court held that the appropriate period to quantify the damages was from November 1, 2010, until September 30, 2014, when 9107 terminated the franchise agreement with Voyage Vasco.  It applied an accounting for profits approach, based on its finding that all of 9225’s sales were direct losses of 9107. The court also awarded damages for the troubles, annoyances and inconvenience suffered by 9107 because of Voyage Vasco’s breach of the exclusive territory rights.

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