Franchisees who seek equitable relief, such as relief from forfeiture or injunctions, to prevent the termination of their franchise agreements may face limitations on affecting their contractual rights. The Ontario Superior Court of Justice recently dismissed a franchisee’s attempt at equitable relief in the case of 2659953 Ontario Inc. v. Druxy’s Franchising Inc. et al, 2022 ONSC 6356. The franchisee sought to reinstate a terminated franchise agreement for a Williams Fresh Café in Brampton, Ontario but was unsuccessful in their motion.
The Court found that the franchisee did not meet the requirements for interlocutory injunctive relief. The franchisee was in an overholding position on an expired month-to-month franchise agreement and had chosen not to renew when they had the opportunity. Additionally, it was clear that the franchisee had no intention of continuing to operate the franchise after reinstatement. Considering these factors, the Court determined that reinstating the franchise would not align with the purpose and spirit of the franchise agreement.
The plaintiff franchisee had entered into two franchise agreements with Druxy’s Franchising Inc., operating two Williams Fresh Café locations. Druxy’s terminated the First Franchise due to alleged breaches of the franchise agreement, including financial and operational breaches, as well as non-compliance with required hours of operation. The franchisee received two notices of default before the termination.
The franchisee sought relief from forfeiture and an interlocutory injunction to reinstate the First Franchise and continue operations. However, Justice Daley of the Ontario Superior Court of Justice denied the franchisee’s motion based on several reasons.
Firstly, the Court applied a stricter standard of strong prima facie case instead of the lower standard of serious issue to be tried when assessing the need for an interlocutory injunction. This higher standard was justified because the injunction would require the franchisee to remain in a commercial agreement during trial. As the franchise and lease agreements had already expired, the franchisee’s request for renewal was not in accordance with the contract’s terms.
Secondly, the Court considered the franchisee’s intentions after reinstatement. It was revealed that the franchisee planned to sell the operation rather than continue operations. Combined with limited financial evidence of the franchisee’s ability to sustain the business, this led the Court to conclude that reinstating the franchise would not align with the purpose and spirit of the franchise agreement.
Lastly, Justice Daley determined that the franchisee did not meet the overall injunction test. The franchisee failed to demonstrate a strong prima facie case for reinstatement, could not establish irreparable harm, and the balance of convenience favored Druxy’s. Druxy’s had already taken back possession of the premises, made repairs, and had plans to install a new operator.
This case provides support for franchisors seeking to terminate defaulting franchisees. When a franchisee engages in litigation solely to improve their leverage or negotiation position, rather than genuinely seeking to continue the business, there may be judicial skepticism toward granting equitable relief. While injunctions are fact-dependent, this case serves as a guideline for franchisors looking to terminate franchisees whose terminations appear valid.
