Clear Contractual Breaches by a Franchisee are Sufficient Grounds to Deny a Franchisee an Injunction to Stop a Termination

In the recent Ontario Superior Court of Justice decision in C.M. Takacs Holdings Corp. V. 122164 Canada Ltd. (c.o.b. New York Fries), the court sent a strong message that a franchisor is justified in terminating a franchisee that fails to abide by its contractual responsibilities concerning the payment of amounts due under the franchisee agreement.

Osler Franchise Review
October 1, 2010

Clear Contractual Breaches by a Franchisee are Sufficient Grounds to Deny a Franchisee an Injunction to Stop a Termination
Derek Ronde

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In the recent Ontario Superior Court of Justice decision in C.M. Takacs Holdings Corp. V. 122164 Canada Ltd. (c.o.b. New York Fries), the court sent a strong message that a franchisor is justified in terminating a franchisee that fails to abide by its contractual responsibilities concerning the payment of amounts due under the franchisee agreement. In this case, the court refused to grant an injunction requiring a franchisor to return the possession of four franchise locations to a franchisee after the franchise agreements for those locations were terminated due to the failure to pay amounts owed to the franchisor and other breaches of the agreements.

The plaintiff franchisee (Takacs) operated four franchises under the “New York Fries” brand name. The plaintiff had failed to pay rent, franchise fees and other creditors on a timely basis. In May 2010, Takacs gave the franchisor (New York Fries) a cheque to pay outstanding franchise fees, but the cheque was dishonoured due to insufficient funds. Takacs requested a meeting with New York Fries to discuss the amounts owed, but New York Fries terminated the franchise agreements in June 2010. In bringing its motion for an injunction, Takacs argued that New York Fries prematurely terminated the franchise agreements given the proposed meeting and that prior conduct by New York Fries in which late payments were tolerated meant that New York Fries was precluded from terminating the agreements.

In defending its termination of the franchises, New York Fries pointed to the fact that although Takacs had a history of late payments, there had been a significant increase in the number of defaults in recent years, and furthermore, New York Fries had identified additional contractual breaches, including substantial arrears to other creditors, security interests that had been given by Takacs to other creditors and the failure of Takacs to pay rent on their restaurant locations. This latter fact was particularly egregious because New York Fries was the sub-landlord at these locations. New York Fries argued that Takacs’ financial situation was worse than had been initially anticipated, and when it learned of the true financial position of the franchises, the franchise agreements were terminated.

In rejecting Takacs’ motion for an injunction to reverse the terminations, the court found that Takacs could not establish that there was a serious issue to be tried in respect of contesting New York Fries’ right to terminate the franchise agreements. The court found that New York Fries did not act unfairly, in bad faith or in a commercially unreasonable fashion in enforcing the terms of the franchise agreements. Simply put, the court found that “[t]he explanations for the events of default do not cure the defaults,” and dismissed the idea that it should “impose notice requirements when the Franchise Agreement allows that termination without notice.” Given that New York Fries would continue to operate the franchise locations post-termination, no irreparable harm to the plaintiff was found, as any losses would be easily calculable given the continued operation. The court also found that the risks faced by New York Fries if the injunction was granted, namely liability for unpaid rent and potential breaches of the head leases by Takacs, meant that the balance of convenience regarding the injunction was in favour of New York Fries.

Franchisors can take some comfort in this decision, as it supports the principle that a franchisor is not acting unfairly or in bad faith if it simply enforces the terms of the franchise agreement between it and its franchisee. This decision, particularly with respect to the test for obtaining an injunction in Canada, will be of assistance to franchisors resisting injunctions by franchisees looking to set aside terminations resulting from contractual breaches.

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