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Ontario court declines to order franchisees to pay royalties

In 10313033 Canada Inc. v. 2418973 Ontario Inc. et al, 2018 ONSC 2406, the Ontario Superior Court of Justice was faced with a claim by a franchisor against seven of its 11 franchisees who had ceased making royalty and marketing fund contributions to their franchisor.

The franchisor had recently acquired the franchise system after the former franchisor went into insolvency protection under the Companies’ Creditors Arrangement Act, RSC 1985 c C-36. The defendant franchisees claimed that the former and current franchisor had failed to perform their obligations under the franchise agreements and that the franchisees had essentially received no value for any of the royalty payments. The franchisor moved for an interlocutory injunction to compel the franchisees to pay the amounts owing.

The Court declined to award the franchisor the injunction.

The Court was satisfied that the franchisor had raised a serious issue to be tried, as the franchise agreement clearly required the franchisees to make their payments and the franchisees’ grievances did not permit them to withhold the payments.

However, the franchisor had failed to produce its financial statements in support of its contention that it would suffer irreparable harm if the injunction was not issued. Instead the franchisor’s witness simply asserted baldly that the franchisors’ losses constituted 70% of its total revenue and that it could not meet its financial obligations without the franchisees’ payments.

Having failed to produce financial statements and other evidence to support its contention of irreparable harm, the Court refused to grant the injunction. The Court also found that the failure to produce financial records meant that there was insufficient evidence to consider the balance of convenience.

The franchisees cross-moved for appointment of an arbitrator. The franchisees had invoked the arbitration provision in their franchise agreements, yet the franchisor had refused to agree to the appointment of an arbitrator. In light of the clear language in the franchise agreement, the Court granted the franchisee’s motion and stayed the underlying Court action in favour of arbitration.

This case confirms that parties seeking an injunction should be prepared to put forward their best evidence available, including on the issue of irreparable harm.

By Adam Ship

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McCarthy Tétrault LLP

McCarthy Tétrault is a Canadian law firm that delivers integrated business law, litigation services, tax law, real property law, labour and employment law nationally and globally.McCarthy publishes a series of blogs to share information with companies to help them comply and manage their businesses. On the Inside Internal Controls blog we will share some of those blog posts sharing their expertise among others, in the areas of Competition/Anti-trust, Corporate and Commercial Law, Intellectual Property, Privacy, Environmental Law, Technology and Litigation. Read more here
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