Ask A Legal Expert: What Do I Need To Know About Relief From Termination?

The following article was originally published in Franchise Canada.

Q: What do I need to know about relief from termination?

A: What rights do franchisees have when they face termination of their franchise agreements? Was the termination done in bad faith? What if the termination was in response to a breach made by the franchisee?

Most franchise agreements contain robust termination rights so the franchisor can move quickly to prevent irresponsible franchisees from causing harm to the system. However, the franchisor's ability to exercise its termination rights does not go unchecked:

1. The franchisor must comply with the termination provisions in the franchise agreement
2. The franchisor cannot terminate in bad faith
3. Where franchisees can rectify their breach and face consequences that are disproportionate to the breach, franchisees may be able to obtain relief from forfeiture from the court

If the franchisor is threatening termination, check the franchise agreement. Franchisors are typically required to provide notice of default and an opportunity to cure monetary and operational breaches of the franchise agreement before terminating. If this is done within the cure period, then the franchisor is not entitled to terminate.

Additionally, the franchisor must not breach its common law and statutory duties of good faith and fair dealing. ¹. Both parties to a franchise agreement must act honestly, fairly, and reasonably in their dealings with each other. If the franchisee has evidence that the franchisor has an improper or fraudulent motive, then they may be able to resist termination of the franchise agreement.²

If the franchisor terminates in good faith after providing notice of default, the franchisee might be able to get assistance from the court by seeking relief from forfeiture. If a breach occurs, but the conduct is not wilful or egregious, the courts may allow the franchisee to retain their rights in the franchise if they promptly remedy the default and demonstrate good faith.

Relief from Forfeiture

Historically, relief from forfeiture applied in the context of insurance policies and leases, but courts have extended this principle to a variety of commercial relationships, including franchise agreements.

In the commercial leasing context, the Ontario Court of Appeal explains that the relevant factors for granting relief from forfeiture fall into two broad categories: (1) the conduct of the parties, and (2) the impact on the parties of granting or refusing the request for relief from forfeiture.³

The Supreme Court of Canada identified the factors to be considered by the court in the exercise of its discretion as: conduct of the franchisee; gravity of the breaches; and disparity between the value of the property forfeited and the damages caused by the breach.⁴

With respect to the conduct of the franchisee, unreasonable conduct or wilful breaches of contract may bar relief from forfeiture. One such example is Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co. ⁵where the application for relief from forfeiture was dismissed because the applicant did not make reasonable attempts to renew an insurance policy before it lapsed.

Relief from Forfeiture in the Franchise Context

A franchisee is more likely to obtain relief from forfeiture where the breach is purely financial or a minor operational issue that either has been remedied by the franchisee or the franchisee is taking reasonable steps to remedy promptly.

For monetary breaches, the Court will normally require full payment or impose a payment plan as a condition of granting relief.⁶

In the case ANC Business Solutions Inc. v. Virtualink Canada Ltd., the Court found that there was nothing wilful or malicious in the conduct of the franchisee and that the forfeiture of the franchisee's million dollar investment was grossly disproportionate to any harm caused by its alleged misconduct.⁷ The alleged misconduct was regarding a breakdown of the franchisee's phone mail system and a dispute about whether the franchisor provided the franchisee with sufficient time to repair or replace the system.⁸

It is important to note that relief from forfeiture is generally limited to situations in which the franchisee acted reasonably, and the breach relates to financial breaches or minor operational issues. Relief is unlikely to be granted where the breach relates to unauthorized transfers, serious operational issues, the expiry of the franchise agreement or other situations in which the franchisee has engaged in improper conduct directly related to the subject matter of its claim.

Practical Considerations for Franchisees

Act quickly to remedy any breaches. If a franchisee faces termination despite taking good faith steps to remedy a breach, they must act quickly to seek assistance from the Court.

Keep good records. If a franchisee is required to move quickly for relief from the court, the franchisee will need to have ready access to records of investments, communications with the franchisor and other relevant parties, efforts taken to avoid or repair the breach, and an explanation as to any additional steps required to remedy the breach.

Relief from forfeiture is an important safeguard for franchisees in Canada. In the limited circumstances where the franchisee faces termination that is lawful but unfair, they might be able to get assistance from the court to preserve their substantial investment in their franchise.

Footnotes

1 See e.g. Ontario Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c.3,and Alberta Franchises Act, RSA 2000, c F-23, andShelanu Inc. v. Print Three Franchising Corp., 2003 CarswellOnt 2038, 64 O.R. (3d) 533 at para 5 and 64-66.

2 Seto v. Wendy's Restaurants of Canada Inc., 2016 ABQB 493 at paras 34-35.

3 Ibid.

4 Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co., [1994] 2 S.C.R. 490 at para 32 and 33.

5 Ibid at para 34

6 Hudson's Bay Company, supra at para 57

7 ANC Business Solutions Inc. v. Virtualink Canada Ltd., 2014 ONSC 1619, at para 68.

8 Ibid

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.