A brief summary as to what this case means for you:

Franchisors must ensure that when their franchise agreements state that the franchisor can exercise its "discretion" or "sole discretion", the franchisor must act in good faith in the exercise of that discretion. In the case below, the franchisor was allowed to establish franchisee delivery zones in its sole discretion. By deciding to grant another franchise with a delivery zone that overlapped an existing franchisee's delivery zone, the franchisor's good faith was called in to question.

362041 B.C. Ltd. v. Domino's Pizza of Canada Ltd.

[2006] B.C.J. No. 1127, British Columbia Supreme Court
Meiklem J.
May 16, 2006

The plaintiff franchisee brought this motion seeking an interlocutory injunction restraining its franchisor from opening another Domino's franchise in an area that overlapped the plaintiff's service area, contrary to the express and implied provisions of the plaintiff's franchise agreement. The franchise agreement defined the franchisee's "area of primary responsibility" as a 1 mile radius from the franchised location, and also provided that as long as the franchisee was in good standing under its agreement, its franchisor would not operate or grant a franchise whose area of primary responsibility "significantly overlaps" the franchisee's. The franchise agreement also granted the franchisee rights to offer delivery service to any customer within 30 minutes of the location, as determined in the franchisor's sole discretion. The franchise agreement was due to expire in November of 2008 and contained no further rights of renewal. It also provided that Alberta law would govern the agreement.

It was not disputed that the proposed new store's delivery and service area overlapped the plaintiff's delivery and service area. The plaintiff alleged that the defendant was engaging in this practice of cramming franchisees together in order to avoid financial penalties levied against it as a master franchisee for not opening the required quota of franchised locations. The plaintiff invoked Alberta 's Franchises Act and sought to apply the duty of fair dealing to the franchisor's discretionary decision of locating new franchises. The court found that the plaintiff was able to demonstrate that there was a fair question to be tried, that of whether the defendant's exercise of its discretion had met the standard of good faith and fair dealing. Turning to the issues of balance of convenience and irreparable harm (which, in addition to the requirement of a fair question to be tried make up the three part test for the granting an injunction), the court reasoned that granting an injunction would have a permanent effect on the defendant if a competitor opened up a store in the competing area, and, coupled with the limited term remaining in the franchise agreement lent support to the argument that the plaintiff would suffer no irreparable harm if the injunction were not granted. On the other hand, the defendant brought about the events that altered the status quo, and the court found that there was a reasonable basis for the plaintiff to establish that offering the plaintiff franchisee a right of first refusal over an additional territory was a minimum requirement of fair dealing when the result would be the defendant significantly curtailing the plaintiff's delivery area. Turning to the balance of convenience issue, the court found that the balance of convenience did not favour the plaintiff on the terms sought, but would favour the plaintiff if the effect of the injunction was to prohibit the defendant from imposing a restriction on the plaintiff's delivery service area. Thus, the plaintiff was awarded an interlocutory injunction prohibiting the defendant from imposing any revision, restriction or qualification upon the terms of the plaintiff's delivery and service area.

Previous Featured Cases