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

Franchisors should make sure that all agreements with their franchisees are fully executed to ensure not only compliance with the terms of the agreement during the franchise relationship but also to ensure the survival of the post-termination covenants.

The Second Cup Limited v. Niranjan et. al.

[2007] O.J. No. 3409, Superior Court of Justice
Lederman J.
August 17, 2007

The plaintiff franchisor moved for an interlocutory injunction preventing the defendant franchisee from breaching the non-competition and confidentiality provisions of its franchise agreement. The franchise agreement provided for a 4 year term and no rights of renewal. Upon expiry of the franchise agreement the franchisee was advised that the franchisor would not be seeking to renew the franchise agreement and reiterated the post-termination covenants to which the franchisee was obligated. One month prior to the expiration of the franchise term, the franchisee opened a coffee shop through a different corporation. The franchisor claimed that the franchisee had been working at the other coffee shop and had drawn customers from the franchised business to the competing shop, and claimed that the franchisee's actions breached the non-competition provisions of the franchise agreement, prohibiting a franchisee from being involved in any business which was the same or similar to the franchised business.

The court began by noting that neither party could produce a copy of the franchise agreement that had been signed by both parties, and the court only received a copy of the agreement signed by the franchisee. Typically a court can conclude that conduct consist with a contract can effect approval of the contract's terms, however, in this case the franchisor was insistent in its initial negotiations with the franchisee that there would be no agreement between the parties until the franchise agreement had been fully executed. The franchisor argued that the parties' conduct between the granting of the franchise term and the conclusion of the franchise term, as specified under the agreement, evidenced the contract was in force, further arguing that both parties performed their obligations under the franchise agreement as though it were fully executed. While the court indicated it would accept such an argument in terms of the payment of royalties and other fees and the length of the agreement, it did not see any evidence presented to indicate that the parties agreed to the non-competition provisions of the agreement, and absent a signed document, could not draw that conclusion from the conduct of the parties. The court found the evidence demonstrated that there was to be "some" post-termination covenants required of the franchisee, however the court was not presented with evidence to demonstrate the exact terms of the post-termination covenants.

Generally, in order to grant an interlocutory injunction the applicant must demonstrate that there is a serious issue to be tried (in addition to showing the balance of convenience favours the granting of the injunction, and that the applicant would suffer irreparable harm if the injunction were not granted). In some cases, such as this case, a stricter standard was required where the granting of the injunction would effectively be a determination of the issues, in which case the applicant must establish a strong prima facie case. The court found that in this case, the fact that the franchise agreement was not executed and the fact that there was no privity of contract between the franchisor and the new company incorporated by the franchisee, the court could not find that the parties were bound by the non-competition covenant, and the plaintiff did not make out a prima facie case in favour of granting the injunction. Accordingly, the franchisor's motion was dismissed.

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