Franchising focus: Implied termination rights

A 2014 decision from the Ontario Superior Court of Justice, France v. Kumon, 2014 ONSC 5890 (“Kumon”), presents an interesting precedent for the proposition that any franchise agreement may be terminable on reasonable notice where the franchise agreement does not otherwise provide for termination rights.

In Kumon, the franchisee entered into an informal oral franchise agreement with the franchisor in 1991. In 1994, the franchisor had a written franchise agreement prepared and asked that all of its existing franchisees sign the franchise agreement. The franchisee decided that the terms were not to her benefit and refused to sign. The franchisor asked the franchisee to sign the franchise agreement again in 1995, but she refused.

The issue was left unaddressed between the parties for almost eleven years until 2006 when the franchisor once again insisted on the franchisee signing the franchise agreement, but offered to work with the franchisee to address some of the franchisee’s concerns. Predictably, the franchisee refused to sign the agreement once again.

Finally in 2007, the franchisor presented the franchise agreement to the franchisee for signature and told the franchisee that if she did not sign, they would be terminating her franchise rights on twelve (12) months’ notice. The franchisee refused to sign and the franchisor, after numerous extensions to the deadline, ultimately gave notice that the franchisee’s rights to the franchisor’s system would terminate on December 23, 2010.

In addition to other matters before the Court was the fundamental question of whether or not the Court had the jurisdiction to imply a termination right in a franchise agreement which was otherwise silent on the matter. The Court held that where a franchise agreement does not contain a termination clause, the Court has but one of two options: to imply a right of termination; or to treat the agreement as perpetual.

The Court found that notwithstanding the imbalance of power inherent in the franchising relationship, the franchisor in Kumon had upheld its duty of good faith to the franchisee and that the twelve (12) month termination notice was reasonable in light of the circumstances.

In making this ruling, the Court pointed out that the Court had not created a hard and fast rule for reasonable termination notice in similar situations, but rather that a determination of what constitutes a reasonable notice period in the franchising context would be dependent on the following criteria:

(a)          the length of the relationship;

(b)          evidence of oppressive conduct or bad faith on the part of the franchisor;

(c)          a history of poor performance by the franchisee;

(d)          evidence of good faith throughout the course of the relationship by both parties; and

(e)          evidence of any violations of the Arthur Wishart Act of Ontario.

While Kumon is not mandatory authority in British Columbia, it is still persuasive and could be potentially used as grounds to assist franchisors who may be stuck in similar situations; this should be welcome news in light of the fact that that British Columbia’s proposed franchise legislation includes the same duty of good faith that is found in Ontario’s legislation.

While it is true that undocumented franchise relationships are extremely rare, some do still exist. More commonly however we see documented franchise agreements that have not been properly drafted and are missing key termination rights for franchisors, which can be problematic if the franchisor wishes to terminate the relationship and the franchisee has not materially breached the agreement.

Should you have any questions regarding termination rights, franchise legislation in British Columbia or franchising in general, please do not hesitate to contact one of the members of our Franchise Practice.