Thinking of terminating a verbal (franchise) agreement?

2015-07-23

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THINKINGOFTERMINATINGAVERBAL(FRANCHISE)AGREEMENT?
S
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AWYERS,PATENTANDTRADE-MARKAGENTS

Recently,theOntarioSuperiorCourtofJusticeruledonthesensitiveissueofthe
terminationofaverbalfranchisingagreementwhich,atfirstglance,madeno
provisionsinthisregard.

TheCasesofFrancev.Kumon
ThecaseofFrancev.Kumon[2014ONSC5890]pittedMs.France(hereinafter
“France”),whoranafranchiseofmentoringprogramsfornearly20years,startingin
1991,againstKumonCanadaInc.(hereinafter”Kumon”),thefranchisor.Francewas
areadingandmathteacher,andthereforehadtheskillstoprovideKumonprograms,
whichshedidthroughouttheverbalfranchiseagreement.In1994,Kumonbegan
requiringthatallfranchiseesboundbyoralcontractssignawrittenagreement.
Francerefusedtosignone,onthepretextthatthefinancialprovisionscontained
thereinwereunfavorabletoher.Fornearly16years,bothpartiespursued
negotiations,ultimatelyfailingtoproduceasignedwrittenagreement.OnDecember
23,2010,afterproviding12months’notice,Kumonendedtheoralfranchise
agreementbetweentheparties.

Ananalysisofthegoodfaithofeachpartywithinthecontractualfranchisor-franchisee
relationshipledtheCourttoassesswhethertherehadbeeninterferenceintheoral
contractualrelationshipbetweenKumonandFrance.First,theCourtanalyzedthe
obviousinequalityoftherelationshipbetweenastrongerparty,Kumon,andafar
weakerparty,France.Theiranalysisconcluded:”Thecourtwilltypicallylookto
specifictermsofthecontractaswellastherelationshipbetweenthepartiesto
determinewhetherthecontractisperpetualornot.”TheCourtheldthatevenifthe
contractorsaretwocompanieswhoarebothwell-informedinbusinessmatters,itmay
stillbenecessarytointervenewhenacontracthasanill-definedprovisionfor
termination,sothatitdoesnotcontinueinperpetuity.Inthiscase,theCourtcited
1397868OntarioLtd.v.NordicGamingCorp.:Whenthetermofacontractisnotfixedandthereisnoprovisionfor
terminationonreasonablenotice,acourtmaytreatacontractas
eitherperpetualinnatureorasanindefinitetermcontractintowhich

©CIPS,2015.*FromROBIC,LLP,amultidisciplinaryfirmofLawyers,andPatentandTrade-markAgents.Publishedin
theWinter2015(Vol.18,no.3)Newsletterofthefirm.Publication068.188E.

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thecourtimpliesaprovisionofunilateralterminationonreasonable
notice.

Inlightoftheevidencesubmitted,JudgeGoldsteinheldthattheoralfranchise
contractbetweenthepartieswasnotperpetualbutratheranindefinitetermcontract
intowhichtheCourtimpliedareasonablenoticeterm.Inordertodeterminewhat
wouldconstitutereasonablenoticeinthecaseathand,theCourtaskedthat
additionalsubmissionsbemadebytheparties.
Inasubsequentdecisionontheissueofreasonablenessofthenotice
givenbyKumontoFrance(Francev.Kumon)theCourtfoundthat
thefranchisor-franchiseerelationshipwasmoreakintoanemployer–
employeerelationshipthantooneinadistributorshipcontext.
Nevertheless,theCourtnuancedthiscomparisonbystatingthat
althoughtherearesomesimilarities,thefranchiseeisnotan
employee(heisverymuchsoanindependentcontractor)andthe
franchisordoesnothaveafiduciarydutytowardssaidfranchisee

TheCourtthensetout,certainfactorsthatitdeemedimportantwhenconsideringa
reasonablenoticeperiodinafranchisecontext:
•Thelengthoftherelationshipbetweenthefranchiseeandthe
franchisor;
•Whethertherewasahistoryofoppressiveconductorbadfaithon
thepartofthefranchisor;
•Whethertherewasahistoryofpoorperformancebythefranchisee;
•Whetherthefranchisororfranchisee,asthecasemaybe,hasacted
ingoodfaiththroughoutthecourseoftherelationship;and,
•WhethertherehavebeenviolationsoftheWishartAct.

Intakingthesefactorsintoaccount,theCourtdecidedthatthe12months’notice
giventoFrancewerenotsufficientunderthecircumstancesandthattheappropriate
noticeperiodthatshouldhavebeengiventoFranceis18months.

Finally,theCourtfeltitwasimportanttomakeitclearthatthisawardshouldnotbe
interpretedasa“ruleofthumb”.

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