Thinking of terminating a verbal (franchise) agreement?

Thinkingofterminatingaverbal(franchise)agreement?(http://intranet.robic.com/content/29063)Version13Dernièremodification:lundi9février2015Propriétairedelapage:NoemiaL’HEUREUX-DAIGNEAULTImprimé:mardi10février2015Page1
Thinkingofterminatingaverbal(franchise)agreement?

ParSBE

Recently,theOntarioSuperiorCourtofJusticeruledonthesensitiveissueoftheterminationofaverbal
franchisingagreementwhich,atfirstglance,madenoprovisionsinthisregard.

TheCasesofFrancev.Kumon

ThecaseofFrancev.KumonpittedMs.France(hereinafter”France”),whoranafranchiseofmentoring
programsfornearly20years,startingin1991,againstKumonCanadaInc.(hereinafter”Kumon”),the
franchisor.Francewasareadingandmathteacher,andthereforehadtheskillstoprovideKumonprograms,
whichshedidthroughouttheverbalfranchiseagreement.In1994,Kumonbeganrequiringthatallfranchisees
boundbyoralcontractssignawrittenagreement.Francerefusedtosignone,onthepretextthatthefinancial
provisionscontainedthereinwereunfavorabletoher.Fornearly16years,bothpartiespursuednegotiations,
ultimatelyfailingtoproduceasignedwrittenagreement.OnDecember23,2010,afterproviding12months’
notice,Kumonendedtheoralfranchiseagreementbetweentheparties.

Ananalysisofthegoodfaithofeachpartywithinthecontractualfranchisor-franchiseerelationshipledthe
CourttoassesswhethertherehadbeeninterferenceintheoralcontractualrelationshipbetweenKumonand
France.First,theCourtanalyzedtheobviousinequalityoftherelationshipbetweenastrongerparty,Kumon,
andafarweakerparty,France.Theiranalysisconcluded:”Thecourtwilltypicallylooktospecifictermsofthe
contractaswellastherelationshipbetweenthepartiestodeterminewhetherthecontractisperpetualornot.”
TheCourtheldthatevenifthecontractorsaretwocompanieswhoarebothwell-informedinbusinessmatters,
itmaystillbenecessarytointervenewhenacontracthasanill-definedprovisionfortermination,sothatitdoes
notcontinueinperpetuity.Inthiscase,theCourtcited1397868OntarioLtd.v.NordicGamingCorp.:

“Whenthetermofacontractisnotfixedandthereisnoprovisionforterminationonreasonable
notice,acourtmaytreatacontractaseitherperpetualinnatureorasanindefinitetermcontract
intowhichthecourtimpliesaprovisionofunilateralterminationonreasonablenotice.”
Inlightoftheevidencesubmitted,JudgeGoldsteinheldthattheoralfranchisecontractbetweentheparties
wasnotperpetualbutratheranindefinitetermcontractintowhichtheCourtimpliedareasonablenoticeterm.
Inordertodeterminewhatwouldconstitutereasonablenoticeinthecaseathand,theCourtaskedthat
additionalsubmissionsbemadebytheparties.

InasubsequentdecisionontheissueofreasonablenessofthenoticegivenbyKumontoFrance(Francev.
Kumon)theCourtfoundthatthefranchisor-franchiseerelationshipwasmoreakintoanemployer–employee
relationshipthantooneinadistributorshipcontext.Nevertheless,theCourtnuancedthiscomparisonby
statingthatalthoughtherearesomesimilarities,thefranchiseeisnotanemployee(heisverymuchsoan
independentcontractor)andthefranchisordoesnothaveafiduciarydutytowardssaidfranchisee

TheCourtthensetout,certainfactorsthatitdeemedimportantwhenconsideringareasonablenoticeperiodin
afranchisecontext:

“•Thelengthoftherelationshipbetweenthefranchiseeandthefranchisor;
•Whethertherewasahistoryofoppressiveconductorbadfaithonthepartofthefranchisor;

Thinkingofterminatingaverbal(franchise)agreement?(http://intranet.robic.com/content/29063)Version13Dernièremodification:lundi9février2015Propriétairedelapage:NoemiaL’HEUREUX-DAIGNEAULTImprimé:mardi10février2015Page2
•Whethertherewasahistoryofpoorperformancebythefranchisee;
•Whetherthefranchisororfranchisee,asthecasemaybe,hasactedingoodfaiththroughoutthe
000000courseoftherelationship;and,
•WhethertherehavebeenviolationsoftheWishartAct;”

Intakingthesefactorsintoaccount,theCourtdecidedthatthe12months’noticegiventoFrancewerenot
sufficientunderthecircumstancesandthattheappropriatenoticeperiodthatshouldhavebeengivento
Franceis18months.

Finally,theCourtfeltitwasimportanttomakeitclearthatthisawardshouldnotbeinterpretedasa“ruleof
thumb”.