Ontario civil | Contracts
Franchise agreements
Restrictive covenant not ambiguous
MEDIchair, franchisor, operated franchise stores that sell and lease home medical equipment. One franchise location in Peterborough was owned and operated by DME. DME’s latest franchise agreement was 2005 Franchise Agreement. Appellants purchased DME’s franchise and agreed to be bound by 2005 Franchise Agreement, including restrictive covenant which applied on termination and prevented them from operating similar store for 18 months within 30-mile radius of their store or nearest franchise store. MEDIchair franchise system sold to Centric which also purchased Motion Specialties, group of corporate stores similar to MEDIchair, including one in Peterborough. Appellants claimed Centric focused on Motion stores and number of MEDIchair stores declined. Appellants did not renew franchise agreement, instead removing MEDIchair signage and continuing to operate. Arthur Wishart Act requires franchisor to provide prospective franchisee with disclosure document before franchise agreement signed except where grant of franchise not effected by or through franchisor. MEDIChair successfully applied to enforce restrictive covenant. Application judge found that MEDIchair exempt from disclosure requirement. Appellants’ appeal allowed. No error in finding that MEDIchair exempt from disclosure. MEDIchair merely gave required approval, took transfer fee and obtained covenants and guarantee. Restrictive covenant not ambiguous. Appellants extracted same restrictive covenant from former owner of DME. Courts regularly address restrictive covenants where standard is “similar” business. No basis to interfere with conclusion that “similar” not ambiguous in context of MEDIchair’s business. Courts give restrictive covenants presumption of validity when negotiated as part of sale of a business. Focus is whether there is legitimate or proprietary interest of franchisor that is entitled to protection of covenant. MEDIchair had legitimate or proprietary interest to protect goodwill in MEDIchair system. Purpose of covenant was to protect that interest for limited time and within defined territory. MEDIchair not entitled to protect its interest in franchise system as whole. By deciding not to operate in Peterborough, MEDIchair effectively acknowledged it had no legitimate or proprietary interest to protect within defined territorial scope of covenant.
MEDIchair LP v. DME Medequip Inc. (Feb. 29, 2016, Ont. C.A., K. Feldman J.A., MacPherson J.A., and B.W. Miller J.A., CA C60733) Decision at 257 A.C.W.S. (3d) 104 was reversed. 263 A.C.W.S. (3d) 287.
Restrictive covenant not ambiguous
MEDIchair, franchisor, operated franchise stores that sell and lease home medical equipment. One franchise location in Peterborough was owned and operated by DME. DME’s latest franchise agreement was 2005 Franchise Agreement. Appellants purchased DME’s franchise and agreed to be bound by 2005 Franchise Agreement, including restrictive covenant which applied on termination and prevented them from operating similar store for 18 months within 30-mile radius of their store or nearest franchise store. MEDIchair franchise system sold to Centric which also purchased Motion Specialties, group of corporate stores similar to MEDIchair, including one in Peterborough. Appellants claimed Centric focused on Motion stores and number of MEDIchair stores declined. Appellants did not renew franchise agreement, instead removing MEDIchair signage and continuing to operate. Arthur Wishart Act requires franchisor to provide prospective franchisee with disclosure document before franchise agreement signed except where grant of franchise not effected by or through franchisor. MEDIChair successfully applied to enforce restrictive covenant. Application judge found that MEDIchair exempt from disclosure requirement. Appellants’ appeal allowed. No error in finding that MEDIchair exempt from disclosure. MEDIchair merely gave required approval, took transfer fee and obtained covenants and guarantee. Restrictive covenant not ambiguous. Appellants extracted same restrictive covenant from former owner of DME. Courts regularly address restrictive covenants where standard is “similar” business. No basis to interfere with conclusion that “similar” not ambiguous in context of MEDIchair’s business. Courts give restrictive covenants presumption of validity when negotiated as part of sale of a business. Focus is whether there is legitimate or proprietary interest of franchisor that is entitled to protection of covenant. MEDIchair had legitimate or proprietary interest to protect goodwill in MEDIchair system. Purpose of covenant was to protect that interest for limited time and within defined territory. MEDIchair not entitled to protect its interest in franchise system as whole. By deciding not to operate in Peterborough, MEDIchair effectively acknowledged it had no legitimate or proprietary interest to protect within defined territorial scope of covenant.
MEDIchair LP v. DME Medequip Inc. (Feb. 29, 2016, Ont. C.A., K. Feldman J.A., MacPherson J.A., and B.W. Miller J.A., CA C60733) Decision at 257 A.C.W.S. (3d) 104 was reversed. 263 A.C.W.S. (3d) 287.
