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News and Views — Comment on France v. Kumon

France v. Kumon |

2014 CarswellOnt 17335 |

Ontario Superior Court of Justice

In France v. Kumon  (2014 CarswellOnt 17335),  the Superior Court of Ontario had its first opportunity to examine the factors which determine the length of notice in a franchise agreement that does not set out a time-limited period.  

The parties were found to have reached an oral agreement to operate a franchise starting in 1991, well before the Arthur Wishart Act came into effect.  The franchisor in the ensuing years wished to change its business model and to have the franchisee sign a written agreement.  The franchisee refused to comply, and the franchisor sought to cancel the contract.

In an earlier determination (France v. Kumon, 2014 CarswellOnt 17050) the court had already ruled that the franchisee had not any contractual terms, but the franchisor was entitled to end the contract upon reasonable notice.  Goldstein J. found it was appropriate to imply a term of notice in a franchise contract, based on common law principles and comparisons with employment and distributorship agreements.  The parties were invited to make submissions on the proper notice period at a further hearing, which formed the basis of the case under discussion.

The standard franchise agreement used by the defendant contained a three year renewal clause, but as the franchisee had not signed the agreement this term was not applicable.  

The franchisee’s counsel suggested a notice period between 20 to 24 months based on a comparison with employment law cases.  Goldstein J. found that a discount was necessary to account for the fact that the franchisee was an independent contractor.  While being careful to state that laying down an absolute rule would be inappropriate, six different factors were identified for determining the length of notice due when terminating a franchise agreement: the length of the relationship, whether the franchisor had engaged in bad faith or oppressive conduct, whether the franchisee had a history of poor performance, whether both parties had acted in good faith, whether the Arthur Wishart Act had been breached, and the size and relative power of the franchisee.  Applying these factors, the notice period was set at 18 months, six more than had been initially offered by the franchisor.

On a close reading, Goldstein J. does not merely calculate the notice period that would apply in an employment relationship, then lower that amount by adjusting for the new factors set out above.  If that were strictly the case, then the length of the relationship is being considered twice, once when setting out the initial notice period and again when it is being discounted.  However, the term “discount” would likely not have been used at all if employment law factors were not to be considered.  Even if the notice due in an employment relationship merely sets a bar the notice in a similar franchise contract may not to rise above, employment law factors still set that bar.

While the notice period was reduced specifically because the franchise relationship is a lesser one than one of employment, many of the considerations listed by Goldstein J. imply a higher duty.  The second factor, bad faith and oppression in the history of the relationship, is considerably different than common law doctrine.  Although the Supreme Court of Canada has very recently recognized a common law duty of good faith in contract generally (see Bhasin v. Hrynew, 2014 CarswellAlta 2046), the specifics of employment law state that bad faith is to be considered in the manner of dismissal alone.  Similarly, while the conduct of the employee can form the basis of a dismissal, when considering notice it has been specifically rejected as a factor, and courts have long rejected the concept of “near cause.”  Some of this discrepancy is likely due to the working of the Arthur Wishart Act, itself set out as a notice factor.  Section 3 of the Act creates a duty of fair dealing between both parties to a franchise, which expressly includes a duty of good faith.  Given the statutory duty that already exists, it seems less onerous to import some similar considerations into notice calculations.

Goldstein J. notes that ascertaining the factors to be taken into account is a venture into “uncharted territory”, and unlike in employment law, calculating notice periods is hardly the most common form of award for a successful plaintiff.  The fact that rescission is specifically allowed under the Arthur Wishart Act may sometimes provide an easy, early remedy that lessens the number of cases that would later require notice periods to be set out. Courts have also awarded general damages for breach of good faith.  Probably most importantly, most franchise agreements will provide clear renewal or termination periods within the text of the agreement itself, so that the court will not have to determine them.  It may be years before this particular issue is revisited, let all relevant factors fully set out.  

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