Restrictive covenants in franchise agreements in Ontario: Enforce the enforceable

In a recent decision of the Ontario Superior Court of Justice[1], the court affirmed that post-term restrictive covenants in franchise agreements are “presumptively lawful.”

The court reaffirmed the basic requirements for an enforceable post-term restrictive covenant.  One will be enforced:

1. unless it can be established on a balance of probabilities that its scope is unreasonable;
2. if it is not ambiguous;
3. if it is reasonable and protects legitimate proprietary interests that would be harmed if it was not enforced.

In the case before the court, the court upheld an 18 month, 30 mile radius restriction.

Lawsuits in Ontario are commenced either by way of an “action” or an “application.”  There are different steps involved in these two processes.  The merits of an action are usually determined at a trial.  An application allows the franchisor to have a hearing on the merits based on a paper record containing affidavits and cross-examinations on affidavits.

This case gave support to the value of enforcing restrictive covenants by way of application rather than by an interlocutory injunction in the course of an action.

An analysis of all the pros and cons of starting an action and then seeking an interlocutory injunction pending trial or starting the case as an application and taking the steps through to a final hearing on the application where the right to the injunction is sought is beyond the scope of this blog.  There are specific tests which must be satisfied to obtain an interlocutory injunction.  This case is a reminder that there is no need to show either irreparable harm or prove that the balance of convenience favours the franchisor on an application (as there is when arguing for an interlocutory injunction).  This fact favours the franchisor seeking an injunction by way of application. A franchisor which believes it has a winning case should strongly consider proceeding by way of application and expedite the hearing on the merits.  If its claim has merit and it satisfies the tests for an enforceable covenant, it will get its injunction.  As long as the court does not feel that it needs a trial to sort out any conflicts in the evidence, an application can well be the preferred procedure.  Of course, in the right case, nothing stops an applicant from also seeking an interlocutory injunction on a motion pending the hearing of the application.  That can also serve as a dry run to the final hearing.  The result of the motion can also become influential to the parties’ settlement positions.

In summary, franchisors should review their restrictive covenants, ensure they are enforceable, make claims to enforce them where they feel they need to and consider doing so using the application route.

[1] MEDIchair LP v. DME Medequip Inc. [2015] OJ No.3745 (S.C.J.)