The Ontario Court of Appeal recently nullified a non-competition covenant in a franchise agreement because the franchisor, medical equipment provider MediChair, had no intention of continuing to operate a store within the geographical area covered by the contract.
In 2008, the appellants purchased a franchise in Peterborough, Ont., and part of the transaction included a restrictive covenant prohibiting them from directly or indirectly operating a similar business within a 48-km (30-mi) radius of the store or the nearest franchise until 18 months after termination of the agreement.
By early 2015, MediChair’s ownership changed hands and the franchisees became disenchanted. When their franchise agreement expired, they changed the signage on their store and continued business as usual under a new name. The franchisor sued the franchisees to try to enforce the non-competition covenant and won. A lower court ruled the franchisees had breached their contract.
The franchisees called for a retrial and the Ontario Court of Appeal overturned the decision. It found the covenant unreasonable because MediChair had no ongoing intention to operate a competing store in the area, negating the proprietary interest the contract intended to protect.
McCarthy and Tetrault lawyer Shanique Lake says courts will limit the enforceability of restrictive covenants to those reasonably necessary to protect the franchisor’s ‘legitimate’ interests. They will look at the scope of the clause, the parties’ plans for the business and their present and future expectations for the business in a specified geographical area, she says. If the analysis proves there is no legitimate interest to protect, the courts will find it unenforceable.
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