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Franchisor Cannot Terminate based on Unproven Allegations of Exploitation against Franchisee

court room termination

Recently, in Golden Globe Pizza Inc. v. Domino's Pizza of Canada Ltd., 2015 BCSC 356, the B.C. Supreme Court granted an injunction sought by a franchisee to prevent the franchisor from terminating the franchise agreement based on unproven allegations of exploitation made by employees of the franchisee.

The case stemmed from a confrontation between the principals of Golden Globe Pizza Inc., a Domino's pizza franchisee, and their two former employees who were demanding payment of wages that they claimed were owing to them. The Canadian Broadcasting Corporation also reported that the two employees alleged that the principals of the franchisee made death threats and assaulted them after the employees had refused to work until they received their back pay.

The two employees complained to the Employment Standards Branch and it was reported in the media that the police launched an investigation into the matter. The principals of the franchisee denied the allegations.

The franchisor, Domino's Pizza of Canada Ltd., delivered a notice terminating the franchise agreement with the franchisee after conducting its own investigation. As grounds for termination, the franchisor relied on a provision of the franchise agreement, which states that the franchisor has a right to immediately terminate the agreement where: (a) the franchisee or its owners "engage in any conduct which adversely affects the reputations of the Store or the goodwill associated with the Marks as conclusively determined by [the franchisor]", or (b) the franchisee or its owners "are involved in any act or conduct which impairs [the franchisor's] reputation and the goodwill associated with the marks and the system as conclusively determined by [the franchisor]".

The franchisee applied for an injunction to the B.C. Supreme Court in order to prevent the franchisor from terminating the agreement. The franchisor, in turn, sought an injunction requiring the franchisee to immediately cease operations.

In determining whether to grant an injunction, the Court considered the contractual provision allowing the franchisor to terminate the franchise agreement where the franchisee's conduct adversely impacts the franchisor's reputation or goodwill as conclusively determined by the franchisor. The Court held that, while this provision would allow the franchisor to determine whether, and the extent to which, the conduct of the franchisee adversely affects the franchisor, it cannot be interpreted to give the franchisor the unfettered right to determine what the franchisee has or has not done. The judge noted at paragraph 11: "Such an interpretation would give [the franchisor] the right to terminate the agreement on the basis of any evidence it chose to accept, even where the evidence was clearly unreliable or would be seen by an objective observer to be patently false."

The judge went on to say that, were the allegations from the former employees true, the franchisor would have had the right to terminate the franchise agreement. However, since the franchisee and its principals denied the allegations and there were conflicting affidavit evidence as to the veracity of the allegations, the judge held, at paragraph 12, that there was a serious question still to be tried - whether the franchisee in fact engaged in the alleged conduct. The judge granted the injunction being sought by the franchisee and required the franchisor to pay the franchisee's court costs.

On August 27, 2015, the civil case between the franchisee and the franchisor was settled by court order, which was agreed to by both the franchisee and franchisor. The Court mandated the franchisee to pay $30,000.00 to the franchisor and to retain an arm's-length company to administer the payroll services on behalf of the franchisee. The franchisee retained its franchise.

For more information, please contact Marina Abrosimov at 613-563-6684 or by email at [email protected].

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