760437 Alberta Ltd. v Fabutan Corporation, a
decision of Romaine J. in the Court of Queen's Bench of
Alberta, is a cautionary case for franchisors seeking to deny a
franchisee their right of renewal. In this case, the Court
ordered the franchisor to offer a renewal of a franchise agreement
despite what would appear to be a complete breakdown in the
The franchise agreement in this case provided that so
long as the agreement had not been terminated and the franchisee is
not in default, the franchisee had the option to renew for a
further five years, either on the terms of the existing agreement
or the terms in the standard form of franchise agreement in use by
the franchisor at that time.
In this case, the franchisor and franchisee corporations were
controlled by a brother and sister, respectively. The
relationship between the siblings quickly deteriorated when the
brother (the franchisor) sent a communication to its franchisees
that was alleged to have been embarrassing to the sister (the
franchisee). Following the communication, the sister demanded
repayment of a loan made to the franchisor, while the
franchisor-brother intimated that his sister's franchise
agreement might not be renewed.
During negotiations, the brother relied on the term of the
franchise agreement which provided the new standard form of
franchise agreement would apply to renewals. On this basis he
proposed various terms of renewal that were unique to his
sister's franchise. In particular, he requested a bond be
posted in lieu of a sublease of the premises.
Ultimately, the brother's terms were rejected by the
sister. In one communication, the sister stated that she
"will not sign any form of agreement that you or your
legal [counsel] have or will prepare". On the basis
of this statement, the brother gave notice of termination.
Romaine J. did not accept the brother's characterization of
the termination as having been made due to concerns about the
damage to the corporate brand and ordered him to offer a
renewal. Fatal to the brother's argument was his
admission that his sister had never defaulted under her previous
franchise agreements and that the franchisor had never before
demanded an assignment of leases.
The brother argued that that various communications by his sister
to the franchisee community had discredited the franchisor and the
brand and were thus destructive of an ongoing trusting franchise
relationship. However, Romaine J. held that the argument was
essentially a personal squabble and the business relationship
between franchisor and franchisee could continue.
This decision illustrates the courts' tendency to grant
franchisees the right of renewal, even where relationships are
strained. An apparent breakdown in the relationship may not
be sufficient to withhold renewal rights. Without a clear default
under the franchise agreement, the franchisor will face an uphill
battle convincing a court that the relationship should end.
These issues emphasize the importance of careful drafting of
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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After several months of consultation and deliberations, the Organisation for Economic Co-operation and Development rendered public a revised draft Guidance on Due Diligence for Responsible Business Conduct.
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