In the recent case of Pet Valu Canada Inc. v. 1381114
Ontario Limited, the Court dealt with a motion by a
franchisor, Pet Valu Canada Inc., against a numbered company
operating as "Pet Stuff & Supplies" and its
principals. Pet Valu was seeking an injunction stopping the
defendants from operating a pet supply store which allegedly
breached a non-competition covenant in a franchise agreement.
Robin Martin, as sole officer and director of 1381114 Ontario
Limited, entered into a franchise agreement with Pet Valu that
contained a restrictive covenant. Ms. Martin personally
operated the Pet Valu franchise store until the franchise agreement
At that point, according to the franchise agreement, she was
prohibited from operating or participating in a competing business
for 2 years within a 20 kilometer radius of the store.
Ms. Martin's husband was one Mark Fingarson. He was
the long-time owner and operator of Alfa Security Systems, a
security services company.
In the month prior to the termination of Ms. Martin's
franchise agreement, Mr. Fingarson directed a numbered company
which he had incorporated earlier to register the business names
"Pet Stuff & Supplies" and "Alfa
After the termination of the franchise agreement, that numbered
company began to operate a pet supply store 450 meters from a Pet
Valu store. In addition to pet supplies, the store sold spy
equipment and skateboards. Ms. Martin's former manager
was employed there after having set up the store. Shelving,
racking and inventory with distinctive labels, price tags and
product codes from Ms. Martin's Pet Valu franchise were in use
at the new store.
A private investigation firm hired by Pet Valu conducted
surveillance of the store on a Saturday in the month following the
termination of the franchise agreement and observed Ms. Martin
attending there on two occasions throughout the day including
dropping off several roles of change at the business.
Pet Valu sought an injunction to require the new store to
close. The judge had no difficulty granting the
injunction. The judge found that while Mr. Fingarson had not
been a signatory to the franchise agreement, he clearly set up the
new company to assist his wife to compete with Pet Valu when she
had undertaken not to do so. It was plain to the judge that
the new company had been incorporated by Mr. Fingarson to hide his
wife's involvement, and that she was involved in the operation
of the new store.
The judge found that this was all a "transparent effort by
all of the defendants to avoid the restrictive
covenant". She regarded all of this as "no more
than a feeble attempt" to do so.
Mr. Fingarson had insisted that Pet Stuff was not actually
competing business within the meaning of the restrictive covenant
because it also sold spy equipment and skate boards. This
argument was completely rejected as well.
The judge went on to make a significant point on the law
relating to injunctions relating to restrictive covenants.
In a normal injunction proceeding, the party seeking the
injunction must show that there is evidence supporting a valid
complaint. In addition, it must show if the injunction is not
granted, the party seeking the injunction will suffer harm which is
"irreparable" which is to say that compensation in
damages will not be adequate. Finally, the party must
demonstrate that the harm to it if the injunction is not granted
outweighs the harm to the defendant if it is granted. This is
what is referred to as the "balance of convenience"
However, as the Court pointed out, a fundamental aspect of any
franchise system is the protection of its method of operation,
goodwill, products and services. Accordingly, where there is
a clear breach of a negative covenant in a franchise agreement, the
elements of irreparable harm and balance of convenience are not
required. All the moving party has to do is to demonstrate
that it has a valid and supportable claim for a breach of a
non-competition provision or other restrictive covenant.
This is a useful reminder of the law relating to the enforcement
of restrictive covenants in franchise agreements. It is also
a useful reminder to the public generally that transparent attempts
to circumvent these covenants will never be tolerated.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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