A "Pet Valu" franchisee in Ontario claimed that sales
were declining, so she terminated the Franchise Agreement. After
termination of the agreement, her husband established a competing
"Pet Stuff" business nearby. When a franchise location
fails as it did in this case, what happens with the
"restrictive covenants" in the agreement? Can these
provisions be circumvented by the use of a separate company, or by
using a friend or family member?
If you are in the franchise business, either as a franchisor or
a franchisee, you will undoubtedly have to deal with
"restrictive covenants". These are the provisions in the
Franchise Agreement that control what the franchisee can do after
the termination of the agreement. Most franchise agreements contain
clauses prohibiting the franchisee from establishing a competing
business, soliciting customers, or using confidential information
of the franchise.
The recent decision in Pet Valu Canada Inc. v. 1381114
Ontario Limited, 2013 ONSC 5361, dealt with an
ex-franchisee who established a competing business through her
husband's numbered company within a few blocks of an existing
Pet Valu location. Pet Valu, the franchisor, applied to the court
for an injunction to compel the ex-franchisee to stop this
competition. Pet Value sued both the franchisee and her husband,
and each of their companies. Pet Valu argued that the actions of
the ex-franchisee breached the terms of the franchise agreement
the operation of a competing business for a period of 2 years
after the end of the franchise agreement within a 20 km radius of
any other Pet Valu Store,
the hiring of any employee of a Pet Valu franchise for 1 year
after the end of the Franchise Agreement; and
the use of customer lists, confidential information and all Pet
Valu branded signs, labels and price tags after the termination of
The court in this case had no trouble looking behind this
"transparent effort" on the part of the ex-franchisee to
establish a competing "Pet Stuff" business. The "Pet
Stuff" business also hired away one of the store managers who
had worked at the Pet Valu franchise, and even made use of shelving
and inventory with distinctive labels, price tags and product codes
from the old Pet Valu franchise. The court issued an interim
injunction against the ex-franchisee and her husband.
Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
While most are well aware that the sale of a business is generally a complex process, even sophisticated business owners are surprised by just how much cost and effort is required to complete the sale.
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