The recent decision Pet Valu Canada Inc. v. 1381114 Ontario
Limited 1is unique because it is one of the first
decisions in Canada to explicitly hold that non-competition clauses
may be binding on non-arm's length parties to a franchise
Prior to the Pet Valu decision, the courts have only discussed
corporate alter egos by stating in Bark v.
Fitz2 that, "If the non-competition clause did
not bind the principal of the corporate franchisee, that clause
would be effectively meaningless: the principal could simply start
a new corporation."
Pet Valu, therefore, takes it one step further by throwing
non-arm's length parties to the mix. In Pet Valu, the
franchisee was the sole officer and director of 1381114 Ontario
Limited and entered into a franchise agreement with Pet Valu that
contained a non-competition clause that prohibited the franchisee
from operating or participating in a competitive business for 2
years within a 20 kilometer radius of the store. However, instead
of complying with the non-competition clause, the franchisee asked
her husband to set up a new corporation by the name of Pet
Stuff & Supplies which was located a mere 450 meters from the
closest Pet Valu location.
The judge in this decision decided to enforce the
non-competition covenant against the non-parties to the franchise
agreement because the judge determined that the husband had set up
the new corporation to hide his wife's involvement in the
competing business in order to assist her in competing with Pet
Valu when she had undertaken not to do so.
The judge in this decision stated that the actions were "a
transparent effort by all of the defendants to avoid the
restrictive covenants" and therefore, ordered the defendants
to cease operating the competing business, explaining that a
"fundamental aspect of any franchise system is the protection
of its method of operation, goodwill, products and services";
therefore, the defendants' breach of their undertaking to not
compete would harm the Pet Valu franchise system.
This decision demonstrates that the courts will enforce a
non-competition clause on non-parties if the non-parties are
non-arm's length third parties who are operating the competing
business in an attempt to assist the signatory in evading their
non-competition undertakings. Therefore, potential franchisees
should fully understand the non-competition provisions in their
franchise agreement before signing on the dotted line.
The decision in the Pet Valu case is similar to a situation that
took place about ten years ago in Hamilton, Ontario. In
Bulk Barn Foods Ltd. v Faber3, the court
granted an injunction restraining Faber and her company from
competing with Bulk Barn following the expiration of a franchise
agreement. Faber was a 50% shareholder of the franchisee
company, a fact that had not been disclosed to Bulk Barn at the
time the franchise agreement was signed. The franchise
agreement required shareholders to give an undertaking to be bound
by the non-competition covenant in the franchise agreement, but
Faber never gave it. Faber had been involved with her husband
in the day-to-day operation of the Bulk Barn franchise during the
term of the franchise agreement. She was held to be bound by
the undertaking not to compete as if she had signed it.
1. Pet Valu Canada Inc. v. 1381114 Ontario
Limited, et al, 2013 ONSC 5361 (CanLII).
2. Bark & Fitz Inc. v. 2139138 Ontario Inc.,
2010 ONSC 1793,  OJ No 1428.
3. Bulk Barn Foods Ltd. v Faber  OJ No
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