Canada: Claim Against Former Franchisee For Soliciting Customer Lists "Turfed" By BC Court

Last Updated: May 6 2014
Article by Christopher Horkins

In 0867007 BC Ltd v. Destinations International,1 the Provincial Court of British Columbia dismissed the claims of a franchised business purchaser seeking to rely on purported non-competition and non-solicitation provisions in its claim against the former franchisee that sold the business. Although the case involved relatively small monetary amounts, it demonstrates the need for parties to take great care in addressing non-competition and non-solicitation obligations upon the transfer of a franchise.

The defendant, Destinations International Development Corp. (BC0390661) ("Destinations"), became a franchisee of lawn-care franchisor, Turf Logic Inc. ("Turf Logic"), in 2007. Destinations operated in North Vancouver and throughout the North Shore area. In 2010, the principal of Destinations, Alan Dudley ("Dudley"), decided to sell his business and move to Northern BC to pursue a relationship and a job opportunity. Dudley advertised the business online and was contacted by Leo Dion ("Dion"), a representative of the claimant company, 0867007 B.C. Ltd. d.b.a. Get Green Landscapes ("Get Green"), who expressed interest in acquiring the business. Dudley and Dion negotiated an agreement which was concluded on June 30, 2010 (the "Purchase Agreement").

The Purchase Agreement, which the Court found was "very poorly drawn," provided for payments, totalling $29,000, from Get Green to Destinations but did not say when they were to be made other than "on completion." The Purchase Agreement also contained no express non-competition or non-solicitation provisions, although Dion testified that it was his expectation that such a clause would be included. Dion claimed to have been assured that Dudley, who was moving north, would not be around to compete with his business or solicit former customers. Both parties agreed that the key element of the transaction was Destinations' customer list of approximately 75 clients in the North Shore area, many of whom had pre-paid annual contracts for "lawn maintenance" services in addition to monthly lawn-cutting. Dion, however, believed that Get Green was merely purchasing Destinations' customer list and would be able to consider becoming a Turf Logic franchise at a later date. Dudley testified that his intention was to sell the entire franchised business, as to sell only the customer list would result in a breach of Destinations' franchise agreement. The Court found that a fair and reasonable interpretation of the Purchase Agreement supported Dudley's view.

The transaction did not go as planned. In June 2010, after paying an initial $5,000 to Destinations, Get Green received approximately 25 of the 75 names on Destinations' customer list. Later, in July 2010,  despite having not paid the balance of the purchase price Get Green received an additional 35 names representing the "lawn maintenance" customers with pre-paid annual contracts. An additional $10,000 of the purchase price was eventually paid after the fall maintenance work was done. The relationship then broke down due, in large part, to Get Green's refusal to pay the remaining $14,000 of the purchase price. The franchisor, Turf Logic, then stepped in to broker a settlement whereby Get Green would settle Destinations' owed amounts under its franchise agreement with Turf Logic in exchange for paying a lesser remaining payment to Destinations under the Purchase Agreement. Dudley agreed to this deal and, in exchange, Turf Logic sent him a letter stating that he and Destinations were "released from all further obligations, whether financial, contractual or otherwise, that may exist in regards to the Franchise Agreement..." But for this letter, the Court found that Destinations and Dudley would have been subject to an express two-year non-competition provision under the franchise agreement. Turf Logic's principal admitted at trial that this piece of correspondence was "unfortunate."

After this deal was agreed upon, Dudley sent an email to his former customers providing contact information for Get Green, and explaining that any delays in service were due to the issues surrounding the transition and, in particular, Get Green's failure to pay the full purchase price under the Purchase Agreement. The Court found that this email could not be construed as an effort to solicit Destinations' former customers, as Dudley expressly stated he was engaged in a new job in the recycling sector in Northern BC and would not be returning. Later in 2010, however, Dudley decided to leave Northern BC and return to the North Shore. After inquiring with Turf Logic, he learned that Get Green had failed to conclude a deal to become a Turf Logic franchisee and as such, Dudley believed he could proceed to contact his former Destinations' customers to build a customer base for a new lawn-care business in the North Shore area to be commenced in early 2011. At the time of the trial, Dudley was providing lawn-care service to 22 customers on the list he provided to Get Green pursuant to the Purchase Agreement.

After failing to establish the existence of an express non-competition or non-solicitation provision binding Dudley and/or Destinations, Get Green argued that an implied non-solicitation provision existed under the Purchase Agreement. Although the Court found that, where, as here, a business sale includes an amount for goodwill a non-solicitation provision must necessarily be implied into the contract, such a provision is only effective upon the completion of the sale in question. Since Get Green never completed payment of the purchase price under the Purchase Agreement, the implied term in this case never became operative. Alternatively, Get Green's breach of the payment provision went to the root of the Purchase Agreement and effectively excused Destinations from compliance with the implied non-solicitation provision. The Court also found that Get Green had not adduced any actual evidence that its loss of customers was due to solicitation by Dudley's new business, finding instead that it had been the "author of its own misfortune" losing business through poor service and its own failure to abide its contractual payment obligations to Destinations and Turf Logic. Although Dion alleged that Get Green had lost 60 of the 75 customers it received from Destinations following the Purchase Agreement, because Dudley was only servicing 22 of his former customers in his new business this necessarily implied that most of the customer list was lost to other competitors notwithstanding Dudley's re-entry into the North Shore market. In the result, the claim against Destinations was entirely dismissed and the Court found Dudley was free to operate his new business without any restriction from contacting Destinations' former Turf Logic customers.

The Destinations decision highlights some important lessons for franchisors dealing with transfers of existing franchises to new owners. In this case, the franchisor's involvement in the transaction came too late to ensure the transaction was properly structured to protect its interest in the territory. Franchisors should strive to be aware of and involved with such transfers in order to ensure that their franchise system's goodwill and customer base is maintained and protected. Further, this case demonstrates the necessity of clearly drafted and enforceable non-competition and non-solicitation provisions in franchise agreements and in agreements of purchase and sale relating to franchise transfers. Franchisors should always take care to ensure that compliance with such covenants is not waived in a blanket release granted to a departing franchisee, as was the case here. As always, franchisors are advised to contact their legal advisors for advice when dealing with prospective franchise transfers in their system.

Footnote

1  2013 BCPC 0295 (CanLii) [Destinations]. 

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