Canada: Ontario Court Upholds Restrictive Covenants In Franchise Agreement

Last Updated: May 26 2015
Article by Helen Fotinos, Sam Khajeei and Adam Ship

Most Read Contributor in Canada, September 2018

Franchise agreements often contain covenants restricting the activities of a franchisee both during the term of the franchise agreement and for a period afterwards. In 1598631 Ontario Inc. v. Imvescor Restaurant Group Inc. ("Imvescor"), the Ontario Superior Court of Justice (the "Court") had the opportunity to comment on the following restrictive covenant upon application by a former franchisee (the "Franchisee") for a declaration that the covenant be void as ambiguous and/or as an unreasonable restraint of trade:

"Franchisee agrees that for a period of five years after the termination of this Agreement or expiration of the Term...neither Franchisee, its directors, officers, shareholders, the Owner nor any Key Personnel will...in any manner whatsoever, carry on or be engaged in or be concerned with...any business which is located within a radius of ten (10) kilometers of the Premises or any other Baton Rouge Restaurant anywhere in Canada and which is substantially similar to the Business, namely the operation of a restaurant selling generally all the products listed in Section 2.1.18."

Section 2.1.18 provided that "Products" means southwestern/tex-mex style cuisine and related products as are permitted and approved in writing by the franchisor and to be prepared as appears in the manual of the franchisor (the "Manual").

The Court, following the earlier Ontario court decision Imvescor Restaurants Inc. v. 3574423 Canada Inc., (affirmed by the Ontario Court of Appeal in 2012 ONCA 387), dismissed the Franchisee's application to declare the restrictive covenant void for the following key reasons:

  1. a five year, ten kilometer restriction is reasonable in a fully competitive industry such as the restaurant industry which is characterized by limited barriers to entry, particularly in order to allow a franchisor to develop its concept and to provide an opportunity to prospective franchisees who consider that an investment in an operating chain with a recognized name, décor and menu reduces the franchisee's investment risk; and
  2. the restrictive covenant only applied in narrow circumstances, namely a scenario where the Franchisee seeks to operate or be engaged in a restaurant business that will use substantially the same recipes as set forth in the Manual for most of its products.

The Imvescor decision confirms that Courts will assess restrictive covenants on a contextual case-by-case basis with reference to the duration, geographic scope and express restrictions of such a covenant. In Imvescor, the Court was particularly persuaded by the "limited reach" of the restrictive covenant outlined in item (1) above, noting that, for example, there was no restriction on the ability of the Franchisees to earn a livelihood by investing in restaurants offering different products from those offered by the franchisor.

The Imvescor decision is a reminder that restrictive covenants contained within a franchisor's standard form franchise agreements should be limited to only that which is necessary for the protection of the legitimate interests of the franchisor.

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