MEDIchair LP v DME Medeqip Inc., 2016
ONCA 168 is a case with important implications for all franchisors
and franchisees. In the decision released on February 29, 2016, the
Ontario Court of Appeal struck down a non-competition covenant
because the franchisor had no intention of operating a competing
business within the geographical area covered by the covenant.
Overturning the lower court decision, the Court of Appeal held that
a legitimate proprietary interest is necessary to enforce a
Coverage of the lower court decision is available on our
Consumer and Retail Advisor blog here.
The respondent franchisor, MEDIchair LP, operates a network of
franchisees that sell and lease home medical equipment.
In 2008, the appellants purchased a MEDIchair franchise located
in Peterborough, Ontario. As part of the purchase transaction, the
appellants agreed to a restrictive covenant that at its core
prohibited them from directly or indirectly operating a
"similar business" within a 30-mile radius of their store
or the nearest franchise store in Canada, for a period of 18 months
upon termination of the applicable franchise agreement.
By early 2015, the ownership of the franchise network had
changed hands and the appellants became disenchanted with
MEDIchair. Accordingly, upon the expiration of the franchise
agreement, the appellants changed the signage on their store and
continued to carry on business as usual under a different name.
MEDIchair brought an application to enforce the non-competition
covenant. The application judge held that the covenant was
enforceable and the appellants were in breach of it by their
actions. He noted that it was not relevant whether MEDIchair would
be opening a new franchise within the protected geographical area;
instead, he gave more weight to the "integrity of the
franchise system" as a whole and maintaining the bargain
struck by the parties.
The Appeal Decision
The Court of Appeal overturned the lower court decision to
enforce the covenant. It found the covenant to be unreasonable
because MEDIchair had no ongoing intention to operate a competing
store in the area, negating the proprietary interest that the
covenant was intended to protect.
The Court held that:
The application judge
erred in law by focusing on the effect of non-enforcement on the
MEDIchair franchise system as a whole, without regard to the
reasonableness of the restrictive covenant to protect the
franchisor's legitimate or proprietary interest within the
temporal and territorial scope of the covenant.
In so holding, the Court emphasized that MEDIchair's lack of
intention was effectively an acknowledgment that it had "no
legitimate or proprietary interest", and therefore the
restrictive covenant was "unreasonable as between these two
parties in the circumstances". The Court said:
As the reasonableness
of the covenant will be interpreted based on the parties'
anticipated expansion of the business when they entered into their
agreement, it should similarly be interpreted to take account of
the parties' expectations at that time with respect to the
future continued operation of the franchise in the territory. In
this case, the clause was reasonable on the assumption and
understanding that MEDIchair would want to continue to operate in
the protected Peterborough area, but not if it did not.
MEDIchair presents a number of takeaways.
Notwithstanding the fact that a covenant may be found to be
reasonable and unambiguous, Courts will limit the enforceability of
restrictive covenants to those reasonably necessary to protect the
franchisor's "legitimate" interests.
In determining the reasonableness of the covenant, the Court
will look at the scope of the clause, the parties' plans for
the business, as well as the "parties' expectations at
that time with respect to the future continued operation" of
the business within the geographical area. If upon engaging in this
fact-specific analysis there remains no legitimate interest to
protect – then the covenant will be held unenforceable.
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.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan 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.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).