Case Notes

Draft That Franchise Agreement Carefully!

by Tom Marlay

The outcome in a preliminary proceeding of a recent case in the Ontario Superior Court, W. A. B. Bakery Franchising Ltd. v. Canam Advertising Ltd., and Raphi Shram, must have surprised the “What A Bagel” franchisor, who was the plaintiff. 

The plaintiff brought a motion for an injunction to prevent a former franchisee from operating “Bagel Nash” after the expiration of a ten-year franchise term for a What A Bagel outlet. Note that the word is “expiration” not “termination.” You might think those words are synonyms in English and for some purposes they may be, but not in this case.

The judgment is a good example of the way courts use rules of interpretation in resolving disputes over legal agreements. The non-competition provision in the agreement in question applied “in the event of termination of this Franchise Agreement for any reason whatsoever.” Surely, expiration is one form of “termination” of an agreement? Well, in English usage, yes, but in this case, no.

Courts strive to give meaning to every provision in a legal agreement and to take words at their ordinary meaning, unless doing so would render an absurd result. In the Franchise Agreement there were several sections that referred both to expiration and termination, so when in another part of the agreement only the word “termination” is used it is assumed in legal reasoning that this different usage of terminology was intentional. It may be unusual for a franchise agreement to have a non-competition clause that applies only on premature termination of the agreement and not its normal expiration, but it is by no means absurd. It could be the case that the parties intended that after ten years the franchisee was to be free to compete with his former franchisor.

If you think that the franchisor in the dispute would be free to explain that was not his intention, not so. If one side could explain away what is written down so easily, there would be litigation almost every time contracting parties had a difference of opinion. Barring wording that leads to an absurdity, parties are stuck with what they wrote. Saying to the court – “That is not what I meant!” – is not an option.

When the actual trial takes place, the plaintiff will get to make his argument again that the non-compete applies after “expiration” and not just “termination,” as this preliminary decision determined only whether an injunction should be issued to prevent the former franchisee from competing until the matter goes to trial. The court refused the injunction, but on other grounds, not that this question was not a serious issue for trial. So the trial court could ultimately come to a different conclusion on the point, although the judge on this interim motion makes it pretty clear he would not.

Regardless, the lesson is clear. Legal drafting is a very precise exercise. Fail to be precise at your peril. You can bet that franchisees, franchisors and their lawyers are already running to look at their agreements to see what they provide will happen on termination – er, sorry, that is on termination or expiration!