Court Of Appeal Summaries (February 29- March 4, 2016)

Good afternoon.

Cases this week included a couple of commercial leasing decisions involving issues such as insurance and allocation of risk for damage between landlord and tenant and the commencement of the limitation period for suing for ongoing breaches of covenants. Other topics included the enforceability of a choice of law and forum clause in a financial adviser case, MVA, copyright, and a debtor-creditor case where the debtor got the better of the creditor and succeeded in a claim against the creditor for intentional interference with economic relations.

Perhaps the most interesting decisions released this week were the MEDIchair and the Accuworx decisions. In MEDIchair, the Court of Appeal struck down a non-competition covenant that purported to restrict the business of a former franchisee in a particular geographical area where the franchisor had no intention to carry on business in that area. In Accuworx, a successful claim for unjust enrichment was brought against a landlord corporation for environmental clean-up work on its property even though the contract to clean up was not with that corporation but with a related tenant corporation that had gone bankrupt. The court found that the landlord corporation received the benefit of avoiding a potential clean-up order issued by the Ministry of the Environment and therefore should be liable for the clean-up costs even though it was the related tenant corporation that had contracted for the work to be performed. This was a clever way to get around the annoying issues of privity of contract and the corporate veil. No doubt the fact that the landlord and tenant corporations were related (they were closely held corporations with the same controlling mind) played a critical role in the outcome. It would have been interesting to see if the same result would have followed if the corporations had been at arm's length.

Have a nice weekend.

CIVIL DECISIONS

MEDIchair LP v. DME Medequip Inc., 2016 ONCA 168

[Feldman, MacPherson and Miller JJ.A.]

Counsel:

David S. Altshuller and Jennifer Pocock, for the appellants

R.S.M. Woods and Peter Smiley, for the respondent

Keywords: Contracts, Franchise Agreements, Restrictive Covenants, Enforceability, Reasonableness in Scope, Legitimate or Proprietary Interest, Elsley v. J.G. Collins Ins. Agencies, Payette v. Guay, Arthur Wishart Act (Franchise Disclosure), s. 5, Disclosure Statement, Fresh Evidence

Facts: MEDIchair LP is a franchisor that operates a network of franchise stores that sell and lease home medical equipment. One of its franchise locations was in Peterborough, Ontario. It was owned and operated by DME Medequip Inc. ("DME"). DME's latest franchise agreement was dated 2005 (the "2005 Franchise Agreement"). In 2008, the appellants, Ms. Rolph and Mr. Seiderer, incorporated the appellant 2169252 Ontario Inc. to purchase the Peterborough franchise from the owners of DME, and agreed to be bound by the 2005 Franchise Agreement, including the restrictive covenant. That covenant, which was to apply on the termination of the agreement, prevented them from operating a similar store for 18 months within a 30-mile radius of their store or the nearest franchise store. In 2011, the MEDIchair franchise system was sold to Centric Health Corporation ("Centric"). In 2012, Centric also purchased Motion Specialties ("Motion"), a group of corporate stores similar to the MEDIchair stores. One of those stores was in Peterborough, competing directly with the appellants' MEDIchair store. The appellants allege that, following these acquisitions, Centric focused its support on the Motion stores, rather than the MEDIchair stores. The number of MEDIchair stores began to decline. Having become very disenchanted with MEDIchair, the appellants did not renew their franchise agreement when it expired in 2015. Instead, they removed the MEDIchair signage and continued to operate their business at the same premises with the same merchandise and the same employees, and changed their name to Living Well Home Medical Equipment. The respondent franchisor, MEDIchair LP, was successful on its application to enforce the restrictive covenant against the appellants, DME Medequip Inc. (its former franchisee) and related parties.

Issues:

(1) Should the court admit and consider fresh evidence?

(2) Did the application judge err by holding that MEDIchair was not required under the Arthur Wishart Act (Franchise Disclosure) to provide the appellants with a franchise disclosure document when they originally purchased the franchise?

(3) Did the application judge err by holding that the term "similar to" in the restrictive covenant was not ambiguous?

(4) Did the application judge err by finding that the restrictive covenant was reasonable in scope, having regard to the legitimate or proprietary interest that MEDIchair was entitled to protect?

Holding: Appeal allowed.

Reasoning:

(1) No. The appellants sought to introduce fresh evidence regarding the modification of their business in order to try to make it sufficiently dissimilar to the MEDIchair business to comply with the covenant, and the declining state of the MEDIchair franchise system. The court did not call on the respondent to address the issue of the admissibility of this evidence on the appeal. With the limited exception of the current state of the MEDIchair franchise system, all of the other proposed fresh evidence could have been obtained by cross-examination of the respondent's deponents and put before the application judge.

(2) No. Subsections 5(1) and (4) of the Arthur Wishart Act require a franchisor to provide a prospective franchisee with a "disclosure document" that contains prescribed information about the franchise at least 14 days before a franchise agreement is signed or payment is made. However, in a number of cases described in ss. 5(7) of the Act, a franchisor is exempted from that obligation. One is where the grant of the franchise by a franchisee "is not effected by or through the franchisor": ss. 5(7)(a)(iv). The application judge found that the respondent had very little involvement in the sale of the franchise and was therefore exempt from the disclosure requirement. The respondent merely gave its required approval for the transfer, took a transfer fee, and obtained personal covenants from Ms. Rolph and Mr. Seiderer to be bound by the 2005 Franchise Agreement, as well as a guarantee from the appellant numbered company for DME's obligations under the 2005 Franchise Agreement.

(3) No. The application judge found that the respondent has "a method of operation, goodwill, products, and services that it has a legitimate interest in protecting from similar operations specializing in the sale or rental of home medical equipment." In other words, the similarity is found by comparing not only the product line, but also the method of operation, including whether the appellant was trading on the goodwill of the MEDIchair operation from which it had benefitted over the years.

(4) Yes. The basic principles governing the courts' approach to the enforceability of covenants in restraint of trade have been set out in two cases from the Supreme Court of Canada, Elsley v. J.G. Collins Ins. Agencies, [1978] 2 SCR 916, and Payette v. Guay, 2013 SCC 45. In Elsley, Dickson J. (as he was then) stated that a covenant in restraint of trade is enforceable only if it is reasonable between the parties and with reference to the public interests. In Payette, Wagner J. concluded that in the commercial context - i.e. the sale of a business - the courts will treat a restrictive covenant as lawful unless it is shown on a balance of probabilities to be unreasonable. In this case, the application judge erred in finding the scope of the restrictive covenant reasonable. It was clear from the evidence that by deciding not to operate in Peterborough, MEDIchair effectively acknowledged that it had no legitimate or proprietary interest to protect within the defined territorial scope of the covenant. Nor had the respondent attempted to suggest that it would be entitled to enforce the MEDIchair restrictive covenant in order to protect its interest in another business, Motion, owned within the same corporate group. The restrictive covenant was unreasonable as between the two parties in the circumstances of the particular Peterborough franchise because MEDIchair did not have a legitimate or proprietary interest to protect within the territorial scope of the covenant.

Accuworx Inc. v. Enroute Imports Inc. 2016 ONCA 161

[Gillese, Hourigan and Brown JJ.A.]

Counsel: Tamara Farber and Alexandra L. White, for the appellant William A. Chalmers, for the respondent

Keywords: Environmental Law, Environmental Protection Act, Remedial Orders, Unjust Enrichment, Quantum...