MEDIchair LP v. DME Medequip Inc. et al., (2016) 347 O.A.C. 31 (CA)

• Judge: Feldman, MacPherson and Miller, JJ.A.
• Court: Court of Appeal (Ontario)
• Case Date: January 25, 2016
• Jurisdiction: Ontario
• Citations: (2016), 347 O.A.C. 31 (CA);2016 ONCA 168

MEDIchair LP v. DME Medequip Inc. (2016), 347 O.A.C. 31 (CA)

MLB headnote and full text

Temp. Cite: [2016] O.A.C. TBEd. MR.002

MEDIchair LP (applicant/respondent) v. DME Medequip Inc., Allison Rolph, Ron Seiderer and 2169252 Ontario Inc. (respondents/appellants)

(C60733; 2016 ONCA 168)

Indexed As: MEDIchair LP v. DME Medequip Inc. et al.

Ontario Court of Appeal

Feldman, MacPherson and Miller, JJ.A.

February 29, 2016.

Summary:

A franchisor successfully applied to enforce a restrictive covenant against its former franchisee and related parties ("new franchisee"). See 2015 ONSC 3715. The former and new franchisees appealed.

The Ontario Court of Appeal allowed the appeal.

Contracts - Topic 6723

Illegal contracts - Contrary to public policy - Restraint of trade - Interpretation - [See Franchises - Topic 2004 ].

Contracts - Topic 6732

Illegal contracts - Contrary to public policy - Restraint of trade - Agreements not to compete or solicit - The Ontario Court of Appeal stated that "The basic principles governing the courts' approach to the enforceability of covenants in restraint of trade have been set out clearly in two cases from the Supreme Court of Canada, Elsley v. J.G. Collins Ins. Agencies, [1978] 2 S.C.R. 916, and most recently, Payette v. Guay, 2013 SCC 45, [2013] 3 S.C.R. 95. Both cases also address the difference in approach when the clause is contained in a contract for the sale of a business versus an employment contract. Although the test is essentially the same, courts will give more scrutiny to the reasonableness of a restrictive covenant in the employment context, while applying a presumption of validity to such clauses where they have been negotiated as part of the sale of a business." - The test was whether the covenant was reasonable between the parties and with reference to the public interest - See paragraphs 33 to 35.

Contracts - Topic 6732

Illegal contracts - Contrary to public policy - Restraint of trade - Agreements not to compete or solicit - A franchise agreement for a franchise in the Peterborough area had a restrictive covenant that prohibited the franchisee from involvement in any business "similar to" that carried on by the franchisor (MEDIchair) - MEDIchair successfully applied to enforce a restrictive covenant against its former franchisee and related parties (the appellants) - The appellants appealed - The Ontario Court of Appeal held that the issue was whether the franchisor had a legitimate protectable interest - 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 - The court held that the restrictive covenant was unreasonable as between these two parties in the circumstances of the particular Peterborough franchise because MEDIchair did not have a legitimate or proprietary interest to protect within the covenant's territorial scope - See paragraphs 37 to 52.

Contracts - Topic 7425

Interpretation - Ambiguity - General - [See Franchises - Topic 2004 ].

Franchises - Topic 2004

Franchise agreement - General - Interpretation - A franchise agreement had a restrictive covenant that prohibited the franchisee from involvement in any business "similar to" that carried on by the franchisor (MEDIchair) - MEDIchair successfully applied to enforce a restrictive covenant against its former franchisee and related parties (the appellants) - The appellants appealed and argued that because (a) there was no definition of the MEDIchair business in the 2005 Franchise Agreement, (b) its business covered a variety of products, and (c) different franchise outlets might offer different products, it was impossible to know what would constitute a similar business - The Ontario Court of Appeal found no reasons to interfere with the application judge's conclusion that the term "similar to" was not ambiguous in the context of the MEDIchair's business - The application judge found similarity by comparing not only the product line, but also the method of operation, including whether the appellants were trading on the goodwill of the MEDIchair operation - See paragraphs 28 to 32.

Franchises - Topic 2063

Franchise agreement - Duties of franchisor - To provide statement of material facts (disclosure) - A franchisor (MEDIchair) successfully applied to enforce a restrictive covenant against its former franchisee and related parties (numbered company and two individuals (Rolph and Seiderer), collectively "new franchisee") - The new franchisee had purchased the franchise from the former franchisee in 2008 - The former franchisee had purchased the franchise from MEDIchair in 2005 - The application judge found that the franchisor had very little involvement in the sale of the franchise and was therefore exempt from the disclosure requirement in ss. 5(1) and 5(4) of the Arthur Wishart Act, by virtue of s. 5(7)(a)(iv) - The franchisor merely gave its required approval for the transfer, took a transfer fee, and obtained personal covenants from Rolph and Seiderer to be bound by the 2005 Franchise Agreement, as well as a guarantee from the numbered company for the former franchisee's obligations under the 2005 Franchise Agreement - The application judge rejected the argument that once the franchisor gave some disclosure, it was then obliged to give the full statutory disclosure - Further, the franchisees must have been aware of the 2005 Franchise Agreement, and could have requested a copy if they did not receive one - On appeal, the Ontario Court of Appeal found no error in the application judge's approach or in his conclusion - See paragraphs 22 to 27.

Master and Servant - Topic 1323

Contract of hiring (employment contract) - Covenants in restraint of trade - Restrictive covenants - Whether reasonable - General - [See first Contracts - Topic 6732 ].

Practice - Topic 9031

Appeals - Evidence on appeal - Admission of "new evidence" or "fresh evidence" - A franchisor (MEDIchair) successfully applied to enforce a restrictive covenant against its former franchisee and related parties ("franchisees") - The franchisees appealed and applied to adduce two categories of fresh evidence on appeal - The first category consisted of the franchisees' attempt to modify their business following the decision under appeal, in order to try to make it sufficiently dissimilar to the MEDIchair business to comply with the covenant, and MEDIchair's negative response to those attempts - The second category was further details from MEDIchair about the declining state of the MEDIchair franchise system at the time of the application and since - The Ontario Court of Appeal dismissed the fresh evidence application - With the 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 MEDIchair's deponents by the use of hypotheticals - Second, the application judge took cognisance of the fact that the system "may be experiencing difficulty" in deciding whether the restrictive covenant was reasonably necessary to protect MEDIchair's legitimate or proprietary interest - See paragraphs 18 to 21.

Words and Phrases

Similar to - The Ontario Court of Appeal discussed the meaning of this phrase as contained in a restrictive covenant in a franchise agreement - See paragraphs 28 to 32.

Cases Noticed:

R. v. Palmer, [1980] 1 S.C.R. 759; 30 N.R. 181, appld. [para. 18, footnote 1].

2189205 Ontario Inc. et al. v. Springdale Pizza Depot Ltd. et al. (2011), 283 O.A.C. 55; 336 D.L.R.(4th) 234; 2011 ONCA 467, dist. [para. 27].

2240802 Ontario Inc. et al. v. Springdale Pizza Depot Ltd. et al., 2014 ONSC 3442, affd. (2015), 331 O.A.C. 282; 2015 ONCA 236, dist. [para. 27].

Mapleleaf Franchise Concepts, Inc. v. Nassus Frameworks Ltd. et al., [2011] A.R. Uned. 659; 2011 ABQB 594, dist. [para. 27].

Second Cup Ltd. v. Niranjan (2007), 39 B.L.R.(4th) 73 (Ont. S.C.), dist. [para. 27].

Invescor Restaurants Inc. et al. v. 3574423 Canada Inc. et al., [2011] O.T.C. Uned. 1609; 85 B.L.R.(4th) 12; 2011 ONSC 1609, affd. (2012), 292 O.A.C. 322; 100 B.L.R.(4th) 173; 2012 ONCA 387, refd to. [para. 29].

Pacific Northwest Cruiseshipcenters Ltd. v. Super Cruise World Travel (Delta) Inc. (1991), 38 C.P.R.(3d) 528 (B.C.S.C.), refd to. [para. 29].

Jamani v. Subway Franchise Systems of Canada Ltd. (2008), 461 A.R. 205; 53 B.L.R.(4th) 128; 2008 ABQB 677, ref to. [para. 29].

Collins (J.G.) Insurance Agencies Ltd. v. Elsley Estate, [1978] 2 S.C.R. 916; 20 N.R. 1, folld. [para. 33].

Guay Inc. v. Payette et al., [2013] 3 S.C.R. 95; 448 N.R. 1; 2013 SCC 45, refd to. [para. 33].

Tank Lining Corp. v. Dunlop Industrial Ltd. (1982), 40 O.R.(2d) 219 (C.A.), refd to. [para. 38].

McAllister v. Cardinal, [1965] 1 O.R. 221 (H.C.), refd to. [para. 40].

Statutes Noticed:

Arthur Wishart Act (Franchise Disclosure), S.O. 2000, c. 3, sect. 5(7)(a)(iv) [para. 22]; sect. 5(8) [para. 23].

Counsel:

David S. Altshuller and Jennifer Pocock, for the appellants;

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

This appeal was heard on January 25, 2016, by Feldman, MacPherson and Miller, JJ.A., of the Ontario Court of Appeal. Feldman, J.A., delivered the following decision on February 29, 2016.