Friday, December 12, 2014

Superior Court Rules that Kumon Franchisee was Entitled to Reasonable Notice

Kumon is a well-established franchise offering after-school math and reading programs.  To my understanding, it has a very successful system for leading its students to excel in advanced content.  And the franchises are all over the place, including two within Newmarket.

But there's a very interesting new case, making new law, dealing with the termination of a Kumon franchise.  The facts are quite unique, as the franchisee (Ms. France) had been operating since before Kumon started using written franchise agreements, and refused to sign the various franchise agreements put to her by the franchisor.  So we're left with the scenario of an oral contract governing a franchise agreement, which is quite exceptional in this day and age.

One of the primary issues for Kumon is that France was resisting shifts to their business model - they've been trying to present a more professional image to the world, including establishing permanent and visible presence in appropriate commercial space, as distinct from - to use France's business as an example - just renting a church basement two nights per week.

With France refusing to sign written franchise agreements, Kumon eventually decided to end the relationship, and provided her with 12 months of notice.  Ms. France sued, taking the position that the contract was 'perpetual' and could not be terminated by the franchisor.  Kumon argued that there was an implied term permitting termination on reasonable notice, and that 12 months was reasonable.

The Decisions

The Court accepted Kumon's argument that a franchise agreement could be terminated on reasonable notice, but found that 12 months wasn't enough, and sought subsequent submissions on the reasonable notice period, rendering a decision on that issue yesterday.

There are some interesting parallels drawn between the franchise relationship and employment relationships, both in finding that Kumon was entitled to terminate the relationship on reasonable notice, and in the assessment of the reasonable notice period, including that franchise agreements are like employment agreements because they "include an element of mutual trust and an element of unequal bargaining power."

And in a context like a Kumon franchise, where many such businesses are run by single operators with minimal employees, it does indeed bear a significant resemblance to an employment relationship, or at least to a dependent contractor relationship.  On the other hand, if you look at a franchisee running, for example, a half dozen Swiss Chalet restaurants, it might be a little bit harder to see the resemblance.

Justice Goldstein assessed the reasonable notice period at 18 months, awarding Ms. France an additional six months' worth of income - quite a modest amount, really.

The judge made new law here, creating a 'test' for the reasonable notice period for terminating franchise agreements, including a non-exhaustive list of factors as follows:

  1. The length of the relationship;
  2. Whether or not there is a history of bad faith or oppressive conduct by the franchisor;
  3. Whether or not the franchisee has a history of poor performance;
  4. Whether the terminating party acted in good faith throughout the relationship; and
  5. Whether there have been violations of the Arthur Wishart Act.

When applying the factors (Ms. France was a 20-year franchisee, with a good history of performing her obligations, and Kumon had met its obligations of good faith to her), Justice Goldstein went on to apply a 'discount' recognizing that "Ms. France was not an employee, but an independent contractor".


Suffice it to say that the test Justice Goldstein has laid out is very different from the employment law test for assessing reasonable notice periods, and in fact is directly inconsistent with that test in certain ways.  Which wouldn't necessarily be a problem, but for two things:  Firstly, he got to the point of applying such a test simply because of the similarities to an employment relationship, and secondly, the application of a 'discount' because she was an independent contractor and not an employee would suggest that the test is somehow supposed to be similar to that in place for employees.  It's also very probably wrong to call her an independent contractor.

In employment law, we look at the Bardal factors, including length of service, age of the employee, character of employment, and availability of replacement employment.  Fundamentally, the test largely addresses the challenges of obtaining new employment.  Performance is arguably irrelevant, so long as poor performance doesn't rise to the level of just cause.  Likewise, employer bad faith no longer factors into the assessment of the notice period in most cases.

Independent contractors are presumptively not entitled to notice.  However, there's an intermediate category of 'dependent contractors', who are treated similarly to employees.  There's little doubt that, if we're going to fit Ms. France into this framework at all, it's as a dependent contractor.

In a circumstance like France's, it's not so difficult to apply the Bardal factors.  As an individual franchisee, her age and ability to obtain similar work are not so difficult to assess.  Again, if we were looking at an owner of several restaurants, that changes things significantly.  But I might suggest that larger and more sophisticated businesses built on the franchise model would require more notice - that the implied term of reasonable notice is designed to give the non-terminating party an opportunity to land on its feet when the agreement is terminated.  So instead of the "availability of replacement employment", you might look at the availability of alternate business arrangements, and the difficulty associated with such a transition.  If you're running a fast food restaurant, and your franchise agreement is terminated, can you turn it into another type of fast food restaurant?  How hard would it take to enter into a new franchise agreement?  How long to physically transition the business and business model to suit the new franchisor?  Is there a non-competition agreement in place?  What long-term liabilities can the franchisee be expected to have?

The way I see it, the analysis has to be premised on the business entity underlying the franchisee continuing to exist and carry on business in some other fashion, and the reasonable notice period should bear the ultimate goal of allowing the franchisee to plan that transition.

Instead, Justice Goldstein seems to want the notice period to balance a series of rewards and punishments for good and bad behaviour in the course of the contract.  I'm not sure I see a principled basis for that.

The reality, though, is that the practical implications of this decision will be limited.  Most franchise agreements these days include detailed written provisions regarding how and when the agreement can be terminated (including fixed term provisions, notice provisions, or both).  This case will be an important precedent only for those few cases where the termination of the contract isn't spelled out in writing.


This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

The author is a lawyer practicing in Newmarket, primarily in the areas of labour and employment law and civil litigation. If you need legal assistance, please contact him for information on available services and billing.

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