Is a Restrictive Covenant Enforceable where no Legitimate Interests Exists?
In 2011 MEDIchair was sold to Centric Health Corporation (hereinafter “Centric”), which also acquired another competitive company of MEDIchair. After these acquisitions Centric began making business decision which favoured the competitive company, as such business at many MEDIchair stores began to decline. In 2014 Centric sold MEDIchair and the competitive company to Birch Hill Equity Partners.
In 2015, DEM opted not to renew their franchise agreement with Centric, due to the decline in business. However, DEM essentially continued to carry on the same business in the same location, but removed all MEDIchair signage and changed their business name to operate as Living Well Home Medical Equipment.
Relying on their 2005 agreement, MEDIchair brought an application to stop DME from carrying on business as per the restrictive covenant. DME argued that the restrictive covenant was not enforceable and therefore they were not in violation of the 2005 agreement. The application Judge found the restrictive covenant to be enforceable, and thus DME was in breach of the 2005 agreement. DME appealed the decision.
The central issue for the Court to consider was “whether the franchisor was entitled to enforce the restrictive covenant when its evidence was that it had no intention of opening another MEDIchair store within the protected geographical area.” (para 2)
The Ontario Court of Appeal’s Decision
In the context of a franchise agreement, the Court declined to decide whether the restrictive covenant provision should be treated as it is in an employment contract context because of the potential imbalance of bargaining power. Instead, the Court focused on determining whether there was a legitimate interest of MEDIchair entitled to the protection of the covenant. MEDIchair acknowledged that there was effectively no legitimate interest to protect within the scope defined by the covenant. As such, the Court found that the application Judge erred in the application of the law by failing to assess the reasonableness of the restrictive covenant. The Court found that the restrictive covenant was reasonable when the franchise agreement was entered into. However because MEDIchair no longer had a proprietary interest to protect within the scope of the restrictive covenant it is unreasonable under the new circumstances of the parties.
The above article is for general information purposes only and does not constitute legal advice. If you have concerns with regard to the foregoing issues, please make an appointment with one of our lawyers or a qualified legal practitioner elsewhere.