Franchise Agreement – Renewal – Wrongful Termination – Tax Offences
Blair Rebane and Rob Deane for Boston Pizza

This case involved a dispute over the non-renewal of a franchise agreement. The Defendants had operated a Boston Pizza franchise in Cranbrook since 1997. In August 2007, the principals of the franchisee were convicted of 16 charges under the Excise Tax Act related to the operation of the franchise and fines were levied against them, which had not been paid by February 2008. When the franchise agreement came up for renewal in February 2008, Boston Pizza indicated that it would not be renewing the agreement. The Defendants claimed this was a wrongful termination of the agreement. Boston Pizza then brought a summary trial application for a declaration that the franchise agreement terminated in February 2008 and for other consequential relief based on the termination provisions of the agreement. One of the provisions of the franchise agreement indicated that Boston Pizza would not refuse to renew the agreement except for “Good Cause”, which was defined as including “the Franchisee having been convicted of a crime which substantially impairs the goodwill associated with the Franchisor's trade mark, service mark, [or] trade name…”. Other relevant provisions of the franchise agreement provided that the franchise would be operated in accordance with all applicable laws and regulations, and that the franchisee would be in default of the franchise agreement if the franchisee or its principal(s) were convicted of an offence that detracts from Boston Pizza's reputation or if a judgment against the franchisee or its principal(s) remained unpaid for seven days.

The court agreed with Boston Pizza that the tax offence convictions justified Boston Pizza's refusal to renew the franchise agreement. The court accepted American authority presented by Boston Pizza to the effect that a franchisee's criminal conviction creates a presumption of damage to the franchisor's goodwill, especially where the conviction relates to the operation of the franchise. It rejected the Defendants' argument that in order to prove it had “Good Cause” not to renew, Boston Pizza had to present evidence from members of the community of the effect of the convictions on the public's perception of Boston Pizza's goodwill. Rather, the court considered whether the convictions had a substantial effect on Boston Pizza's goodwill on an objective basis and it had no hesitation in finding that it did. The court granted the declaration and other relief sought. The Defendants appealed the decision but the appeal has been settled.