When a Contract of Adhesion (i.e. a Franchise Agreement) Really Becomes Adhesive

INTRODUCTION

Most franchise agreements contain restrictive/non-compete covenants which require that, upon expiration or termination, the former franchisee and their principals (collectively the “franchisee”) are restricted from carrying on a similar business, for a certain time, and within a certain geographical area.

Courts are generally loath to enforce covenants against competition and will only do so where the covenant is, inter alia, reasonable. Cases dealing with the enforceability of restrictive covenants arise along a continuum, from the employment context at one end, in which there is almost no bargaining power between the parties, to the sale of a business, on the opposite end, where the parties are usually considered to be of equal bargaining power. While the general legal framework is the same, the level of scrutiny applied by appellate courts in determining whether a restrictive covenant is reasonable will be greater in the employment context than in the commercial context, due to the lesser degree of bargaining power in the employment context. As a generalization, in the franchise context, the level of scrutiny to be applied to a restrictive covenant will depend in part on whether the franchise agreement is truly a contract of adhesion (meaning that the franchisee had little ability to negotiate the agreement). Where the franchisee truly negotiated the franchise agreement, the court will likely be more inclined to apply a level of scrutiny reserved for disputes between vendor/purchaser as opposed to employee/employer.

ATTEMPTS TO AVOID OBLIGATIONS UNDER A RESTRICTIVE COVENANT

A franchisee sometimes attempts to evade the restrictive covenant by arranging for a third party to own and operate the formerly franchised business. The parties collude in an attempt to circumvent the restrictive covenant, assuming that the franchisor will not be able to enforce the restrictive covenant against the third party since it is not a signatory to the franchise agreement.

Canadian courts have expressed their disapproval of this approach by enforcing restrictive covenants against non-signatories. For instance, the British Columbia Court of Appeal, in Garcha Bros. Meat Shop v Singh (“Garcha Bros.”),[2] granted an injunction to enjoin a former franchisee principal’s cousin from operating a similar business with the help of the principal, even though the cousin was a non-signatory to the original franchise agreement. Likewise, in the much earlier decision in Ontario Duct Cleaning Ltd v Wiles (“Ontario Duct”),[3] the Ontario Superior Court of Justice granted an injunction and classified the defendant’s new business as a “corporate cloak” for the purpose of defeating the non-competition obligations of the former franchisee. The foregoing issues were recently addressed in Bilomba Inc. v Barrett (“Bilomba Inc.”).[4]

BACKGROUND FACTS

The Plaintiff, Bilomba Inc. cob Fully Promoted Canada (the “Franchisor”), operates a franchised branding and marketing franchise system. It entered into two franchise agreements (the “FAs”) with 3338255 Nova Scotia Ltd. and Fully Promoted Dartmouth (the “Franchisees”), and John Barrett (“John”), as principal. John was the person who actively managed the Franchisees. The FAs included a broad non-compete clause as follows (the “Non-Compete”):

14.04 Post Term Non-Competition:

“…for a period of two (2) years thereafter, regardless of the cause of the termination, expiry, transfer or assignment, You agree not to, either directly or indirectly, for your own benefit, or on behalf of, or in conjunction with any other person, persons, partnership, association or corporation, own, maintain, engage in, participate in, lend money to, be employed by or have any interest in the operation of any business which sells or provides,… , products and services that are similar to the Products and Services offered through a FULLY PROMOTED Business, … located:

(a) within the Premises or within a Two Hundred (200) kilometers radius of the Premises; and/or

(b) within a One Hundred (100) kilometer radius of the premises of any other FULLY PROMOTED Franchisee of the Franchisor. (emphasis added)

 

Prior to executing the FAs, John attempted to reduce the geographic scope to a 50-kilometre radius. Though he was unsuccessful, the Franchisor did reduce the geographic scope in s. 14.04(a) (though we do not know by how much). After several defaults, the Franchisor terminated the FAs.

Contemporaneously, John’s son, Aaron Barrett (“Aaron”), who was an employee of the Franchisees, formed a new company called Creative Cresting Print and Promo Ltd. (“Creative”). Creative purchased the assets and client list from the Franchisees and commenced providing substantially the same services as the Franchisees provided. John and Aaron were both shareholders of Creative, and the business operated out of the same premises as one of John’s Franchisees. The Franchisor’s signage continued to be displayed outside Creative. The Franchisor brought a claim against John, Aaron, and Creative (the “Defendants”) and sought an interlocutory injunction to enforce the Non-Compete.

ANALYSIS

(i)     The Non-Compete

The Defendants argued that the Non-Compete was unenforceable because the temporal and geographical elements were unreasonable. In determining the enforceability of the Non-Compete, the court stated that:

1. the onus is on the party seeking to enforce the restrictive covenant to show that it is reasonable;
2. there is an inequality of bargaining power in franchisor-franchisee relationships; and
3. the prism through which a restrictive covenant should be analyzed in a franchise context leans closer towards the employer-employee standard of restrictiveness.

The Court found the two-year temporal condition to be reasonable without explanation. In assessing whether the geographical restrictions were reasonable, the Court noted that it is key to not only consider the power imbalance of the underlying relationship, but also to consider the evidence as a whole. The fact that the Franchisor had already reduced the distances during initial negotiations with John allowed the court to conclude that the geographical restrictions in the Non-Compete were reasonable.

 

(ii)     The Interlocutory Injunction

The test for granting an interlocutory injunction is found in RJR-MacDonald Inc. v Canada (Attorney General) (“RJR-MacDonald”):[5]

1. Is there a serious issue to be tried?
2. Will the moving party suffer irreparable harm if the injunction is not granted; that is, harm that cannot be compensated for by monetary damages?
3. Does the balance of convenience lie in favour of granting the injunction?

In granting the injunction against John and Creative, the court determined that:

1. The evidence indicated that Aaron was engaged in assisting John, and they collectively circumvented the contractual obligations of the Non-Compete given that they were diverting customers away from the Franchisee and were effectively operating the same business as the former Franchisee.
2. The Franchisor would suffer irreparable harm if the injunction were not granted, stating non-competition agreements are key to protecting the Franchisor and the success of their brand.
3. The harm to the Franchisor would strongly outweigh the harm to the Defendants if the injunction were not granted.

 

(iii)     The Order Against the Third Party – Aaron Barrett

The Court did not prevent Aaron from working in the industry as the Court deemed it contrary to the balance of convenience. Regardless of Aaron’s non-signatory status, the Court held that his future difficulty in earning a living was the factor in his exemption. The Court considered Aaron’s work experience and even noted how he took specific courses in high school, which would indicate his narrow employment opportunities outside of the branding and marketing industry. To bar Aaron for two years from generally applying his cultivated skills would amount to a harsh limitation, despite his involvement with Creative.

 

PRACTICE TAKEAWAYS

This case demonstrates that:

1. The granting of interlocutory injunctive relief rests on the judge’s assessment of what is fair and appropriate in the circumstances, considering the interests of both the plaintiffs and the defendants. Canadian courts apply the test established by the Supreme Court of Canada in RJR-MacDonald, which considers whether there is a serious issue to be tried, whether the applicant will suffer irreparable harm, and whether the balance of convenience favours granting the injunction.
2. When a non-compete clause is the product of negotiation between parties, courts may apply a less rigorous standard of scrutiny, which can render an otherwise unreasonable clause enforceable. This principle was evident when the Court assessed the reasonableness of the clause’s geographic scope. Noting that its boundaries had already been modified through negotiation, the Court found that the Defendants had limited grounds on which to challenge its enforceability.
3. Courts evaluate non-signatories on a case-by-case basis, recognizing that not all individuals who assist in a breach warrant the same level of restraint. The scope of any injunction depends on the individual’s level of involvement and whether such relief would be unduly harsh in the circumstances. This principle was clearly illustrated in the differing restrictions imposed on John and Aaron, which reflected the unique facts of their respective situations. In the Court’s view, this tailored approach constituted the fairest and most equitable remedy for all parties involved.

 

[1] Ryan Dickson was a 2L Summer Student at Loopstra Nixon, LLP, returning for Articles in May 2026

[2] 2022 BCCA 36.

[3] [2001] OJ No 5150, 2001 CarswellOnt 6190 (Ont SCJ).

[4] 2025 NSSC 124.

[5] [1994] 1 S.C.R. 311, 333-34.