“Extreme” Requirement Struck Down: The Newfoundland Supreme Court Rejects Franchisor’s Restrictive Covenant
MTY Tiki Ming Enterprises v. Azmy Enterprises Inc., 2018 NLSC 169
MTY Tiki Ming Enterprises (“MTY”), an Extreme Pita™ franchisor, applied for an interlocutory injunction prohibiting Azmy Enterprises (“Azmy”), a former franchisee, from operating a restaurant called “Stuff-it Pita”. MTY argued that the injunction was justified on the basis of a restrictive covenant in its franchisor’s agreement. (The restrictive covenant remained in force one year after the franchise agreement’s expiry, which is why it was possible to bring the action against Azmy as a former franchisee.) This Supreme Court of Newfoundland and Labrador decision provides useful guidance on the limits of such covenants.
To enforce a restrictive covenant, the applicant must prove that (1) the plaintiff has proprietary interests requiring protection, (2) the covenant does not go beyond the protection of those interests, (3) the covenant is reasonable between the parties as to area and time, and (4) the covenant is reasonable with respect to the interests of the defendants.
Generally, courts will grant interlocutory injunctions if (1) there is a serious issue to be tried, (2) there is the possibility of irreparable harm to the applicant, and (3) the balance of convenience favours the injunction. Where the result of an injunction will have the practical effect of putting an end to the action, the applicant must prove not just a serious issue to be tried but also a prima facie case. A prima facie case is one that is likely to succeed at trial. The court held that an application to enforce a restrictive covenant is a classic example of a situation where the applicant must prove a prima facie case. In the situation at hand, if MTY had succeeded in its application, the harm done to Azmy would have been significant and lasting. This justified the application of a higher evidentiary burden.
MTY failed in all aspects of the injunction test.
First, MTY failed to demonstrate a prima facie case. It did not provide sufficient evidence to satisfy the court of any proprietary interest the restrictive covenant is intended to protect: the most that could be said of the similarities between the two restaurants was that both incorporated “Pita” into their name. Further, the restrictive covenant did not clearly identify the geographic area to which the covenant applied. The covenant stated that Azmy could not conduct a competing business anywhere in the territory of another Extreme Pita. It did not define the term territory. The court found that the term was far too ambiguous to enforce.
Second, MTY failed to demonstrate that it had suffered irreparable harm. The court noted that irreparable harm is harm which either cannot be quantified in monetary terms or which cannot be cured, usually because one party cannot collect damages from the other. MTY failed to produce sufficient evidence of any harm. It did not satisfy the court that the public associated the two restaurants with one another, or that Stuff-it Pita was likely to infringe on Extreme Pita’s market share.
Finally, the court decided that the balance of convenience favoured not granting the injunction. Here, the court emphasized the relative positions of the parties, noting that while Azmy was a small business on which the owner depended to provide for his family, MTY was a multinational corporation that would suffer negligible harm by Stuff-it Pita’s continued operation.
MTY is consistent with Canadian law’s general skepticism towards restrictive covenants. As MTY demonstrates, Newfoundland courts will generally only grant injunctions based on restrictive covenants if applicants provide clear, compelling evidence of a prima facie case. Anyone seeking to enforce a restrictive covenant faces an uphill battle.
The comments contained in this eCaseNote provide general information only and should not be construed as legal advice or opinion. For more information or specific advice on matters of interest, please call our offices at (709) 579-2081.