



COURT OF APPEAL FOR ONTARIO

CITATION: MEDIchair LP v. DME Medequip Inc., 2016 ONCA 168

DATE: 20160229

DOCKET: C60733

Feldman, MacPherson and Miller JJ.A.

BETWEEN

MEDIchair LP

Applicant (Respondent)

and

DME Medequip Inc., Allison Rolph, Ron Seiderer,
    and 2169252 Ontario Inc.

Respondents (Appellants)

David S. Altshuller and Jennifer Pocock, for the
    appellants

R.S.M. Woods and Peter Smiley, for the respondent

Heard: January 25, 2016

On appeal from the judgment of Justice Thomas J. McEwen
    of the Superior Court of Justice, dated July 14, 2015, with reasons reported at
    2015 ONSC 3718.

Feldman J.A.:

[1]

The respondent franchisor, MEDIchair LP, was successful on its application
    to enforce a restrictive covenant against the appellants, DME Medequip Inc. (its
    former franchisee) and related parties.

[2]

On the appeal, the appellants raised a number of arguments that were rejected
    by the application judge. They also sought to introduce a significant amount of
    fresh evidence. The court called on the respondent on only one issue: 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 geographic area.

[3]

The outcome of the appeal turns on that issue.

Facts

[4]

MEDIchair LP is a franchisor that operates a network of franchise stores
    that sell and lease home medical equipment. One of its franchise locations was in
    Peterborough, Ontario. It was owned and operated by DME Medequip Inc. (DME)
    for 20 years. DMEs latest franchise agreement was dated 2005 (the 2005
    Franchise Agreement).

[5]

In 2008, the appellants, Ms. Rolph and Mr. Seiderer, incorporated the
    appellant 2169252 Ontario Inc. (216) to purchase the Peterborough franchise
    from the owners of DME. With the approval of the respondent, 216 purchased all
    of the shares of DME and entered into an Amending Agreement in respect of the
    2005 Franchise Agreement. 216 guaranteed all of the obligations of DME and the
    individual appellants personally agreed to be bound by the 2005 Franchise
    Agreement, including the restrictive covenant. That covenant, which was to apply
    on the termination of the agreement, prevented them from operating a similar
    store for 18 months within a 30-mile radius of their store or the nearest
    franchise store.

[6]

The restrictive covenant reads as follows:

15.02 RESTRICTION

For a period of eighteen (18) months after the termination of
    this Agreement, Franchisee, its principals, officers, shareholders, directors,
    guarantors, personal covenantors, and the spouses and/or children thereof shall
    not either individually or in partnership, in conjunction with any person or
    persons, firm, association, syndicate, company or corporation as principal,
    agent, shareholder or in any manner whatsoever, carry on, or engage in, or be
    concerned with, or be interested in, or advise, lend money to, guarantee the
    debts or obligations of, or permit its name or any part thereof to be used or
    employed by, any person or persons, firm, association, syndicate, company or
    corporation engaged in any business similar to the business carried on by MEDIchair
    or any of its authorized Franchisees within an area of 30 miles of the nearest MEDIchair
    Store business in Canada or the MEDIchair Store business operated by Franchisee
    prior to termination of this Agreement.

[7]

The appellants operated the franchise for two years, then renewed in
    2010 for a further five-year term.

[8]

In 2011, MEDIchair was at a peak size in Canada, with 50 franchisees
    that operated a total of 66 franchise and satellite locations, while MEDIchair
    operated four corporate stores, totalling 70 stores nationally. The last new MEDIchair
    franchise was opened in British Columbia in mid-2010.

[9]

In June 2011, the MEDIchair franchise system was sold by its corporate
    owner, Lifemark Health Limited, to Centric Health Corporation. In early 2012,
    Centric also purchased Motion Specialties, a group of 24 corporate stores,
    mostly in Ontario, similar to the MEDIchair stores. One of those stores was in
    Peterborough, competing directly with the appellants MEDIchair store.

[10]

The
    appellants allege that, following these acquisitions, Centric focused its
    support on the Motion stores, rather than the MEDIchair stores. As Centric did
    not update its MEDIchair franchise documents, it was not able to sell any new MEDIchair
    franchises. The number of MEDIchair stores began to decline. The appellants
    have commenced a separate action against MEDIchair in respect of its alleged
    failure to support the system after 2012 and its increased support to the
    competitor Motion stores.

[11]

In
    September 2014, Centric sold both MEDIchair and Motion Specialties to its
    current owner, Birch Hill Equity Partners.

[12]

Having
    become very disenchanted with MEDIchair, the appellants did not renew their
    franchise agreement when it expired in January 2015. Instead, they removed the MEDIchair
    signage and continued to operate their business at the same premises with the
    same merchandise and the same employees. They advised their suppliers by email
    that they were carrying on business as usual under a new name, Living Well Home
    Medical Equipment.

[13]

These
    actions by the appellants led the respondent to apply to the court to enforce
    the restrictive covenant. The appellants took the position that the covenant
    was not enforceable or that they were not in breach, but the application judge
    found that the covenant was enforceable and that the appellants were in breach.

Issues on the Appeal

[14]

Since
    the decision of the application judge, the parties have continued to litigate. The
    appellants brought an unsuccessful motion for a stay pending appeal. The
    respondent has moved for contempt, taking issue with the extent of the
    appellants attempts to comply with the judgment by trying to make their
    business operations dissimilar to those of a MEDIchair franchise.

[15]

For
    the purpose of those proceedings, a significant further record was generated. The
    appellants now ask this court to treat that record as fresh evidence on the
    appeal, or as new evidence that has arisen after the decision, but which is
    relevant to the appeal. Otherwise, the appellants raise the same issues and make
    the same arguments on the appeal as on the application.

[16]

As
    a result, there are four issues on the appeal: 1) should the court admit and
    consider the fresh evidence; 2) did the application judge err by holding that MEDIchair
    was not required under the
Arthur Wishart Act (Franchise Disclosure)
, 2000, S.O. 2000, c. 3,

to
    provide the appellants with a franchise disclosure document when they
    originally purchased the franchise; 3) did the application judge err by holding
    that the term similar to in the restrictive covenant was not ambiguous; and
    4) did the application judge err by finding that the restrictive covenant was
    reasonable in scope, having regard to the legitimate or proprietary interest
    that MEDIchair was entitled to protect?

[17]

As
    I have already noted, the court called on the respondent only on the last
    issue. I will deal briefly with the first three.

Analysis

(1)

Should the court admit and consider the fresh evidence?

[18]

The
    appellants seek to introduce two categories of fresh or new evidence on the
    appeal. The first consists of the attempts by the appellants to modify their
    business following the decision under appeal, in order to try to make it sufficiently
    dissimilar to the MEDIchair business to comply with the covenant, and the
    negative response of the respondent to those attempts. The second category is
    further details from the respondent about the declining state of the MEDIchair
    franchise system at the time of the application and since.

[19]

The
    court did not call on the respondent to address the issue of the admissibility
    of this evidence on the appeal. The evidence does not meet the
Palmer
criteria.
[1]
With the limited exception of the current state of the MEDIchair franchise
    system, all of the other proposed fresh evidence could have been obtained by
    cross-examination of the respondents deponents  Mr. Lucas, Director of
    Franchise Operations, and Ms. Ekels, President of MEDIchair  and put before
    the application judge.

[20]

These
    two individuals could have been cross-examined by the use of hypotheticals regarding
    the extent of the changes that would make a business dissimilar to a MEDIchair
    franchise store. And further questions of Ms. Ekels on the state of the MEDIchair
    franchise system at the time of the application would have elicited the same
    evidence that was later obtained from her cross-examination on the affidavit
    she filed in response to the stay motion. Her answers were direct and
    straightforward.

[21]

The
    fresh evidence also suggests that the MEDIchair franchise system has declined
    further since the hearing of the original application. However, the application
    judge took cognisance of the fact that the system may be experiencing
    difficulty in deciding whether the restrictive covenant was reasonably
    necessary to protect the legitimate or proprietary interest of the respondent. For
    the reasons discussed below, that evidence was sufficient for a proper
    consideration of that issue.

(2)

Was MEDIchair required under the
Arthur Wishart Act
to provide
    a franchise disclosure document?

[22]

Sections
    5(1) and (4) of the
Arthur Wishart Act
require a franchisor to provide
    a prospective franchisee with a disclosure document that contains prescribed
    information about the franchise at least 14 days before a franchise agreement
    is signed or payment is made. However, in a number of cases described in s.
    5(7) of the Act, a franchisor is exempted from that obligation. One is where
    the grant of the franchise by a franchisee is not effected by or through the
    franchisor: s. 5(7)(a)(iv).

[23]

Section
    5(8) then elaborates on the exemption by describing two factors that do not, in
    and of themselves, indicate that a grant by a franchisee is effected by or
    through a franchisor  namely, where:

(a) the franchisor has a right,
    exercisable on reasonable grounds, to approve or disapprove the grant; or

(b) a transfer fee
    must be paid to the franchisor in an amount set out in the franchise agreement
    or in an amount that does not exceed the reasonable actual costs incurred by
    the franchisor to process the grant.

[24]

The
    application judge found that the respondent did not provide the disclosure
    document in accordance with ss. 5(1) and (4) of the Act. Although the evidence
    was in dispute, the application judge proceeded on the basis that the
    documentation that the respondent provided to the appellants when they were
    buying the franchise from its previous owners did not contain a copy of the
    2005 Franchise Agreement, which was a required part of the disclosure document.
    The legal issue before him, therefore, was whether the respondent came within
    the statutory exemption in s. 5(7)(a)(iv), as explained in s. 5(8), which
    turned on the extent of the respondents involvement in the transaction when
    the franchise was sold to the appellants.

[25]

The
    application judge found that the respondent had very little involvement in the
    sale of the franchise and was therefore exempt from the disclosure requirement.
    The respondent merely gave its required approval for the transfer, took a
    transfer fee, and obtained personal covenants from Ms. Rolph and Mr. Seiderer to
    be bound by the 2005 Franchise Agreement, as well as a guarantee from the
    appellant numbered company for DMEs obligations under the 2005 Franchise
    Agreement.

[26]

The
    application judge rejected the appellants further argument that once the
    respondent gave some disclosure, it was then obliged to give the full statutory
    disclosure. He also found that the appellants must have been aware of the 2005
    Franchise Agreement, and could have requested a copy if they did not receive
    one.

[27]

On
    appeal, the appellants submit that the application judge should have followed a
    number of cases where a different conclusion was reached on different facts: see
2189205 Ontario Inc. v. Springdale Pizza Depot Ltd.
, 2011 ONCA 467,
336 DLR (4th) 234
;
2147191 Ontario Inc. v. Springdale Pizza
    Depot Ltd.
, 2014 ONSC 3442, affd 2015 ONCA 116;
Mapleleaf Franchise
    Concepts, Inc. v. Nassus Framework Ltd.
,

2011 ABQB 594; and
Second
    Cup Ltd. v. Niranjan
(2007),

39 B.L.R. 4th 73 (Ont. S.C.). We do
    not agree. Those cases are distinguishable. The application judge in this case applied
    the law to the facts as he found them. We see no error in his approach or in
    his conclusion.

(3)

Is the restrictive covenant ambiguous in its use of the term similar
    to as a description of the prohibited business activity?

[28]

The
    application judge gave fairly short shrift to this issue, given that the
    appellants had merely changed the name of their business, but otherwise carried
    on exactly as they had before. He also noted that the appellants had extracted
    the same restrictive covenant from the former owners of DME when they purchased
    the franchise, making their argument that the language was ambiguous an
    untenable one in the circumstances.

[29]

The
    application judge also referred to and agreed with the observation of
    Wilton-Siegel J. in
Invescor Restaurants Inc. v. 3574423 Ontario Inc.
,
    2011 ONSC 1609,
85 B.L.R. (4th) 12,

at
    para. 57, affd 2012 ONCA 387, 100 B.L.R. (4th) 173, that courts regularly address
    restrictive covenants where the standard is a similar business. See e.g.
Pacific
    Northwest Cruiseshipcenters Ltd. v. Super Cruise World Travel (Delta) Inc.
(1991),
    38 C.P.R. (3d) 528 (B.C.S.C.); and
Jamani v. Subway Franchise Systems of
    Canada, Ltd.
, 2008 ABQB 677, 53 B.L.R. (4th) 128.

[30]

The
    appellants argue that because a) there is no definition of the MEDIchair
    business in the 2005 Franchise Agreement, b) its business covers a variety of
    products, and c) different franchise outlets may offer different products, it is
    impossible to know what would constitute a similar business.

[31]

The
    application judge dealt with this argument. He found that the respondent has a
    method of operation, goodwill, products, and services that it has a legitimate
    interest in protecting from similar operations specializing in the sale or
    rental of home medical equipment. In other words, the similarity is found by
    comparing not only the product line, but also the method of operation,
    including whether the appellant was trading on the goodwill of the MEDIchair
    operation from which it had benefitted over the years.

[32]

Again,
    the court did not call on the respondent on this issue. We see no error of law
    or misapprehension of the factual record that would cause this court to
    interfere with the conclusion reached by the application judge that the term
    similar in the restrictive covenant is not ambiguous in the context of MEDIchairs
    business.

(4)

Is the restrictive covenant reasonable in scope for the purpose of
    protecting the legitimate or proprietary interest that the respondent is
    entitled to protect?

[33]

The
    basic principles governing the courts approach to the enforceability of
    covenants in restraint of trade have been set out clearly in two cases from the
    Supreme Court of Canada,
Elsley v. J.G. Collins Ins. Agencies
, [1978]
    2 S.C.R. 916, and most recently,
Payette v. Guay
, 2013 SCC 45, [2013]
    3 S.C.R. 95. Both cases also address the difference in approach when the clause
    is contained in a contract for the sale of a business versus an employment
    contract. Although the test is essentially the same, courts will give more
    scrutiny to the reasonableness of a restrictive covenant in the employment
    context, while applying a presumption of validity to such clauses where they
    have been negotiated as part of the sale of a business.

[34]

The
    test was described by Dickson J. (as he then was) as follows in the
Elsley
case, at pp. 923-4:

The principles to be applied in considering restrictive
    covenants of employment are well‑established. They are found in the cases
    above-mentioned and in such familiar authorities as the
Nordenfelt
case,
Mason v. Provident Clothing and Supply Co.
and
Attwood v. Lamont.
Of
    more recent vintage:
Scorer v
.
Seymour-John
and
Gledhow
    Autoparts Ltd. v
.
Delaney.
A covenant in restraint of trade is
    enforceable only if it is reasonable between the parties and with reference to
    the public interest. As in many of the cases which come before the courts, competing
    demands must be weighed. There is an important public interest in discouraging
    restraints on trade, and maintaining free and open competition unencumbered by
    the fetters of restrictive covenants. On the other hand, the courts have been
    disinclined to restrict the right to contract, particularly when that right has
    been exercised by knowledgeable persons of equal bargaining power. In assessing
    the opposing interests the word one finds repeated throughout the cases is the
    word reasonable. The test of reasonableness can be applied, however, only in
    the peculiar circumstances of the particular case. Circumstances are of
    infinite variety. Other cases may help in enunciating broad general principles
    but are otherwise of little assistance.

It is important, I think, to resist the inclination to lift a
    restrictive covenant out of an employment agreement and examine it in a
    disembodied manner, as if it were some strange scientific specimen under
    microscopic scrutiny. The validity, or otherwise, of a restrictive covenant can
    be determined only upon an overall assessment, of the clause, the agreement
    within which it is found, and all of the surrounding circumstances.

The distinction made in the cases between a restrictive
    covenant contained in an agreement for the sale of a business and one contained
    in a contract of employment is well-conceived and responsive to practical
    considerations. A person seeking to sell his business might find himself with
    an unsaleable commodity if denied the right to assure the purchaser that he,
    the vendor, would not later enter into competition. Difficulty lies in
    definition of the time during which, and the area within which, the
    non-competitive covenant is to operate, but if these are reasonable, the courts
    will normally give effect to the covenant.

A different situation, at least in theory, obtains in the
    negotiation of a contract of employment where an imbalance of bargaining power
    may lead to oppression and a denial of the right of the employee to exploit,
    following termination of employment, in the public interest and in his own interest,
    knowledge and skills obtained during employment. Again, a distinction is made.
    Although blanket restraints on freedom to compete are generally held
    unenforceable, the courts have recognized and afforded reasonable protection to
    trade secrets, confidential information, and trade connections of the employer.
    [Footnotes omitted.]

[35]

In
Payette
, at para. 58, Wagner J. concluded that
    in the commercial context  i.e. the sale of a business  the courts will treat
    a restrictive covenant as lawful unless it is shown on a balance of
    probabilities to be unreasonable.

[36]

Whether a restrictive covenant in a franchise agreement
    should be viewed and treated as it is in a contract of employment because of an
    imbalance in bargaining power, or as it is in the sale of a business is the
    subject of recent ongoing debate. See Peter J. Klarfeld & Mark S. VanderBroek,
    Law on Covenants Against Competition Shifts Toward Greater Enforceability by
    Franchisors (Fall 2011) Franchise LJ 76; and Jennifer Dolman, Adam Ship, Rebecca
    Hall-McGuire & Tyler Wentzell, Governing Principles & Recent Trends in
    the Enforcement of Restrictive Covenants in Franchise Agreements (2014)
    Advocates Q 448.

[37]

Although
    this case involves a restrictive covenant in a franchise agreement, I do not
    need to decide what level of scrutiny properly applies, because the focus of
    the inquiry is not the reasonableness of the extent of the temporal or
    territorial restrictions. Instead, it is whether there is a legitimate interest
    of the franchisor in this case that is entitled to the protection of the
    covenant. The requirement of a legitimate protectable interest is common to
    both levels of scrutiny.

[38]

As Wagner J. explained in
Payette
, the test for
    reasonableness is whether the clause is limited, as to its term and to the
    territory and activities to which it applies,
to whatever is necessary for
    the protection of the legitimate interests of the party in whose favour it was
    granted
: para. 61 (citation omitted; emphasis added).

See also
Tank
    Lining Corp. v. Dunlop Industrial Ltd.
(1982), 40 O.R. (2d) 219 (C.A.), at
    p. 224: In all the cases the entitlement of a party to a contract to enforce a
    restrictive covenant is based in the protection of a legitimate or proprietary
    interest such as the goodwill of a business which has been purchased or the
    confidential information peculiar to employment.

[39]

The
    respondent has a legitimate or proprietary interest to protect in the goodwill
    in its MEDIchair system, including the trade secrets, method of operation, contacts
    and other benefits that are obtained by a franchisee
.
However, the purpose
    of the restrictive covenant is to protect that interest only for a limited time
    and within a defined territory.
[2]
After the specified period, that interest is no longer protected by the covenant.
    Similarly, during the period, that interest is only protected within the
    defined territory.

[40]

These
    limitations are necessary to achieve the purpose of the restrictive covenant 
    namely, to prevent the appellants from competing with the franchisor or another
    franchisee within the protected territory when they leave the franchise system.
    Therefore, as Wagner J. stated in
Payette
, at para. 65, A
    non-competition clause that applies outside the territory in which the business
    operates is contrary to public order. See also
McAllister v. Cardinal
,
    [1965] 1 O.R. 221 (H.C.), where the court refused to enforce a non-competition
    covenant covering a greater area than where the purchased business actually
    operated.

[41]

The
    question that arose squarely on the evidence before the application judge was
    whether the respondent was entitled to protect its interest in the franchise
    system as a whole, in a territory where it had made a deliberate decision not
    to operate a MEDIchair franchise store because the corporate parent, Birch
    Hill, was already operating a competing Motion store within that territory.

[42]

Mr.
    Lucas was straightforward on this point in his cross-examination:

820. Q. So you have no prospective franchisee in the pipeline
    [in Peterborough]?

A. I have leads all over for major  major store areas.

821. Q. Is Peterborough one of those store areas?

A. Well, Birch Hill doesnt want to have conflict areas, so
    they  because there is a Motion store there, they wouldnt  they wouldnt put
     I believe they wouldnt put a store in where theres a conflict area.

822. Q. So the answer is as long as there is a Motion store
    there theres no plan to open [a] new MEDIchair store in Peterborough?

A. I believe thats the case.

[43]

Ms.
    Ekels also gave relevant evidence on this issue. In her affidavit, she explained,
    at para. 6, that the restrictive covenant safeguard[s] the integrity of the
    entire franchise system, for the benefit of franchisor and the franchisees
    alike.

[44]

In
    cross-examination, she was questioned about the contents of that paragraph in
    the context of this case:

13. Q. And you state:

Covenants such as the Restrictive Covenant  and I dont
    think theres any doubt what we are talking about here in terms of my clients MEDIchair
    franchise agreement; I think its section 15.02  allow the franchisor to
    locate a new franchisee in what had been the former franchisees territory
    without having to worry that the former franchise will use the knowledge,
    experience, and contacts built up while a franchisee to compete against the
    newcomer.

So thats the rationale?

A. Right.

14. Q. And Mr. Lucas has told us though that there are no plans
    to put a new MEDIchair franchise in Peterborough.

A. Correct.

15. Q. So the desire of the franchisor to locate a new
    franchisee in the former territory is, in this case, irrelevant?

A. Yes.

16. Q. And then the last part says:

They also  they meaning the restrictive covenant I assume
     they also prevent the former franchisee from placing itself close to an
    existing franchise and then using its knowledge, experience, and contacts to
    compete unfairly with the existing franchisee. In this way, covenants such as [the]
    Restrictive Covenant safeguard the integrity of the entire franchise system,
    for the benefit of franchisor and the franchisees alike.

And given that my clients have  and I dont believe its in
    dispute  have opened their store in the precisely same location that they were
    formerly located, even though there was a move many years ago, there is no
    current apprehension or concern thats relevant to this case about my clients
    moving and placing themselves close to any other MEDIchair franchisee, closer
    than they are today?

A.

Right.

[45]

The
    issue whether MEDIchair had anything to protect in the Peterborough area that was
    covered by the restrictive covenant was squarely raised before the application
    judge, who described the argument as follows, at para. 28:

[T]he respondents argue that the restrictions are not
    reasonable as MEDIchair has been in decline: it has seen a number of its
    locations closed, many franchisees, including the Whitby location, are
    operating on a month-to-month lease, and there is no indication that MEDIchair
    will open a store in Peterborough.  The respondents therefore submit that
    there is no evidence demonstrating that it is reasonable to enforce the
    temporal and spatial scope of the restrictive covenant to protect the
    reasonable interests of MEDIchair. In essence, there is nothing to protect.

[46]

The
    application judge rejected this submission. In his view, the appellants had had
    the benefits of being in the franchise system. While he acknowledged that the
    franchisor may have been experiencing difficulties and that there were no plans
    to open a Peterborough store, he held that those factors did not make the scope
    of the restrictive covenant unreasonable. The application judge gave more
    weight to another factor, which was the integrity of the franchise system,
    which would be significantly compromised if franchisees were simply allowed to
    walk away from the terms of the Agreement if MEDIchair was unable to establish
    that another store was going to open in the same area.

[47]

In
    my view, however, it is clear from the quoted evidence that by deciding not to
    operate in Peterborough, MEDIchair effectively acknowledged that it has no legitimate
    or proprietary interest to protect within the defined territorial scope of the
    covenant. Nor has the respondent attempted to suggest that it would be entitled
    to enforce the MEDIchair restrictive covenant in order to protect its interest
    in another business, Motion, owned within the same corporate group.

[48]

The
    application judge erred in law by focusing on the effect of non-enforcement on
    the MEDIchair franchise system as a whole, without regard to the reasonableness
    of the restrictive covenant to protect the franchisors legitimate or
    proprietary interest within the temporal and territorial scope of the covenant.

[49]

One
    further issue that must be considered when addressing the reasonableness of the
    restrictive covenant is timing. In this case, it was only as a result of
    circumstances that arose after the franchise agreement was entered into that
    the respondent lost or abandoned its interest in the protected Peterborough
    territory. In
Tank Lining
, this court stated, at p. 225:

Reasonableness is determined in the light of circumstances
    existing at the time the contract is made which, of course, includes the
    parties expectations of what might possibly happen in the future:
Cheshire
    and Fifoots Law of Contract
, 9th ed. (1976), p. 378 and [
Stephens v.
    Gulf Oil Canada Ltd.
(1975), 11 O.R. (2d) 129 (C.A.)], p. 145.

[50]

In
Tank Lining
, the restrictive covenant covered the whole of Canada,
    while the parties only had business in some provinces when the agreement was
    terminated. The appellant in that case argued that there was no Canada-wide
    business to protect, making the restriction unreasonable. But the court held
    that the reasonable expectation at the time the parties made their agreement
    was that the tank lining business would expand across Canada, and the test of
    reasonableness applie[d] to that expectation: p. 227.

[51]

As
    the reasonableness of the covenant will be interpreted based on the parties anticipated
    expansion of the business when they entered into their agreement, it should similarly
    be interpreted to take account of the parties expectations at that time with
    respect to the future continued operation of the franchise in the territory. In
    this case, the clause was reasonable on the assumption and understanding that MEDIchair
    would want to continue to operate in the protected Peterborough area, but not
    if it did not. In
Allegra of North America and Allegra Corp. of Canada v.
    Russell Sugimura
, (August 26, 2008), Milton, CV-08-21790-00 (Ont. S.C.),
    where the franchisor did not intend to open another franchise location within
    the territory covered by the restrictive covenant, the court effectively
    applied the same principle. It refused to enforce the covenant where Allegra
    had nothing left to protect within the geographic area.

[52]

In
    response to the application judges concern about the need to enforce the
    covenant for the benefit of the viability of MEDIchairs franchise system as a
    whole, in my view, the answer is that the clause has not been struck down as
    generally unreasonable or unenforceable. It is not ambiguous, nor are the
    temporal or territorial boundaries unreasonably broad. However, the restrictive
    covenant is unreasonable as between these two parties in the circumstances of
    the particular Peterborough franchise because MEDIchair does not have a legitimate
    or proprietary interest to protect within the territorial scope of the covenant.

Disposition

[53]

For
    these reasons, I would allow the appeal, set aside the judgment below, and
    dismiss the application. Costs of the appeal to the appellant fixed at $10,000,
    inclusive of disbursements and HST, which amount reflects a reduction of $7,000
    because of the unnecessary fresh evidence motion.

Released:

FEB 29 2016

KF

K. Feldman J.A.

I agree MacPherson
    J.A.

I agree B.W. Miller
    J.A.





[1]
The Supreme Court of Canada articulated the following four criteria for the
    admission of fresh evidence in
Palmer v. The Queen
, [1980] 1 S.C.R. 759,
    at p. 775:

(1) The evidence should generally not be admitted if, by due
    diligence, it could have been adduced at trial; (2) the evidence must be
    relevant in the sense that it bears upon a decisive or potentially decisive
    issue in the trial; (3) the evidence must be credible in the sense that it is
    reasonably capable of belief; and (4) it must be such that if believed it could
    reasonably, when taken with the other evidence adduced at trial, be expected to
    have affected the result.



[2]
Other clauses in the 2005 Franchise Agreement also address the protection of
    trade secrets (5.03), goodwill (10.03), and rights on termination (13.03(a)).


