Canadian Underwriter

Restoration firm suing DKI Canada over termination of agreement

May 30, 2021   by Greg Meckbach

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Restoration firm DKI Canada Ltd. is being sued in British Columbia by Coquitlam-based Canstar Restorations Limited Partnership, a former member of the DKI network.

Allegations in the lawsuit have not been proven in court.

Until 2020, Canstar was operating multiple DKI restoration locations in B.C. Canstar approached DKI to discuss expanding into Calgary, Supreme Court of B.C. Justice Diane MacDonald noted in Canstar Restorations Limited Parnership v. DKI Canada Ltd., released May 19.

“If that could not be negotiated, Canstar wanted to market itself in Calgary under its own name, Canstar Restoration,” wrote Justice MacDonald. “In response, DKI terminated the agreements between itself and Canstar. DKI allegedly contacted Canstar’s clients to inform them of the termination of the agreements. Canstar argues this was designed to cripple its business in favour of DKI and a new franchisee.”

Justice MacDonald’s did not rule on the merit of the allegations contained in Canstar’s lawsuit. Instead, her ruling denies an application by DKI to have a stay of proceedings — meaning the Canstar lawsuit would be stopped with the potential of being re-started — in B.C.

DKI argued that the lawsuit should be heard in Ontario court, an argument that Justice MacDonald rejected.

Canstar is alleging breaches of contract, breaches of the duty of honest performance at common law, plus breaches of duties of good faith and fair dealing under the B.C. Franchises Act. DKI is counter-suing for breach of contract. None of these allegations are proven.

Key to DKI’s argument about hearing the case in Ontario is the following clause in DKI’s agreement with its members:

“This agreement and the rights, obligations and relations of the parties shall be governed by and construed in accordance with the laws of the Province of Ontario and the laws of Canada applicable therein. The parties agree that the Courts of Ontario shall have exclusive jurisdiction to entertain any action or other legal proceedings based on any provisions of this agreement. Each party hereby attorns to the jurisdiction of the Courts of the Province of Ontario.”

Justice MacDonald ruled that clause in the agreement is not enforceable due to section 12 (1) of the B.C. Franchises Act, which states:

“If a provision in a franchise agreement purports to restrict the application of the law of British Columbia or to restrict jurisdiction or venue to a forum outside British Columbia, the provision is void with respect to claims arising under a franchise agreement to which this Act applies.”

This does not necessarily mean that there actually is a franchise arrangement between DKI and Canstar, Justice MacDonald wrote.

“Whether a franchise relationship exists will be determined after a review of the complete evidentiary record before the trial judge. Nevertheless, I am persuaded that Canstar has established a reasonable basis on the record that a franchise relationship exists.”

Canstar does not operate in Ontario.

From 2011 through 2020, Canstar operated a DKI restoration business in B.C. under the name Canstar-DKI. Canstar paid an initial fee and continuing royalties to DKI. In return, Canstar had the privilege of using DKI’s name.

Instead of providing restoration services directly, DKI contracts with companies to operate DKI restoration businesses. DKI collects fees from these companies in return for the use of the DKI brand, provision of a client base, and some assistance. In return, the companies are expected to comply with DKI operating requirements.

Much of the 51-page court ruling released May 19 discussed the Pompey test, named after the Supreme Court of Canada’s 2003 ruling in Z.I. Pompey Industrie v. ECU-Line N.V.

The Pompey decision arose from a foreign company that tried to sue a Belgian shipping company in Canada. The plaintiff, Polyfibron Technologies Inc., alleged that its cargo was damaged. The cargo was supposed to have been shipped by sea from Antwerp to Seattle. The cargo was offloaded in Montreal and shipped by rail to Seattle.

The Supreme Court of Canada ruled in 2003 that Polyfibron’s lawsuit against ECU-Line should be stayed in Federal Court. In support of its decision, the Supreme Court cited a clause in the bill of lading stipulating that disputes are to be tried in Belgium.

“Once the court is satisfied that a validly concluded bill of lading otherwise binds the parties, the court must grant the stay unless the plaintiff can show sufficiently strong reasons to support the conclusion that it would not be reasonable or just in the circumstances to require the plaintiff to adhere to the terms of the clause.  In exercising its discretion, the court should take into account all of the circumstances of the particular case,” Supreme Court of Canada Justice Michel Bastarache wrote in Pompey.

In the Canstar case, in order to meet the Pompey test, DKI would have to convince the B.C. court that the forum selection clause is enforceable while Canstar would have to show “strong cause” as to why the forum selection clause should not be enforced, wrote Justice MacDonald.

DKI argued that the B.C. Franchises Act would only apply if DKI actually exercised significant control or actually provided significant assistance to Canstar. DKI argued it is an association of independent business owners whose members decide the rules governing the DKI business. Local operators of DKI businesses may vote on matter such as DKI’s membership structure, bylaws, and fees.

For its part, Canstar argued DKI enabled Canstar to access DKI’s national client base of insurers. DKI negotiated contracts with insurers’ clients on behalf of its members, collected funds for services, provided accounts receivable billing services, rendered collection services if clients did not pay, and operated a central phone line to provide emergency service referrals, Canstar argued.

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