Franchise agreements, while offering a structured path to entrepreneurial success, can become breeding grounds for disputes. Thus, “fair dealing” emerges as a critical tool in commercial law to provide a framework for equitable treatment within the franchisor-franchisee relationship.
This blog will explore the duty of fair dealing in light of a recent decision from the Ontario Superior Court of Justice, in which the Court emphasized the importance of mandating fair dealing in franchise relationships.
The Duty of Fair Dealing: An Overview
The duty of fair dealing imposes an obligation on franchisors and franchisees to act in good faith and in accordance with reasonable commercial standards. This duty is generally more onerous on franchisors to exercise all rights and performance obligations required under franchise legislation. Moreover, this duty does not create a fiduciary obligation between the parties, although they must have due regard to the other party’s interests.
What Happens if the Duty of Fair Dealing is Breached?
If a party breaches the duty of fair dealing, the other party may have a right of action for damages against the party in breach. A claim for the breach of the duty of fair dealing is a distinct legal claim and will not arise as a result of every breach of contract.
Some examples of when a franchisor may breach a duty of fair dealing can include, but is not limited to:
- knowingly misrepresenting the terms of the franchise agreement, or
- not providing a right of first refusal to a nearby area for a franchisee who sought to relocate to.
A franchisee may be found in breach of the duty of fair dealing in situations, such as, but not limited to:
- carrying out a royalty strike by withholding royalty fees owed under the franchise agreement, or
- transferring assets out of the franchise to a third party without the approval of the franchisor.
Franchisor Intends to Terminate Franchise Agreement Due to Alleged Defaults by Franchisee
In the matter of First of Five Incorporated v. Recipe Unlimited Corporation, the appellant (“First of Five”) family-owned business obtained rights to a franchise for a Harvey’s and Swiss Chalet restaurant by way of an agreement with the respondent (“Recipe”). The franchise agreement between the parties was set to expire in 2024 with a ten-year renewal option. In late 2022, Recipe informed First of Five that they did not satisfy the renewal requirements and intended to terminate the agreement due to alleged defaults. These defaults were contested by First of Five, which sought an interlocutory injunction to prevent the termination of its franchise agreement until the underlying action could be tried.
The primary dispute involved several contentious issues relating to disagreements over equipment maintenance and financial obligations. Despite these, however, First of Five endeavoured to renew their franchise agreement, arguing they had met the required conditions.
Superior Court of Justice Sets Aside Motion Judge’s Reasons for Denying Injunction
The motion was heard by the motions judge in late 2023, who denied the injunction. First of Five appealed this decision and sought a stay in order to maintain the status quo. It also sought to have the Court re-determine the injunction, or, in the alternative, asked the Court to allow the appeal and remit the matter to a different judge for a fresh hearing.
Upon review, the Court determined that the motions judge’s reasons were brief and insufficient for appellate review and were set aside for the following three reasons:
- they did not adequately address the complexities of the franchise renewal provisions or alleged defaults;
- they were conclusory and did not explain what evidence was relied upon, or why certain evidence was relied upon; and
- they lacked depth in considering Recipe’s obligations under the Arthur Wishart Act (Franchise Disclosure), which governs fair dealing in franchisor-franchisee relationships.
Court Emphasizes Importance of Fair Dealing in Franchise Relationships
The Court noted that the Recipe’s claims of default were “complicated issues that require a detailed consideration of both the terms of the various agreements and the underlying factual matrix.” It went on to state that this analysis may also engage consideration of the Arthur Wishart Act (Franchise Disclosure), specifying that “[s]ection 3 of that legislation imposes a duty of “fair dealing” in the performance and enforcement of every franchise agreement. There is also case law that deals with the general obligation of a party to deal in a good faith, fair and commercially reasonable manner when renewing (or deciding not to renew) a contractual agreement.”
The Court declined to exercise its powers to “make any order or decision that ought to or could have been made by the court or tribunal appealed from” under section 134(1) of the Courts of Justice Act. Instead, it outlined a summary of the issues between the parties regarding whether or not an injunction should be granted and noted that it was “not the function of this court to weigh evidence and determine facts de novo on a voluminous record where the facts are very much in dispute.”
Court Directs Case be Sent Back for a New Hearing
The Court further acknowledged that “Recipe gave an undertaking that it would not terminate the Franchise agreement “pending the determination of [First of Five’s] motion for injunctive relief. Given that I would not decide the merits of the motion for injunctive relief, the question of the scope of this undertaking remains a live issue as it goes to the remedy that this Court should order on this appeal.”
Ultimately, the Court overturned the denial of an injunction to First of Five Incorporated and directed the case be sent back for a new hearing. This was due to the Court’s insistence on a detailed factual analysis by a trial judge, and its emphasis on the importance of adhering to both statutory and contractual obligations in franchise relationships. Furthermore, the Court required Recipe to allow First of Five to operate the franchise until the end of the injunction proceeding.
Contact the Kitchener-Waterloo Litigation Lawyers at Campbell Litigation Lawyers for Trusted Representation in Commercial Disputes
At Campbell Litigation, our skilled and experienced commercial litigation team, led by Richard Campbell, help clients navigate complex commercial disputes, including shareholder disputes, debt collection, commercial lease matters, and agency and franchise claims. We help our corporate clients mitigate risk and protect their assets, reputation, and interests. To schedule a confidential consultation to discuss your commercial dispute matter with a member of our team, contact us online or by phone at 519-886-1204.
