Canada: What Are The Support Obligations Of Franchisors And Their 'Good Faith' And 'Fair Dealing' Performance Duties Under The "Arthur Wishart Act"?

Question: What are the support obligations of franchisors and their "good Faith" and "Fair Dealing" performance duties under the Arthur Wishart Act?

Answer: It is difficult to describe the legal effect of every support obligation which a franchisor may owe to its franchisees under Ontario's Arthur Wishart Act (the "Act"). Such obligations are heavily dependent on what is specified in a particular franchise agreement. A franchisor should consider a number of factors in determining whether a particular support obligation may prove too onerous due to the Act or applicable case law.

A. Good Faith and Fair Dealing under the Act

Sections 3(1) to 3(3) of the Act impose statutory obligations of "fair dealing" and "good faith" on a franchisor and franchisee in their performance of a franchise agreement. Sections 3(1) to 3(3) of the Act (emphasis added) provide:

  1. Every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement.
  2. A party to a franchise agreement has a right of action for damages against another party to the franchise agreement who breaches the duty of fair dealing in the performance or enforcement of the franchise agreement.
  3. For the purpose of this section, the duty of fair dealing includes the duty to act in good faith and in accordance with reasonable commercial standards.

Primarily, the Courts of Ontario have interpreted such duties of "good faith" and "fair dealing" to mean that franchisors owe these duties in relation to performance of the support obligations to their franchisees set forth in their franchise agreements.

B. Support Provided by Franchisor to Franchisee

"Support" may include a broad range of obligations of a franchisor to its franchisees. The word generally refers to efforts by franchisors to assist their franchisees in operating their franchised businesses. Examples of support include:

  • Initial training of management of franchisee;
  • Assistance with opening of the franchise for business;
  • Operational assistance and visits on an ongoing basis by the franchisor's staff;
  • An operations manual (often online);
  • On-line communications through an intranet;
  • Telephone and email support for operational questions;
  • Periodic meetings with each franchisee, plus an annual convention with all franchisees;
  • Normally, a marketing program funded by franchisees;
  • Local marketing assistance;
  • Group insurance program;
  • Plans and specifications for construction/ renovation of a franchisee's premises;
  • System website: external one to attract sales; internal one (intranet) to provide for quick communication between the franchisor and its franchisees;
  • Leasing: franchisor/its associate may become the head tenant and sublet to a franchisee, in which case franchisee must be kept informed of communications with landlord; and
  • System changes: timely system changes to meet/beat the competition.

C. Support Obligations in a Franchise Agreement

It is important that franchisors be conscious not to 'over promise' obligations under their franchise agreements. In Machias v Mr. Submarine Ltd., for example, the Ontario Superior Court of Justice allowed the franchisee's claim for rescission of its franchise agreement due to, among other claims, the franchisor's failure to provide adequate support. The Court stated that:

The defendant failed to provide the promised support to the franchise after it opened. The litany of post-contractual problems cumulatively illustrates conduct on behalf of the defendant that appears high handed in light of the obligations of good faith and fair dealing [in the Act] between franchisor and franchisee.

Franchisors should be cautious not to include support provisions which may prove too onerous for them to meet and thereby open themselves to litigation under the Act.

When considering how Ontario Courts would interpret support obligations of franchisors under their "good faith" and "fair dealing" obligations, it is important first to consider the express terms of the franchise agreement. Courts will place primary emphasis on such terms and will use a contextual approach in their interpretation of them. In the words of Justice Strathy in the leading 2012 Ontario case of Fairview Donuts, "[t]he court's responsibility is to give effect to [the] contract and to require the parties to discharge their contractual obligations fairly, in good faith and in a commercially reasonable manner."

The resolution of contractual disputes under franchise agreements is an evolving area of law in Ontario. The area deserves close attention as it continues to develop.

Originally published in FranchiseCanada magazine

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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