Canada: Alberta Court Clarifies Scope Of Duty Of Good Faith In Franchise Contest

Last Updated: April 24 2017
Article by Trevor R. McDonald


Since the Supreme Court of Canada's decision in Bhasin v. Hrynew (Bhasin),1 the extent of the contractual duties of good faith and honesty have been of significant interest to commercial contracting parties. This is particularly so in the franchise context, where franchisors and franchisees also have a statutory duty of fair dealing in the performance and enforcement of the franchise agreement.2 In Seto v. Wendy's Restaurants of Canada (Seto),3 the Alberta Court of Queen's Bench (the Court) clarified the guidelines for the application of the duties of good faith and fair dealing where a franchisor is contemplating the termination of a franchise agreement.

The Issue

In Seto, the franchisees conceded that they were in breach of the franchise agreement, and that the franchisor, Wendy's, was entitled to exercise its contractual rights of termination. The issue was, in the face of discussions that the franchisees had been having with potential purchasers prior to the termination, whether Wendy's was obligated to permit the franchisees to sell the franchise as a going concern, or to sell it on their behalf, rather than seize the assets and facilitate their liquidation.

The Facts

The franchisees operated a Wendy's restaurant franchise in Camrose, Alberta. On March 1, 2011, after falling into financial difficulty, the franchisees entered into a conditional purchase and sale agreement with a potential purchaser of their franchise business. That same day, in response to a request from the franchisees, Wendy's provided copies of its standard transfer application package. The franchise agreement required Wendy's to act reasonably in considering whether to allow a transfer, and set out a number of criteria that transferees had to meet. On March 8, 2011, the Department of Justice notified Wendy's that it had had issued writs of seizure and sale with respect to the franchisees' assets, which included its restaurant equipment and the franchise license, due to unpaid taxes and source deductions owed to Canada Revenue Agency (CRA). On March 17, 2011, as the franchisees were in default under their franchise and sublease agreements by failing to make timely payment of rent, royalties and other payments owed to Wendy's, and by neglecting to pay taxes to CRA resulting in the asset seizure, Wendy's terminated the agreements. Wendy's took possession of the restaurant and its assets and converted the franchise into a corporate store. The tangible assets were later appraised, and then sold to Wendy's through a private sale by the civil enforcement agency.

Claims of the Franchisee

The franchisees sued Wendy's, claiming that they had suffered substantial losses as a result of Wendy's termination of the franchise in the face of a potential sale. They also claimed that Wendy's was obligated to maximize the return on the assets, by permitting or promoting the sale of the franchise to a new franchisee as a going concern. The franchisees argued that Wendy's had breached its contractual and statutory duties of good faith and fair dealing.

The Decision

The Court reviewed the jurisprudence on fair dealing and good faith in the franchise context, both before and after Bhasin. The Court concluded that to establish a breach of duty, the franchisees needed to show that the termination was contrary to the provisions of the contract, or that it was done dishonestly or for an improper purpose. In this case, the termination was authorized under the default provisions of the franchise agreement, and there was no evidence that Wendy's real purpose was to frustrate the prospective sale. There was also no evidence that the transfer application was ever completed or provided to Wendy's, or that the purchase offer was still valid at the time of the termination. The Court dismissed the franchisees' claims and awarded summary judgment to Wendy's.

The Court held further that the duties of fair dealing and good faith could not be used to alter the express terms of the contract, which in the Seto case, contained a clause stating that any and all goodwill arising from the franchise business would inure to the benefit of Wendy's. This effectively precluded the franchisees from claiming compensation for any goodwill lost as a result of the termination. In the absence of a specific contractual clause, Wendy's had no legal duty to maximize the realization of the assets for the franchisees' benefit and no obligation to sell the franchise business as a going concern.

The Court left open the possibility that, in different circumstances, a franchisor may have a duty to preserve the franchisees' remaining interests in the business and assets. For example, if a specific, binding and imminent sale opportunity is disclosed to the franchisor prior to termination, this could impact the analysis.

Concluding Thoughts

It would be prudent for franchisors considering terminating a franchise agreement in the face of a franchisee's request or known intention to sell or transfer their franchise rights, to carefully review the termination and transfer provisions in the franchise agreement and its transfer policies before deciding on a course of action. Where there is a proposed sale to a qualified purchaser that is ready to close, the franchisor should exercise additional scrutiny and caution. The reasons for the termination and the contractual clauses relied upon by the franchisor should always be clearly expressed to the franchisee in writing to reduce the likelihood of a finding of improper purpose or an absence of fair dealing.

Conversely, franchisees who are contemplating a sale or transfer should request and review the franchisor's transfer policies and procedures, vet prospective transferees in accordance with those criteria and keep the franchisor highly involved in and informed of the application and transfer process.

*Trevor McDonald is a partner in BD&P's Litigation Group and was counsel of record for the successful franchisor in the Seto case.


1  Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494 (S.C.C.)

2  See for example the Franchises Act, RSA 2000, c. F-23, section 7.

3  Seto v. Wendy's Restaurants of Canada, 2016 ABQB 493, 43 Alta. L.R. (6th) 96 (Alta. Q.B.).

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.