Introduction
Franchise relationships are built on mutual trust. The franchisee invests significant capital and effort in building a business, relying on the franchisor to provide support, maintain brand standards, and act fairly. But what happens when that trust breaks down? When a franchisor acts unreasonably, dishonestly, or in a way that undermines the franchise relationship, Ontario law provides important protections for franchisees.
The Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (the "AWA") imposes a statutory duty of fair dealing on both parties to a franchise agreement. This duty, combined with the common law duty of honest performance recognized by the Supreme Court of Canada in Bhasin v. Hrynew, 2014 SCC 71, creates a framework that constrains how franchisors can exercise their contractual rights and discretionary powers.
This article explains what bad faith looks like in a franchise context, what legal protections are available to Ontario franchisees, and what practical steps you should take if your franchisor is acting in bad faith.
What Does Bad Faith Look Like in a Franchise Relationship?
Bad faith in a franchise context can take many forms. It does not require outright fraud or intentional harm — it can include conduct that is unfair, arbitrary, or inconsistent with the reasonable expectations of the franchise relationship. The following are common examples of bad faith conduct by franchisors:
• Refusing reasonable requests without justification. For example, arbitrarily denying a franchisee’s request to transfer the franchise to a qualified buyer, or unreasonably withholding consent to a lease renewal.
• Imposing unreasonable conditions. A franchisor that suddenly requires expensive renovations or equipment upgrades that are not justified by brand standards or consumer demand may be acting in bad faith, particularly if the requirements are imposed selectively.
• Misusing discretionary powers. Many franchise agreements give the franchisor broad discretionary authority — over site approval, advertising expenditures, supply sources, and more. Exercising that discretion in a way that benefits the franchisor at the franchisee’s expense can constitute bad faith.
• Deceptive conduct. Providing misleading information about system performance, concealing material facts about planned changes to the franchise system, or making promises that the franchisor does not intend to keep.
• Retaliation. Punishing a franchisee for exercising their legal rights — such as imposing extra inspections or refusing support after a franchisee raises legitimate concerns or consults a lawyer.
• Selective enforcement. Enforcing standards or policies against some franchisees while ignoring the same conduct by others, particularly when the enforcement appears to target a specific franchisee for improper reasons.
The Statutory Duty of Fair Dealing: Section 3 of the AWA
Section 3(1) of the AWA provides that every franchise agreement imposes on each party a duty of fair dealing in the performance and enforcement of the franchise agreement. Section 3(2) clarifies that the duty of fair dealing includes the duty to act in good faith and in accordance with reasonable commercial standards.
This is a significant provision. It means that even if the franchise agreement gives the franchisor a contractual right to take a particular action, the franchisor must exercise that right in accordance with the duty of fair dealing. A franchisor cannot hide behind the letter of the contract to justify conduct that is fundamentally unfair or commercially unreasonable.
The duty of fair dealing under section 3 is a mandatory provision of the AWA. It cannot be waived or contracted out of. Any provision in a franchise agreement that purports to exclude or limit the duty of fair dealing is void under section 11 of the AWA.
Common Law Good Faith: Bhasin and Its Progeny
In addition to the statutory duty under the AWA, the Supreme Court of Canada’s decision in Bhasin v. Hrynew, 2014 SCC 71, established that there is a general organizing principle of good faith that underlies all contractual dealings in Canadian law. The Court recognized a specific duty of honest performance, which requires that parties to a contract not lie to or knowingly mislead each other about matters directly linked to the performance of the contract.
The Supreme Court further developed the good faith framework in Callow v. Zollinger, 2020 SCC 45, where it held that the duty of honest performance is breached when a party actively deceives the other party, including through conduct (not just express statements) that the party knows to be misleading. In Callow, the Court found that a party breached the duty of honest performance by creating a false impression that a contract would be renewed when it had already decided not to renew.
These common law duties exist alongside and complement the statutory duty of fair dealing under section 3 of the AWA. Together, they provide franchisees with a robust legal framework for challenging bad faith conduct by franchisors.
Examples of Bad Faith in Practice
Arbitrary Site and Relocation Decisions
Some franchise agreements give the franchisor authority to approve or deny proposed franchise sites or relocations. When a franchisor exercises this authority arbitrarily — for example, denying a site that meets all stated criteria, or approving a competing franchise location in a way that undermines an existing franchisee — the conduct may breach the duty of fair dealing.
Unreasonable Supply Requirements
Requiring franchisees to purchase from designated suppliers is common in franchise systems. However, when a franchisor mandates supplies at prices significantly above market rates, or earns undisclosed rebates or commissions on required purchases, this conduct can raise fair dealing concerns. The franchisor’s supply requirements must serve a legitimate purpose, such as quality control or brand consistency, rather than simply extracting additional revenue from franchisees.
Selective Enforcement of Standards
Franchise systems depend on consistent brand standards. However, enforcing those standards selectively — imposing penalties on one franchisee while ignoring the same breaches by others — can constitute bad faith. Selective enforcement is particularly problematic when it appears to be motivated by a desire to force a franchisee out of the system rather than by genuine quality concerns.
Remedies Available to Franchisees
If your franchisor has acted in bad faith, several remedies may be available depending on the circumstances:
• Damages. You may be entitled to compensation for financial losses caused by the franchisor’s bad faith conduct. This can include lost profits, wasted expenditures, and costs incurred as a result of the franchisor’s unreasonable conduct.
• Injunctive relief. In urgent cases, a court may grant an injunction to prevent the franchisor from taking a particular action — such as terminating the franchise agreement or opening a competing location — pending a full hearing of the dispute.
• Rescission. In some cases, particularly where the franchisor’s bad faith conduct is connected to a deficiency in the original disclosure, rescission of the franchise agreement may be available as a remedy.
• Declaratory relief. A court may make a declaration about the parties’ rights and obligations, which can clarify whether a particular action by the franchisor violates the franchise agreement or the duty of fair dealing.
Practical Steps If Your Franchisor Is Acting in Bad Faith
If you believe your franchisor is acting in bad faith, you should take deliberate and strategic action. The following steps will help protect your rights:
1. Document everything. Keep detailed records of every interaction with the franchisor, including emails, letters, meeting notes, and photographs where relevant. Record dates, times, and the names of individuals involved. A clear documentary record is essential if the matter proceeds to litigation or mediation.
2. Review your franchise agreement carefully. Identify the specific provisions that are relevant to the conduct you are concerned about. Understanding what the agreement says — and does not say — is the foundation for any legal claim.
3. Seek legal advice early. Do not wait until the situation escalates. A franchise lawyer can assess the strength of your position, advise on strategy, and help you avoid steps that might inadvertently weaken your claims.
4. Continue to comply with your obligations. While it may be tempting to respond to bad faith by withholding royalties or refusing to comply with franchisor directives, doing so can give the franchisor a basis to terminate your agreement. Maintain your compliance while pursuing your legal remedies.
5. Consider alternative dispute resolution. Many franchise agreements contain mediation or arbitration clauses. These processes can sometimes resolve disputes more quickly and cost-effectively than litigation.
Frequently Asked Questions
Q: Can a franchisor breach the duty of fair dealing even if it is technically following the franchise agreement?
A: Yes. The duty of fair dealing under section 3 of the AWA applies to how the franchisor exercises its contractual rights, not just whether it has the right in the first place. A franchisor that exercises a contractual right in an unfair, arbitrary, or commercially unreasonable manner may breach the duty of fair dealing even though the right itself exists in the agreement.
Q: What is the difference between the duty of fair dealing under the AWA and the common law duty of honest performance?
A: The duty of fair dealing under section 3 of the AWA is broader than the common law duty of honest performance. The AWA duty requires parties to act in good faith and in accordance with reasonable commercial standards. The common law duty, as established in Bhasin v. Hrynew and clarified in Callow v. Zollinger, focuses more narrowly on honesty — it prohibits lying to or actively misleading the other party. Both duties can apply simultaneously to a franchise relationship.
Q: Should I stop paying royalties if my franchisor is acting in bad faith?
A: Generally, no. Withholding royalties — even in response to franchisor bad faith — can give the franchisor a basis to terminate your franchise agreement for default. This is a common tactical mistake. Instead, continue to comply with your obligations while pursuing your legal remedies through proper channels. A franchise lawyer can advise you on the best strategy for your specific circumstances.
Q: How long do I have to bring a claim for breach of the duty of fair dealing?
A: The general limitation period under Ontario’s Limitations Act, 2002 is two years from the date you knew or ought to have known about the claim. However, limitation periods can be complex and depend on the specific facts. Seek legal advice promptly to ensure your rights are preserved.
Contact Booni Law
If your franchisor is acting in bad faith, you have legal options under Ontario’s Arthur Wishart Act and common law. Booni Law represents franchisees across Ontario in disputes involving bad faith, unfair dealing, and breach of franchise agreements. We can assess your situation, advise on your rights, and help you develop a strategy to protect your franchise investment. Booni Law serves clients across Ontario, including the Greater Toronto Area, Southwestern Ontario, and communities throughout the province. Email us at admin@boonilaw.com or call +1 (226) 271-1751 to get started.
Disclaimer: This article is provided for general informational purposes only and does not constitute legal advice. Reading this article does not create a solicitor-client relationship between you and Booni Law. The information in this article may not reflect the most current legal developments and should not be relied upon as a substitute for professional legal advice tailored to your specific circumstances. If you require legal advice, please contact Booni Law.
