Introduction
The relationship between a franchisor and a franchisee is inherently unequal. The franchisor controls the brand, the system, and in many cases the supply chain. The franchisee has invested its capital and livelihood in a business that operates within parameters set by someone else. Ontario’s legislature recognized this imbalance when it enacted the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (the "AWA"), which includes a statutory duty of fair dealing that applies to every party to a franchise agreement.
This article examines the content, scope, and practical application of the duty of fair dealing under section 3 of the AWA. We explore how Ontario courts have interpreted the duty, its relationship to the common law duty of good faith, the specific franchisor conduct that has been found to breach the duty, and the remedies available to franchisees.
The Statutory Framework: Section 3 of the AWA
Section 3(1) of the AWA provides: "Each party to a franchise agreement has a duty of fair dealing in the performance and enforcement of the franchise agreement." Section 3(2) defines fair dealing as "the duty to act in good faith and in accordance with reasonable commercial standards."
The duty has two components. The first — good faith — is an obligation of honesty and candour. It requires the parties to deal with each other honestly, to refrain from active deception, and to honour the spirit of their commitments. The second — reasonable commercial standards — imports an objective benchmark: the conduct must be consistent with what a reasonable business person in the same industry would consider fair and appropriate.
The duty is mandatory and cannot be waived or contracted out of by the parties. Any provision in a franchise agreement that purports to exclude or limit the duty of fair dealing is void. The duty applies throughout the life of the franchise relationship, from the moment the franchise agreement is executed through its performance, renewal, and termination.
Relationship to Common Law Good Faith
The statutory duty of fair dealing under the AWA operates alongside — and is reinforced by — the common law duty of good faith recognized by the Supreme Court of Canada.
Bhasin v Hrynew (2014 SCC 71)
In Bhasin v Hrynew, the Supreme Court of Canada recognized for the first time a general organizing principle of good faith in contractual performance. The Court held that there is a common law duty of honest performance that applies to all contracts. This duty requires the parties to be honest with each other in relation to the performance of their contractual obligations. They must not lie to each other, and they must not knowingly mislead each other about matters directly linked to the performance of the contract.
While Bhasin was not a franchise case, its principles apply directly to franchise relationships. The common law duty of honest performance is a minimum standard that exists independently of the AWA’s statutory duty. In practice, the statutory duty of fair dealing under section 3 is broader than the common law duty because it incorporates the additional requirement of "reasonable commercial standards," which imposes an objective benchmark that goes beyond mere honesty.
Callow v Zollinger (2020 SCC 45)
In Callow v Zollinger, the Supreme Court further developed the duty of honest performance by clarifying that it prohibits not only outright lies but also conduct that is designed to create a false impression — what the Court described as "active" or "deliberate" deception, including deceptive silence. The respondent in Callow had failed to inform the appellant that a contract would not be renewed while simultaneously giving the impression that the relationship was in good standing. The Court held this conduct breached the duty of honest performance.
Callow has significant implications for franchise relationships. Franchisors that allow franchisees to make investments or commitments based on a false understanding of the franchisor’s intentions — for example, by remaining silent about a planned termination while the franchisee invests in renovations — may breach both the common law duty of honest performance and the statutory duty of fair dealing under section 3.
What Fair Dealing Requires in Practice
Ontario courts have applied the duty of fair dealing to a broad range of franchisor conduct. While no exhaustive list is possible, the case law reveals several recurring themes and requirements.
Honest Communication
The duty of fair dealing requires franchisors to communicate honestly with their franchisees about matters that affect the franchise relationship. This includes providing accurate information about system performance, planned changes, competitive developments, and the franchisor’s intentions regarding renewal, termination, or sale of the system. A franchisor that provides misleading information to induce a franchisee to take a particular action — or that withholds material information for the same purpose — breaches the duty.
No Deceptive Silence
Following Callow v Zollinger, the duty extends to situations where the franchisor’s silence is itself deceptive. If a franchisor knows that a franchisee is operating under a material misunderstanding about a matter directly connected to the franchise relationship, the franchisor has an obligation to correct that misunderstanding. Remaining silent in order to benefit from the franchisee’s mistaken belief is a breach of fair dealing.
Reasonable Exercise of Discretion
Many franchise agreements confer broad discretionary powers on the franchisor — over supply sources, pricing, territory, site approval, advertising, and a host of other operational matters. The duty of fair dealing requires the franchisor to exercise these discretionary powers reasonably and not arbitrarily, capriciously, or in bad faith. A franchisor that exercises a discretionary power for the purpose of harming the franchisee or extracting a benefit to which the franchisor is not entitled breaches the duty.
Case Law on Fair Dealing
Shelanu Inc v Print Three Franchising Corp
In Shelanu, the Ontario Court of Appeal considered the duty of fair dealing in the context of a franchisor that had allowed a competing location to open in proximity to the franchisee’s territory. The Court examined whether the franchisor’s conduct was consistent with the duty to act in good faith and in accordance with reasonable commercial standards. The case demonstrates that encroachment — the practice of permitting new locations that draw customers away from existing franchisees — is a significant fair dealing concern.
Country Style Food Services Inc v Mesic
In Country Style v Mesic, the court examined the franchisor’s exercise of discretion in the context of store relocation. The franchisee alleged that the franchisor had acted unreasonably in refusing to approve a proposed relocation. The court analyzed the franchisor’s decision under the fair dealing standard, considering whether the refusal was motivated by legitimate business reasons or by improper considerations. This case illustrates that courts will scrutinize the reasons behind a franchisor’s exercise of discretion.
Salah v Timothy’s Coffees of the World Inc
In Salah v Timothy’s, the court addressed fair dealing in the context of system-wide changes that materially affected franchisee profitability. The case examined whether the franchisor’s decision to implement changes to the franchise system — including alterations to product offerings and supply arrangements — was consistent with the duty of fair dealing. The decision underscores that franchisors must consider the impact of system changes on their franchisees and must implement such changes in a manner that is consistent with good faith and reasonable commercial standards.
Specific Applications of the Duty
Site Approval and Relocation
Where the franchise agreement gives the franchisor the right to approve the franchisee’s site or to approve or deny relocation requests, the franchisor must exercise that right in good faith. A franchisor that unreasonably withholds site approval in order to pressure the franchisee or to reserve the site for a corporate location may breach the duty of fair dealing.
Supply Sources and Pricing
Franchisors frequently control or influence the supply chain. The duty of fair dealing requires the franchisor to exercise its control over supply sources and pricing in a manner that is consistent with good faith and reasonable commercial standards. A franchisor that uses its supply chain control to extract excessive profits at the expense of franchisee margins — particularly without disclosure — may face a fair dealing claim.
Territory and Encroachment
Even where the franchise agreement does not grant the franchisee an exclusive territory, the duty of fair dealing may constrain the franchisor’s ability to permit competing locations that materially undermine the franchisee’s business. The extent of the duty depends on the specific terms of the agreement, the representations made to the franchisee, and the franchisor’s conduct.
Renewal and Termination
The manner in which a franchisor exercises its renewal or termination rights is subject to the duty of fair dealing. A franchisor that declines to renew a franchise agreement for pretextual reasons, or that terminates the agreement without adequate notice or opportunity to cure, may breach the duty. Similarly, a franchisor that exercises a termination right in retaliation for the franchisee’s exercise of legitimate rights — such as the right to associate with other franchisees — breaches the duty.
Remedies for Breach
A franchisee who establishes a breach of the duty of fair dealing may be entitled to damages, injunctive relief, or both. Damages may include lost profits, wasted expenditures, diminution in the value of the franchise, and consequential losses. In appropriate cases, courts may grant injunctive relief to restrain the franchisor from continuing the offending conduct — for example, by ordering the franchisor to refrain from opening a competing location.
The duty of fair dealing is often pleaded alongside other causes of action, including rescission under section 6, damages under section 7, breach of contract, and the common law duty of honest performance. The interplay between these claims can be complex, and the appropriate remedy depends on the specific facts.
Frequently Asked Questions
Q: Does the duty of fair dealing prevent a franchisor from making changes to the franchise system?
A: No. The duty of fair dealing does not freeze the franchise system in place. Franchisors have the right to evolve their systems, introduce new products, change suppliers, and adapt to market conditions. However, they must exercise these rights in good faith and in accordance with reasonable commercial standards. This means, among other things, considering the impact on franchisees, providing reasonable notice of significant changes, and not using system changes as a pretext for targeting particular franchisees.
Q: Can a franchisee breach the duty of fair dealing?
A: Yes. The duty under section 3 is reciprocal — it applies to every party to the franchise agreement. A franchisee who acts in bad faith — for example, by operating a competing business in violation of a non-compete clause, misrepresenting sales figures, or deliberately undermining the franchise system — may breach the duty of fair dealing.
Q: Is the duty of fair dealing the same as a fiduciary duty?
A: No. The duty of fair dealing is not a fiduciary duty. A fiduciary duty requires one party to subordinate its own interests to those of the other party. The duty of fair dealing is less demanding: it requires honest dealing and conduct consistent with reasonable commercial standards, but it does not require either party to sacrifice its own legitimate business interests. Ontario courts have consistently declined to impose a fiduciary duty on franchisors absent exceptional circumstances.
Q: How do I prove a breach of the duty of fair dealing?
A: A franchisee alleging a breach of fair dealing must establish that the franchisor’s conduct was inconsistent with good faith or with reasonable commercial standards. This requires evidence of the franchisor’s actions, the context in which those actions were taken, the impact on the franchisee, and the standards of conduct that prevail in the industry. Documentary evidence — including emails, correspondence, internal memoranda, and meeting notes — is often critical.
Contact Booni Law
Booni Law advises both franchisors and franchisees on the duty of fair dealing and related obligations under the Arthur Wishart Act. If you believe that the other party to your franchise agreement has acted in bad faith, or if you want to ensure that your own conduct meets the required standard, we can provide the guidance you need. 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.
