Duty of Fair Dealing

 In Business Law

Franchise agreements can be tough to negotiate! Of course it always depends on the opportunity, but bargaining power in negotiating franchise agreements is typically heavily skewed in favour of franchisors. So much so that, as a franchisee, you may find yourself unable to negotiate even a single change to the agreement. The franchisor’s reasoning for this simply being – this is what all of our other franchisees agree to, we have hundreds of them, if you do not like the terms we can find somebody else. You’ve essentially been handed a “take-it-or-leave-it” offer, and are now faced with a fairly serious cost-benefit analysis; to determine if the risks of pursuing your business opportunity are worth it. It can be a nervy time, but perhaps you can draw a little bit of comfort from the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c.3 (the “Act”) while you consider whether or not you would like to proceed.

Section 3 of the Act dictates that each party to a franchise agreement owes a “duty of fair dealing” to the other. The codification of this requirement in statute is an attempt to level the playing field, given the imbalance in the franchisor/franchisee relationship. Importantly, this duty applies beyond the negotiation stage, extending to both the performance and enforcement of the franchise agreement. So what does it mean to have to act fairly? Generally, pursuant to case law, the courts have interpreted this duty as requiring that parties to a franchise agreement must act honestly and reasonably when performing their obligations under the franchise agreement – with reasonableness typically being assessed in light of the legitimate expectations of both parties.

To give an example of when Section 3 of the Act can offer you some protection, it is not uncommon to see a fair amount of discretionary power in franchise agreements, with multiple provisions setting out that decisions shall be made at the sole discretion of the franchisor. For instance, the agreement may give the franchisor the discretionary authority to permit temporary mobile or pop-up locations within what would otherwise be your exclusive territory. But “temporary” has not been defined, and now you are concerned that this could cannibalize your revenue. In this situation, if the franchisor permits such an operation in your territory for an inordinately long period of time, you may be able to claim damages for a breach of the duty of fair dealing. Perhaps with this in mind you may feel more comfortable about some sections of your agreement.

There are certainly a number circumstances where the duty of fair dealing may be called into question. If you suspect that you might have a case in this regard please do not hesitate to reach out.  I would be happy to answer any of your questions.

This blog post was written by Ian McLeod, a member of the Business Law team.  Ian can be reached at ian.mcleod@mannlawyers.com or at 613-369-0373.

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