Dealing With The Duty Of Good Faith And Fair Dealing In Franchise Agreements

The duty of good faith and fair dealing

Provincial franchise legislation imposes a duty of fair dealing on parties whenever they are performing or enforcing the provisions of a franchise agreement.1 Canadian courts have generally noted that the statutory duty of fair dealing is a codification of the common law duty of good faith, which precludes contracting parties from acting in bad faith when exercising discretionary contractual powers.2

In terms of general principles, the duty of good faith requires contracting parties to:

exercise powers with due regard to the interests of the other party, but they are not required to prefer the interests of the other party over their own; observe standards of honesty, fairness and reasonableness; and act with proper motives and not arbitrarily, capriciously or in a manner that is inconsistent with the reasonable expectations of the parties. Although the law remains in a state of development, thus far the duty of good faith has been held not to create new, unbargained for, rights and obligations or alter the express terms of the contract reached by the parties.3 Rather, the duty is applied to ensure that parties do not act in a way that eviscerates or defeats the objectives of the agreement.

If the statutory duty of fair dealing is a codification of the common law duty of good faith, can the scope and content of this duty be tempered by the terms of a franchise agreement? The answer is, to some extent, yes.

Tempering The Duty Of Good Faith And Fair Dealing In Your Franchise Agreements

Franchise cases in Ontario confirm that neither the common law duty of good faith nor the statutory duty of fair dealing are intended to replace or amend express contractual provisions.4 Consequently, when considering whether a party has demonstrated good faith and fair dealing, the impugned conduct must be assessed in light of the provisions of the franchise agreement (as well as the relevant factual circumstances of any particular case). In two recent Ontario franchise decisions that illustrate this point, Fairview Donut Inc. v The TDL Group Corp. ("Tim Hortons")5 and Spina v Shoppers Drug Mart Inc. ("Shoppers Drug Mart"),6 the court rejected bad faith and unfair dealing claims because they ran up "against the wall" of the express provisions of the relevant agreements.

In Tim Hortons, the plaintiff franchisees alleged that Tim Hortons violated its good faith and fair dealing obligations by, among other things, requiring franchisees to change their baking methods and to make certain items available at all times. The plaintiffs complained that these changes reduced their profits, thereby violating the duty of good faith and fair dealing. Tim Hortons successfully moved to dismiss the proposed class action on a summary judgment motion.

Confirming that the good faith and fair dealing duty does not trump the express language of the franchise agreement, the court held that the agreement permitted Tim Hortons to implement these changes, set the prices for supplies that franchisees were required to purchase and specify the maximum selling prices for all menu items.7 The court noted that its responsibility is to give...