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Franchising & the Duty of Good Faith – post Bhasin

Oct 29, 2015
gavel

Last year, in Bhasin v Hrynew, 2014 SCC 71 (“Bhasin”), the Supreme Court of Canada recognized the duty of good faith in contractual relations as an organizing principle in Canadian common law. The Court held that in performing a contract, a party must have “appropriate regard to the legitimate contractual interests of the contracting partner.” The landmark decision left many jurists and legal practitioners unclear as to what precisely is expected of contracting parties under this newly recognized duty.

Since Bhasin, claims for breach of contract often include a claim for breach of good faith. The increased frequency of this claim has given courts an opportunity to analyze how the duty of good faith applies in various scenarios. In Trillium Motor World Ltd v GM of Canada Ltd., 2015 ONSC 3824, the plaintiff (“Franchisee”) claimed the defendant (“Franchisor”) breached the duty of good faith by failing to disclose certain information in a proposed wind-down agreement. The Ontario Superior Court considered how the good faith principle from Bhasin applied in the franchise context.

The Court noted that the parties to a franchise agreement already owe one another a duty of good faith by virtue of section 3 of the Arthur Wishart Act (Franchise Disclosure), 2000, (“Wishart Act”). The section provides:

Fair dealing
3. (1) Every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement.
Right of action
(2) A party to a franchise agreement has a right of action for damages against another party to the franchise agreement who breaches the duty of fair dealing in the performance or enforcement of the franchise agreement.
Interpretation
(3) For the purpose of this section, the duty of fair dealing includes the duty to act in good faith and in accordance with reasonable commercial standards.

A single, encompassing duty of “good faith and fair dealing”

The Franchisee argued that because subsection 3 stipulates that the duty of fair dealing “includes” the duty of good faith, the duty of fair dealing under the Wishart Act requires something more than the common law duty of good faith from Bhasin.

The Court rejected the Franchisee’s argument, holding that “for all practical purposes, the two duties – if they are conceptually distinct – will give rise to the same obligations in the franchise context” and that “for most purposes, the terms ‘good faith’ and ‘fair dealing’ can be used interchangeably.”

Scope of the Duty in Franchising

The Court then considered what effect the decision in Bhasin had on the duties under s. 3 of the Wishart Act. At paragraph 66 in Bhasin, the Supreme Court “counsels lower courts to look to ‘existing doctrines’ of good faith before employing the organizing principle where the existing law is found wanting.” The Superior Court then summarized the jurisprudence on the duty of good faith and fair dealing in s. 3 of the Wishart Act, noting the following existing obligations:

 

  • Franchisor required to exercise powers under the franchise agreement with due regard to the interests of the franchisee.
  • Franchisor required to observe the standards of honesty, fairness and reasonableness.
  • Parties not permitted to act in a manner that eviscerates or defeats the objectives of the agreement.
  • Neither party permitted to substantially nullify the bargained objective contracted for by the other party.
  • Both parties required to exercise discretion reasonably and with proper motive, not arbitrarily capriciously or in manner inconsistent with reasonable expectations.

Essentially, the Court held that the existing law of good faith in the franchise context is not “wanting,” so there’s no need apply the newly recognized organizing principle. Bhasin may indeed be a landmark case for its recognition of an organizing duty of good faith in contractual performance generally; however, in franchising contexts it appears to have no impact.

Section 3 may be broader than Common Law duty

The Superior Court noted that, although the decision in Bhasin held that the duty of good faith does not give rise to a positive duty to disclose, “the Supreme Court was not… purporting to address the franchise context or the ‘existing doctrine’ developed in the franchise cases.”

Agreeing with the decision in 1250264 Ontario Inc. c Pet Valu Canada Inc., 2015 ONSC 29, the Superior Court held that “s. 3 of the Wishart Act may give rise to an obligation to disclose important materials facts in some circumstances, and that the disclosure regime set out in s. 5 of the Wishart Act does not preclude the existence of such a duty.”

While most expect Bhasin to have significant and widespread consequences, in the franchising context its impact is apparently nil. Perhaps the expected consequences of Bhasin were overstated given that so long as existing doctrine is sufficient to permit the court to fairly adjudicate the contractual dispute, the general principle of good faith will not be applied. Lower courts have been hesitant to apply the general organizing principle of good faith given the SCC’s statement that recognizing the duty is intended to allow for the “modest” and “incremental” development of the common law.

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