Franchising in the Courts

AuthorFrank Zaid
ProfessionSenior Partner Osler, Hoskin & Harcourt LLP
Canadi an court s have developed a substa ntial b ody of law in connec-
tion with various fr anchise issue s. Generally, the courts have viewed
franchising a s a commercial relationship, governed by contract, and
they have been reluctant to impose any specif‌ic gover ning principles.
However, a number of genera l principle s have been establi shed.
With the courts continuing to e stablish the common law duty of
good faith and fair dea ling in franchising and the inclusion of a statu-
tory duty of fair deali ng in Alberta and Ontario, franchisees are being
afforded a much more level playing f‌ield for seeking relief in certa in
situations. At the same time, franchisors are being more cautious in
the selling proces s and more prudent in fulf‌illing their disclosure and
other obligations to franchisees. The net result is that, as f ranchising
continues to grow, the legal aspects of franchising must be more care-
fully considered and clearly understood by both sides of the relation-
ship than in the past.
Franchisi ng in the Courts 281
Canadian courts generally constr ue franchise agreements according to
their specif‌ic wording. Furt her, the courts will apply st atute of frauds
legislation to state that a w ritten agreement will override any alleged oral
agreement. Where there is an issue of ambiguity in the interpretation of
a standard franchise agreement prepared by a franchisor, the ambiguity
will generally be determined in favour of a franchisee. Moreover, where
there is an inequality of bargaining power, the courts have been willing
to impose terms in favour of the wea ker party, the franchisee.
1) Con t r a ct I nte r pre t a tio n
In Peters Auto Sales Ltd. v. Chrysler Canada Ltd.,1 the court refused to
imply a term that a franchise agreement was of indef‌inite duration.
This case involved an action by a franchisee clai ming the agreement
was wrongly termin ated and that the original franchis e agreement was
of indef‌inite duration, subject to termination only for cause.
The court held that, in the circ umstances, it could not imply a term
that the franchi se agreement could only be terminated upon reasonable
notice being given. The fact that the fra nchise agreement had ex pired
and the franchisee was allowed to continue with t he franchise wa s not
conduct on the part of the franchis or indicating that the agreement that
had expired was one of indef‌inite duration.
2) Pre-Contractual Negotiations
The case of Bawitko Investments Ltd. v. Kernels Popcorn Ltd.2 illustrates
that franchisors cannot take the position that a franchise agreement
has not been entered into prior to the execution of a written agreement
if there have been signif‌icant pre-execution negotiations and corres-
pondence or other commitments signif ying that a deal has been str uck.
However, if the parties have only contemplated the signing of a formal
written agreement with e ssential terms to be agreed upon at a later
date, then there can be no completed agreement.
The Court of Appeal said the following regard ing the completion of
negotiations leading to a bindi ng franchise ag reement:
fra nchise law282
The parties may “contr act to make a contract,” that is to say, that may
bind themselves to e xecute at a future date a forma l written agree-
ment containing s pecif‌ic term s and conditions. When the y agree on
all the ess ential provi sions to be incorp orated in a formal do cument
with the intent ion that their ag reement shall thereupon b ecome
binding, they w ill have fulf‌illed all t he requisites for the formation of
a contract. The fact that a form al written do cument to the same ef-
fect is to be thereaf ter prepared and signed does not alter the bind ing
validity of the or iginal contr act.
However, when the origi nal contract i s incomplete becau se es-
sential prov isions intended to gover n the contractua l relationship
have not been settled or ag reed upon; or the contract is to o general
or uncertain to be va lid in itself a nd is dependent on the mak ing of
a formal contract; or t he understand ing or intention of the pa rties,
even if there is no uncer tainty a s to the terms of thei r agreement, is
that their legal obl igations are to be defer red until a forma l contract
has been approved and e xecuted, the origin al or prelimin ary agree-
ment cannot constitute an en forceable agreement. In ot her words, in
such circumst ances the “contract to make a cont ract” is not a con-
tract at all. The execut ion of the contemplated forma l document is
not inte nded only as a solemn recor d or memorial of an alrea dy com-
plete and binding contr act but is essenti al to the formation of t he
contract itself.3
The court held that the very nature of a fr anchisor-franchisee rel a-
tionship mandated th at complex terms of the agreement could not be
regarded as mere formalities or as routine language. The subsequent
conduct of both parties in this case showed that there was no agree-
ment between them on these term s.
In Aspiot is v. Coffee Tim e Donuts In c.,4 the plaintiff sought a declara-
tion that an agreement between the plaintiff and the defendant fran-
chisor was bindi ng and enforceable and that the defendant s, including
the president and vice president of the franchisor, wilfully breached
the agreement. The plaintiff brought the action af ter negotiations broke
down between the parties on the issue of a location fee.
The trial judge was unable to conclude that t here was a binding and
enforceable agreement between the partie s because a number of the
essential ter ms of the franchi se acquisition were not contained in the
agreement and no agreement was ever reached on many such ter ms.
3Ibid. at 104.
4 [1995] O.J. No. 419 (Gen. Div.).

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