Franchising in the Courts
Author | Frank Zaid |
Profession | Senior Partner Osler, Hoskin & Harcourt LLP |
Pages | 280-351 |
280
CHAPTER 8
FR ANCHISINGIN
THE COURTS
A. BALANCINGTHE INTERESTS OFTHE
FRANCHISEE AND FRANCHISOR
Canadian courts have developed a substantial body of law in connec-
tion with various franchise issues. Generally, the courts have viewed
franchising as a commercial relationship, governed by contract, and
they have been reluctant to impose any specific governing principles.
However, a number of general principles have been established.
With the courts continuing to establish the common law duty of
good faith and fair dealing in franchising and the inclusion of a statu-
tory duty of fair dealing in Alberta and Ontario, franchisees are being
afforded a much more level playing field for seeking relief in certain
situations. At the same time, franchisors are being more cautious in
the selling process and more prudent in fulfilling their disclosure and
other obligations to franchisees. The net result is that, as franchising
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 Courts281
B. CONTRACTUALRELATIONSHIP
Canadian courts generally construe franchise agreements according to
their specific wording. Further, the courts will apply statute 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 weaker party, the franchisee.
1)Contract I nterpretation
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 claiming the agreement
was wrongly terminated and that the original franchise 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 franchise agreement had expired
and the franchisee was allowed to continue with the franchise was 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 essential 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 binding franchise agreement:
1(1990), 63 Man. R. (2d) 295 (Q.B.).
2(1991), 79 D.L.R. (4th) 97 (Ont. C.A.).
fra nchise law282
The parties may “contr act to make a contract,” that is to say, that may
bind themselves to execute at a future date a formal written agree-
ment containing specific terms and conditions. When they agree on
all the essential provisions to be incorporated in a formal document
with the intention that their agreement shall thereupon become
binding, they w ill have fulfilled all t he requisites for the formation of
a contract. The fact that a formal written document to the same ef-
fect is to be thereaf ter prepared and signed does not alter the bind ing
validity of the original contract.
However, when the original contract is incomplete because es-
sential provisions intended to govern the contractual relationship
have not been settled or agreed upon; or the contract is too general
or uncertain to be valid in itself and is dependent on the making of
a formal contract; or the understanding or intention of the parties,
even if there is no uncertainty as to the terms of their agreement, is
that their legal obligations are to be deferred until a formal contract
has been approved and executed, the original or preliminary agree-
ment cannot constitute an en forceable agreement. In other words, in
such circumstances the “contract to make a contract” is not a con-
tract at all. The execution of the contemplated formal document is
not inte nded only as a solemn recor d or memorial of an alrea dy com-
plete and binding contract but is essential to the formation of the
contract itself.3
The court held that the very nature of a franchisor-franchisee rela-
tionship mandated that 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 terms.
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 binding and enforceable and that the defendants, 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 parties because a number of the
essential terms of the franchise acquisition were not contained in the
agreement and no agreement was ever reached on many such terms.
3Ibid. at 104.
4[1995] O.J. No. 419 (Gen. Div.).
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