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.).