Franchising in the Courts

• Author: Frank Zaid
• Profession: Senior Partner Osler, Hoskin & Harcourt LLP
• Pages: 280-351

280

CHAPT ER 8

FR ANCHISING IN

THE COURTS

A. BAL ANCING THE INTERESTS OF THE

FRANCHISEE AND FRANCHISOR

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

B. CONTR ACTUAL REL ATIONSHIP

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:

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 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.).