In that last two and half years (dating back to the start of the COVID-19 pandemic in early 2020) the business world has experienced drastic changes and challenges. By way of example, many businesses have been affected by:
- A shift to online delivery models;
- Labour market shortages and staff absences;
- Supply chain shortages;
- Heightened inflation and increased material costs; and
- Legal and legislative developments.
These and other changes and challenges have impacted franchising generally, as well as many of the industries that franchising is common in. In many cases, these changes have caused or contributed to franchisees defaulting under their franchise agreements. Strictly enforcing franchise agreements in these situations may be complicated by the ever-evolving duty of good faith and fair dealing. Moreover, in many cases, strict enforcement and/or termination of franchise agreements would not be in the best interest of the franchisor or the franchise system as a whole.
As the business world continues settling into a new normal, it is worth considering strategies for managing defaults in franchise relationships in the new business environment that franchise systems are operating in.
Update on Duty of Good Faith and Fair Dealing
Last year the Supreme Court of Canada (the “SCC”) released two decisions in which it revisited and clarified the principle of good faith contractual performance as previously formulated in Bhasin v. Hrynew.[1] In C.M. Callow Inc. v. Zollinger,[2] the SCC affirmed the duty of honest performance as a general organizing principal of contract law and provided additional guidance on what constitutes “active dishonesty” sufficient to trigger a breach of the duty. In Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District,[3] the SCC more clearly defined the duty to exercise contractual discretion in good faith.
Although neither of these decisions involved a franchise relationship, Ontario courts have previously indicated that the statutory duty of good faith and fair dealing in the Arthur Wishart Act, 2000[4] is a codification of the common law duty of good faith.[5] Accordingly, these decisions inform and expand the statutory duty of good faith and fair dealing in provincial franchise laws.[6]
Indeed, there are certain key takeaways from these cases that franchisors ought to consider when managing franchisee defaults and potential terminations. First, franchisors need to avoid knowingly misleading franchisee on matters relating to defaults and possible terminations. Second, franchisors should exercise caution when exercising contractual discretionary powers, even where the agreement states that such power may be exercised in the franchisor’s sole and absolute discretion.