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Good Faith in Franchising: The Shelanu Decision -- Franchise Lawyer Canada

Written by: Peter Macrae Dillon

Article Overview: This article examines the development of good faith in Canadian franchise law, which received its first important push from the Ontario Court of Appeal in the Print Three v. Shelanu decision. peter macrae dillon franchise franchisor lawyer attorney Toronto Ontario Canada www.franchiselaw.ca

Good Faith in Franchising: The Shelanu Decision -- Franchise Lawyer Canada

Good Faith – The Shelanu Decision

The Ontario Court of Appeal has just released perhaps the most important franchise case since the 1973 Supreme Court Canada decision in Jirna v. Mr. Donut. The decision in Shelanu Inc. v. Print Three Franchising Corp., released on May 20, 2003, may eventually have a greater impact on franchising than Jirna, because Shelanu deals with a number of franchise-related issues.

Defining the Good Faith Standard

The Court reaffirmed that no fiduciary relationship exists, stating that franchisors may act in their own self-interest, provided that they have regard to the legitimate interests of their franchisees. Henceforth, franchisors must give consideration to their franchisees’ interests as well as to the franchisor’s own interests before exercising their discretionary powers. In doing so, the franchisor must act honestly and reasonably.

What Constitutes a Breach of the Duty of Good-faith?

The trial judge in Shelanu found it “intrinsically troublesome for a franchisor to develop a concept for a new franchise operation that will operate in competition with its existing franchise operation”. In finding that the franchisor had not breached its good faith obligation to the franchisee, the Court of Appeal found that the trial judge had failed to consider several material factors, including the fact that none of the new Le Print Express franchises were established within the franchisee’s exclusive territory, the franchisee did not complain about Le Print Express for almost seven years after it was established, and the franchisee presented no evidence that it lost income as a result of competition from Le Print Express: the new system targeted a different business sector.

Exclusionary Clauses

The parties entered into an oral arrangement respecting the organization of the franchisee and payment of royalty rebates subsequent to the execution of the relevant franchise agreements. In seeking to avoid its obligations under the subsequent oral arrangements, the franchisor pleaded that the “entire agreement” clause of the franchise agreement excluded the existence of any arrangement not expressly set forth in the franchise agreement, and the amendment provisions of the franchise agreement required that a change to the franchise agreements must be reduced to writing and signed by the parties. The Court gave short shrift to these arguments, holding that an exclusion clause would not apply to an arrangement that arose after execution of the agreement. With respect to the amendment clause requirements, the court found that the parties, orally and by their conduct, were free to amend their agreement at any time and by any means.

Fundamental Breach of the Franchise Agreement

The ability of franchisees to escape their obligations under their franchise agreement based on an allegation that their franchisor has “fundamentally breached” their agreement has been severely curtailed by this decision. The trial court found that the various failings and breaches by Print Three constituted a fundamental breach of the franchise agreement. The Court of Appeal accepted that Print Three had abused its discretion respecting certain programs, and failed to make certain payments when due, but held that none of these breaches impaired the ability of the franchisee to carry on the commercial purpose of the agreement or deprived the franchisee of substantially the whole benefit of the contract. Accordingly, there had been no fundamental breach and the franchisee continued to be bound by the agreement after its purported termination by the franchisee.

Summary

Lessons for franchisors abound in this very important decision: the importance of reducing amendments to writing; the circumstances in which parallel competing systems may be established; the kind of evidence that must be adduced in order to support a claim for damages extending for the full term of a franchise agreement; the kind of conduct that will amount to a fundamental breach of the agreement by the franchisor; an elucidation of the franchisor’s obligations in order to comply with its good faith duty towards its franchisees (the requirement to have regard to the franchisee’s legitimate interests and to deal promptly, honestly, fairly and reasonably with franchisees). This is a soundly reasoned and commercially favourable decision that bodes well for the conduct of franchising in Ontario.

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