Good Faith in Franchising: The Shelanu Decision -- Franchise Lawyer Canada
Good Faith in Franchising: The Shelanu Decision -- Franchise Lawyer Canada
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.
Good Faith in Franchising The Shelanu Decision Franchise Lawyer Canada - To learn more about this author, visit Peter Macrae Dillon's Website.
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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.
Good Faith in Franchising The Shelanu Decision Franchise Lawyer Canada - To learn more about this author, visit Peter Macrae Dillon's Website.
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John PowerJohn Power, founder of Biltmore Franchise Consulting, has extensive experience developing and marketing franchises and business opportunities. He has been in and around franchising for over twenty years. From 1980 through 1990 he conceptualized, organized, and developed the American Video Association. He grew AVA to 2,000 national members, before selling the company it 1990. It was later merged into another home video marketing company. From 2000 to 2005 he worked as a contract marketing and human resources consultant to several local and national companies. In 2005 Mr. Power began working as a franchise development consultant on a full-time basis. Since that time he has helped more than three dozen companies initiate and develop their franchising program. He notes that there are many companies interested in developing a franchise program, and who need his specialized assistance. Mr. Power is a “hands-on” franchise consultant. He said, “I am the ‘nuts and bolts’ person who tends to the details for my clients.” Mr. Power holds a B.S. degree with a major in Marketing. See: www.biltmorefranchise.com You may contact Mr. Power at: jpower@biltmorefranchise.co - Visit John Power's Website |
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Anne BarrAnne Barr has over 26 years experience in sales and marketing, six years as a franchisee. She has assisted over 367 business owners and purchasers to achieve their goals in career change, transition and exit strategy. She holds the designation of Certified Franchise Executive from the International Franchise Association, Certified Business Intermediary from the International Business Brokers Association and Board Certified Broker from the Texas Association of Business Brokers. Anne is active in professional organizations, networking groups and volunteers for non-profit entities. As owner/operator of four successful businesses, Anne has proven people skills and enjoys helping clients find the right "fit" in business ownership. Visit www.FranchiseOpportunitySpecialist.com for more information about me and my company. - Visit Anne Barr's Website |
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John BrennanJohn Brennan Ed.D. Dr. Brennan is President of Interpersonal Development, LLC, a training and development firm. Interpersonal Development has provided sales training and coaching to more than 3,000 sales reps from over 100 companies. A native of Australia, Dr. Brennan received his doctorate from the University of Rochester. His dissertation researched the effectiveness of Behavioral Modeling Technology in training people in interpersonal skills. While he has spent most of his career designing or delivering training, he was also a Vice-President of Sales of a training and development franchise with operations in 25 markets. Dr. Brennan has designed and delivered sales training in North America, Asia, Europe, Australia and the Middle East. He has been a guest speaker at numerous national and regional professional conferences. When Microsoft wanted Best Practices articles on sales for their web site, they called Dr. Brennan. The results are at http://office.microsoft.com/en-us/FX011387391033.aspx His firm’s clients have included Volvo, The Prudential, Merrill Lynch, Eastman Kodak, Gannett, Equifax Europe, the Economist Group and countless small businesses. - Visit John Brennan's Website |
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Jay Kubassek(Jay's Full Bio: EvanCarmichael.com/jaykubassek) In five years, Canadian-born entrepreneur Jay Kubassek went from selling mufflers at a Midas franchise to revolutionizing Internet marketing with the 2004 launch of CarbonCopyPRO, a online marketing education company, now worth over $20 million with customers in over 160 countries.
As an independent film producer, his upstart film fund Aliquot Films is currently producing a films with Spike Lee and Abel Fererra (starring Ethan Hawke and Dennis Hopper.)
Jay's entrepreneurial spirit is irrepressible. He’s the owner of five companies, a professional speaker and trainer, international real estate developer/investor, extreme sport enthusiast and emerging philanthropist. Jay resides in NYC with his wife Jamie, son Milo and dog Cooper. Visit Jay's official website: www.JayKubassek.com - Visit Jay Kubassek's Website |
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