Let’s Be Fair Here – Interpreting the Duty of Fairness in Franchisor-Franchisee Relationships

Let’s Be Fair Here – Interpreting the Duty of Fairness in Franchisor-Franchisee Relationships

Alex J. Chang, Associate
Phone:  604-685-1255
Email:  ajc@lmlaw.ca


The new BC Franchises Act came into full effect on February 1, 2017. As set out in a previous article, section 3 of the new BC Franchises Act confirms the existence of a duty of fair dealing among the parties to a franchise agreement.

Although the duty of fair dealing is mutual, the franchise legislation is meant to primarily protect franchisees. Thus, it is not surprising that most cases discussing this duty involve claims against franchisors by their franchisees.

It is not clear yet how the courts in BC will interpret and apply the duty of fair dealing enshrined in the new Franchises Act. However, courts outside of BC have interpreted the duty as requiring franchisors fulfill their obligations under franchise agreements honestly, fairly, reasonably and with proper motive. They must also not act arbitrarily, capriciously, or in a manner inconsistent with the reasonable expectations of the parties.[1] However, courts outside of BC have also cautioned that the duty of fair dealing cannot be used to replace or alter the terms of franchise agreements.[2]

A form of this duty of fair dealing probably already existed at common law prior to the Franchises Act coming into effect under the common law principle of good faith contractual performance recognized by the Supreme Court of Canada in Bhasin v. Hrynew, 2014 SCC 71. The Court described this duty as follows:


[G]ood faith contractual performance is a general organizing principle of the common law of contract which underpins and informs the various rules in which the common law, in various situations and types of relationships, recognizes obligations of good faith contractual performance.  The second step is to recognize, as a further manifestation of this organizing principle of good faith, that there is a common law duty which applies to all contracts to act honestly in the performance of contractual obligations.  Taking these two steps will put in place a duty that is just, that accords with the reasonable expectations of commercial parties and that is sufficiently precise that it will enhance rather than detract from the commercial certainty.

There is an organizing principle of good faith that parties generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily.

The organizing principle of good faith exemplifies the notion that, in carrying out his or her own performance of the contract, a contracting party should have appropriate regard to the legitimate contractual interests of the contracting partner.  While “appropriate regard” for the other party’s interests will vary depending on the context of the contractual relationship, it does not require action to serve those interests in all cases.  It merely requires that a party not seek to undermine those interests in bad faith.


Thus, the Supreme Court of Canada may have already provided some guidance when it held that the level of regard a contracting party should have for its contracting partner depends on context. While the duty of fair dealing applies to both franchisors and franchisees under s. 3, the duty of fairness must be interpreted in the context that the Franchises Act purpose is consumer protection legislation for franchisees. For this reason, the duty of fair dealing may be applied by courts more strictly in favor of a franchise and against franchisors.

Section 3 confirms the right of franchisors and franchisees to claim damages against each other for breaching their duty of fair dealing. Subject to potential limits in the franchise agreement, claims could arise against a franchisor with respect to many aspects of the franchise relationship such as when a franchisor may:

  • unreasonably refusals to allow alternative suppliers or service providers;
  • unreasonably refusals to renew licenses or leases;
  • deal with a franchise in a manner that could harm the legitimate interests of another franchise;
  • unreasonably refuse to approve the transfer, assignment or sale of the franchise from a franchise to another potential franchise;
  • misrepresent facts or withholding material information from a franchise; or
  • otherwise, act under the franchise agreement in a manner that lacks appropriate regard to the legitimate interests of the franchise.

These are just a few examples of how the duty of fairness might be breached. Thus, parties to franchise agreements should remain reasonable, fair and honest with each other in all aspects of the franchisor/franchisee relationship. They should also seek legal advice early if they suspect that they are being treated unfairly with respect to a franchise.

Do you have questions about the new Franchises Act? Please contact Alex Chang.

[1] Landsbridge Auto Corp v Midas Canada Inc[2009] OJ No 1279; Seto v Wendy’s Restaurants of Canada Inc, 2016 ABQB 493

[2] 2130679 Ontario Inc v Cora Franchise Group Inc., 2013 ONSC 3099


THIS ARTICLE IS NOT LEGAL ADVICE:  This article provides general information and should not be relied on upon without independent legal advice.

Lesperance Mendes Lawyers
900 Howe St #550, Vancouver, BC V6Z 2M4
(604) 685-3567