Pursuant to Section 3 of the Arthur Wishart Act (Franchise Disclosure) 2000 (the “Wishart Act”) a duty of fair dealing (“Fair Dealing): 1) is imposed on all parties to a franchise agreement; 2) applies to all agreements regardless of when entered into; 3) is in addition to, and does not detract from, a right or remedy available at law; and 4) includes a duty to act in “good faith” and in accordance with “reasonable commercial standards”. Courts have held that Fair Dealing at least requires one party to consider the commercial interests of the other in making decisions and exercising discretion.
Following Salah and 1470256 Ontario Inc. v. Timothy’s Coffees of the World Inc. 2009 CanLII 58066 (ON. S.C.), franchisees can now claim, as a separate actionable right, damages against a franchisor for a breach of Fair Dealing. In Timothy’s, the franchisee purchased a corporate store on the 3rd floor of Bayshore Shopping Centre (“BSC”). The term of the franchise agreement (the “FA”) was for 4 years and the documentation described the premises as “Bayshore Shopping Centre, 100 Bayshore Drive, Napean, Ontario”.
Timothy’s promised that if it could renew the lease the franchisee could renew the FA at a renewal franchise fee of ¼ of the regular fee. Timothy’s renewed its lease but for the 2nd floor of BSC, ultimately granting another franchisee this location. Timothy’s claimed that the option granted to the franchisee was void since it only related to the 3rd floor. Timothy’s failed to communicate with the franchisee on various matters of substance and deliberately misled the franchisee by offering the franchisee the right to purchase the 2nd floor location at a price which was almost $85,000.00 more than the price paid by the new franchisee.
The Court came to the following conclusions:
1) Since all of the documents defined the premises as Bayshore Shopping Centre at 100 Bayshore Drive, Napean, it was not reasonable to expect the franchisee to have deduced that the FA only referenced the 3rd floor location. As a contract of adhesion, the FA is subject to being interpreted against its author and hence the option to renew applied to the BSC in general and not specifically to the 3rd floor location.
2) That Timothy’s had breached the FA by telling the franchisee that its only option was to move to a new location “for a price that was dishonest and apparently only intended to dissuade him.”
3) The Wishart Act is designed to prevent abuses by “the powerful, sophisticated franchisor” by requiring that franchisors act in good faith and comply with their duty of fair dealing. As a result of Timothy’s failure to communicate by not returning phone calls, by deliberately withholding information and by grossly inflating the price that the franchisee would have to pay, Timothy’s breached its duty of good faith. This breach is a separate and actionable duty.
4) Damages should be assessed at a level which will prevent Timothy’s from failing in this duty in the future.
The Court awarded damages for the breach of Fair Dealing in the amount of $50,000.00; interestingly, the Court also included as a small component of the $50,000.00 damages for mental distress arising out of the breach of contract.