In Ontario, under section 3(1) of the Arthur Wishart Act, every franchise agreement imposes on each party a duty of fair dealing in the performance and enforcement of the agreement. The duty of fair dealing includes a duty to act in good faith and in accordance with reasonable commercial standards. Under section 3(2) of the Arthur Wishart Act, a party to a franchise agreement has a right of action for damages against another party if they breach the duty of fair dealing.
In First of Five Inc. v. Recipe Unlimited Corp et al, 2025 ONSC 93, at para 24, Justice A. Kaufman provides a summary of the context for the Arthur Wishart Act. “Franchise agreements often involve an inherent inequality of bargaining power. To address this imbalance, the Arthur Wishart Act was enacted to regulate the franchise marketplace and protect both prospective and existing franchisees. This remedial legislation aims to balance the power dynamics within franchise relationships by imposing a duty of ‘fair dealing’ in the performance and enforcement of every franchise agreement.”
The plaintiff First of Five Incorporated sought an interlocutory injunction to prevent the defendants from terminating the Franchise Agreement, lease and sublease, until this action was determined on the merits.
Justice Kaufman found that there was a serious issue to be tried with respect to the method of termination of the franchise relationship. The defendants’ reliance on the unpaid Small Claims Court fees to justify the termination, now fully paid, presented a serious issue. Justice Kaufman held that the duty of good faith obliges franchisors to enforce agreements without ulterior motives and in a commercially reasonable manner, considering both the franchisee’s and their own interests. By waiting to demand the fees until the renewal period, and basing the denial on a small sum, it made the claims look like there may be ulterior motives.
Justice Kaufman added in obiter at para 34 that questions on the enforceability of indemnity agreements are still at issue. “These sections aim to shield the franchisor from any liability for claims made against it and require the franchisee to reimburse it for any legal fees incurred, except when the franchisee’s claims result from the franchisor’s willful misconduct or gross negligence. Arguably, such provisions may violate section 11 of the AWA.”
At para 36, Justice Kaufman writes that “in Landsbridge Auto Corp. v. Midas Canada Inc., this Court determined that a franchise agreement which required the franchisee to execute a general release of claims against the franchisor before renewing the franchise agreement was void…The Court ruled that if exercising a franchisee’s rights under the franchise agreement necessitates a release of rights granted by the AWA, that release will be void. The Court of Appeal affirmed the motion judge’s decision, stating that “if [a franchisor] includes a term in [a] franchise agreement purporting to be a waiver or release of any rights a franchisee has under the Act, it will be void”.
It remains open to argument that the indemnity and legal fee provisions in the franchise agreement function as a waiver of rights. However, it should be noted that the waiver of rights effectively negates the rights of the franchisee against the franchisor under the legislation.
(Views are my own and do not represent the views of any organization. This article was originally published on Slaw.ca)
