A brief summary as to what this case means for you:

The duty of good faith and fair dealing applies to all parties to a franchise agreement. In the case below, the duty of good faith was applied in connection with a dispute by a franchisor and franchisee as to the renewal terms of their franchise agreement. Courts will apply the duty of good faith on parties to make sure that they perform the terms of the franchise agreement, however, courts will not apply the duty of the good faith to change explicit terms of a franchise agreement.

Pointts Advisory Ltd. v. 754974 Ontario Inc.

The plaintiff franchisor and defendant franchisee entered into a franchise agreement that provided for a 15 year term expiring on January 25, 2003. The agreement provided for a right of renewal for a 10 year term and execution of the franchisor's then-current franchise agreement, including payment of the then-current franchise fee then being charged to new franchisees entering the system. The franchise agreement came up for renewal and the parties entered into a dispute regarding the amount payable for the then-current franchise fee as well as the length of term offered. The plaintiff franchisor argued it was prepared to renew the agreement on the terms agreed to in the original agreement, and that it negotiated fairly and honestly and thus since it could not reach agreement with the franchisee as to the renewal terms was justified in terminating the franchise agreement at the end of its term. The plaintiff sought a judgment declaring the defendant failed to renew the franchise agreement and that the plaintiff was entitled to damages as a result of the defendant's unauthorized use of the trademarks and logo. The defendant counterclaimed that the plaintiff breached the renewal provisions of the franchise agreement and breached its obligation of good faith and fair dealing under the Arthur Wishart Act (the "Act"). The defendant also sought a declaration that the plaintiff did not qualify for an exemption from providing disclosure under the Act because there were material changes contained within the renewal agreement and sought a declaration that the plaintiff was required to provide a disclosure document.

In looking at whether the plaintiff franchisor breached the renewal provisions of the franchise agreement, the court had to determine what the actual franchise fee was that was being charged to new franchisees at that time. The plaintiff submitted that new franchisees were paying $75,000 for their franchise fee. While the plaintiff did sell franchises for the franchise fee of $75,000, the court was also presented with evidence by the defendant that since the coming in to force of the Act the plaintiff sold franchises for $50,000 to $65,000. The court therefore found, based on the evidence presented before it, that the then-current franchisee should be $50,000 as that was the most recent franchise fee charged by the plaintiff. The duty of good faith required the parties to perform the terms of the franchise agreement itself in good faith, and does not enable the courts to change the terms of a franchise agreement. Therefore, in face of the defendant's argument that it should have been granted a 15 year term on renewal, as opposed to the 10 year term offered in the original agreement, the court held that the parties agreed to a 10 year renewal upon signing the original agreement and therefore the court was not prepared to vary that amount of time. On a straight application of the renewal terms of the contract, the defendant was entitled to a 10 year renewal upon payment of the then-current franchise fee. In terms of the plaintiff's requirement to provide disclosure, the court noted that there is nothing in the Act that allows a court to compel a party to provide disclosure. While the duty of good faith requires the parties to act fairly, the court found that it does not go so far as to allow a court to force a franchisor to produce a disclosure document to a franchisee prior to that franchisee renewing its agreement. The court ultimately dismissed the plaintiff's claim and allowed the defendant's counterclaim in part because the plaintiff did breach the franchise agreement by improperly terminating it, and thus the defendant was deprived of the full benefit for which it paid royalties and advertising fees. The court awarded the defendant with the return of a portion of the royalties it paid into trust to compensate it for its damages.

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