the north face shop Encroachment and Good Faith in Franchising
(2) A party to a franchise agreement has a right of action for damages against another party to the franchise agreement who breaches the duty of fair dealing in the performance or enforcement of the franchise agreement.(3) For the purpose of this section, the duty of fair dealing includes the duty to act in good faith and in accordance with reasonable commercial standards. 2000, c. F 23, s.77. Every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement. 64.6. Every person is bound to exercise his civil rights in good faith7. No right may be exercised with the intent of injuring another or in an excessive and unreasonable manner which is contrary to the requirements of good faith.1375. The parties shall conduct themselves in good faith both at the time the obligation is created and at the time it is performed or extinguished.CANADIAN CASE LAWShelanu Inc. v. No.The Court of Appeal confirmed the existence of a good faith obligation between parties to any of adhesion including a franchise agreement. No fiduciary duty exists between franchisors and franchisees, and franchisors are not required to act selflessly and with undivided loyalty in the interest of their franchisees. Having determined that a common law duty of good faith exited, the Court did not re examine the trial judge findings that there was no retroactive application of the duty of good faith to agreements entered into before the coming into force of the Arthur Wishart Act.Mincom Corona Realty Inc. v. No. The franchisor agreed to grant the franchisee the exclusive right to carry on business using the Mincom name in Hamilton. The plaintiff claimed that the defendant breached the Agreement by selling the right to use the Mincom name in Burlington to a third party and as a result, it was entitled to damages. During negotiations, it was of utmost importance to the plaintiff that the exclusive licensed area include Burlington, but the plaintiff franchisee was advised that Burlington could not be included as the defendant was negotiating with a third party. Schedule B to the Agreement defined the exclusive area that was to be granted and also set out when and under which circumstances the Burlington area would become part of the plaintiff exclusive territory. Six months subsequent to signing the Agreement the Burlington area had not been assigned to any third party and the plaintiff considered it to be part of its area, pursuant to Schedule B. When the Burlington territory was sold to a third party, the plaintiff drastically reduced its advertising expenditures, and when the Agreement expired the plaintiff ended the relationship declining any renewal, and claimed damages based on the alleged breach of Schedule B.The action was granted. The court interpreted Schedule B to mean that if the defendant did not sell the Burlington territory within six months of the plaintiff signing the Agreement, then the territory would become part of the plaintiff exclusive territory. Therefore, the defendant breached the Agreement when it sold the Burlington territory after the territory had rightfully become the plaintiff The defendant argued that the plaintiff breached the Agreement by paying fees late, and that it was therefore entitled to sell the Burlington territory. The court examined the defendant conduct in the face of the late payments,
and found that the defendant was deemed to have waived, or was estopped from, relying on any breach of the Agreement. The defendant never sent notice of default to the plaintiff, nor did it enforce any of its remedies under the Agreement. Having found a breach of the Agreement on the defendant part, the court moved on to its assessment of damages. Advertising expenses, the amount paid by Corona to obtain a license, royalty fees, and loss of profits and encroachment loss were all factors the court took into consideration in awarding damages. Regarding punitive damages, the court held that by purposely choosing ambiguous wording for Schedule B, the defendant acted in bad faith which was contrary to the standards of honesty, reasonableness and fairness. The defendant conduct was reprehensible, oppressive and high handed and justified an award of punitive damages.Given the nature of the franchise relationship, the complete abandonment of the plaintiffs (franchisees) by the defendant (franchisor) when they were experiencing serious difficulties in the operation of their Eaton Centre franchise was a serious breach of the defendant’s obligation to assist the plaintiffs. When the plaintiffs themselves found a potential solution and presented it to the defendant, it was incumbent on the defendant to do what it could to assist the plaintiffs to salvage what was left of their business. Based on the practices which had been followed up to that time, and based on the promises contained in the promotional material, the defendant had a legal obligation to assist the plaintiffs. The breach of that obligation constituted an actionable wrong. The defendant went two steps further. By actually opening a new restaurant in unreasonably close competitive proximity to the plaintiffs and then awarding the restaurant to someone else,
the defendant violated the implied duties of good faith and fair dealing contained in their franchise agreement and promotional materials and thereby betrayed the trust that epitomizes the relationship between a franchisor and franchisee. The existence of the practice of giving to the next closest franchisee the first right of refusal to operate a new franchise supported the conclusion that the parties to this agreement had a reasonable expectation that their relationship would be governed by the principles of good faith and fair dealing.