The Duty of Good Faith - What Does It Mean?

Author: Jonathan Mesiano-Crookston

Date: APR 24th, 2015

Topic: Industry Experts

In Ontario, the law governing franchising is called the Arthur Wishart Act (the “Act”). It was introduced to level the playing field between franchisors and franchisees. One of its provisions, section 3, provides that “[e]very franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement”, and this duty of fair dealing is later in the Act said to include “the duty to act in good faith and in accordance with reasonable commercial standards.” However, nowhere in the Act does it explain what good faith means! We therefore need to look to regular legal principles and how judges have interpreted the Act, to know how franchisors and franchisees ought to act towards one another.

In short, the duty of good faith requires contracting parties to act honestly, fairly, with proper motives, and not arbitrarily, capriciously or in a manner that is inconsistent with the reasonable expectations of the parties. Good faith also requires franchisors and franchisees to take the legitimate interests of the other party into account, although neither party must prefer the interests of the other party over their own.

There are a number cases that help define the duty of good faith and help franchisors and franchisees understand what behaviors will breach this duty.

In a 2012 case, various Tim Horton’s franchisees sued the franchisor claiming that its roll-out of the Always Fresh system breached the duty of good faith and fair dealing. Instead of baking donuts from scratch at each restaurant, the Always Fresh system had the franchisor preparing donut dough at a central commissary, before delivering it to franchisees where it would be fully baked and then sold as donuts. The franchisor felt that the system would save preparation and cooking costs for the franchisees. However, the franchisee plaintiffs in this case claimed that they were misled about the cost of the Always Fresh conversion, that Tim Hortons failed to analyze the effect of the conversion on their businesses, and that the price of the pre-baked products was too high.

The court found that the franchisor’s decision to implement the Always Fresh system was done in good faith and did not breach section 3 of the Wishart Act. The decision was made honestly and reasonably, with due consideration for the interests of the franchisees and Tim Hortons took reasonable measures to discuss and involve the franchisees in the development and roll-out of the Always Fresh system. The system itself was part of the reasonable evolution of the Tim Hortons System and had benefits for both parties. In fact, even if the immediate financial benefit to Tim Hortons was greater than the financial benefit to the plaintiffs, the court held that this would not constitute a breach of the duty of good faith and fair dealing.

On the other hand, the 2010 case of Salah v Timothy’s Coffees of the World Inc, is a relatively straightforward example of “bad faith”. A Timothy franchisee with a location in a mall had a lease that was expiring shortly. Timothy’s knew there was another location available for lease on a different floor, but did not tell the franchise. Instead, the court found that the franchisor had "actively sought to keep the franchisee from finding out what was going on with the lease" and deliberately withheld "critical information and did not return calls". By doing these things, the court concluded the franchisor had breached the duty of good faith it owed the franchisee under s. 3(1) of the Wishart Act.

Both of these cases, as well as others, will continue to delineate the boundaries of how franchisors and franchisees ought to behave with respect to one another, leading them more often than not to the common sense result that they ought to treat each other as they would like to be treated themselves.

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