Material Change to Fair Dealing

Author: Cass Lintott

Date: JUN 19th, 2015

Topic: Industry Experts

All Canadian franchise legislation was designed to protect the potential franchisee during the negotiation process. By being required to provide proper disclosure, potential franchisees enter into their selected franchise with eyes wide open to the reality of the imbalance of power that a franchise agreement creates. It is about fairness.

The obligations on franchisors under the various acts do not end after the initial disclosure. The franchisor has a continuing obligation to advise the potential franchisee of any material changes that have occurred since the disclosure document was initially provided. For example, a change in the franchisor’s supplier that the franchisee is required to purchase staples used in the operation of the franchised business.

Franchisors are required to provide a clear and concise statement as to any material change to the previously provided disclosure document for the purpose of ensuring the franchisee is fully informed. There is no requirement to restart the 14 day clock with the provision of a material change statement. That being said, the acts require each party to treat each other in good faith under a duty of fair dealing. It is not clear if this obligation comes into existence upon negotiation or the signing of the franchise agreement. With that in mind, some form of waiting period is in order to ensure that this obligation is met.

Some material change or facts may call for new disclosure. For example, if at the time the specifics of the franchised location’s lease had not been concluded with the landlord and are later settled, new disclosure may be required. What is a material fact is also not as clear as it could be. If a franchisor is not sure whether a change is simply a material change or something more significant it is always safer to disclose. Ask yourself, what would be fairest?

Once the franchise agreement has been signed there is an obligation on both parties to treat each other fairly, or with fair dealing. Fair dealing includes the duty to act in good faith. Some acts, (Ontario’s for example) extend this duty to include in accordance with reasonable commercial standards. This obligation typically will be used by franchisees in claims against their franchisor. For example, the franchisor’s failures to meet its continuing support obligations to its franchisees (initial training, opening assistance, operational advice, answering questions, marketing, lease negotiation, etc.). More often than not, failing franchisees will point the finger of the lack of success in their franchise at the franchisor who was not supporting them.

The terms of the franchise agreement will partially dictate the level of good faith that is required. What is commercially reasonable will also be relevant. The Court will interpret the franchise agreement obligations of each party and the discharge of same fairly, in good faith and in a commercially reasonable manner. Evidence of what is reasonable will vary from jurisdiction to jurisdiction. This leaves the franchisor and franchisee on somewhat uncertain ground.

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