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LEAN ON ME?: A FRANCHISOR’S S OBLIGATION
TO SUPPORT ITS FRANCHISEES
CANADIAN FRANCHISE ASSOCIATION
WEBINAR
JUNE 20, 2012

CANADIAN FRANCHISE ASSOCIATION
WEBINAR
JUNE 20, 2012
1. How Does The Duty To Provide Support
Arise?
2. The Case Law
3. Hypotheticals
4. Best Practices
5. Questions and Answers

1. How Does The Duty To Support Arise?
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The Franchise Agreement
Duty of good faith and fair dealing (the
Wishart Act & common Law)
The Disclosure Document
Oral & Written Representations

1. How Does The Duty To Support Arise?
The Franchise Agreement
• Franchises are a contractual relationship
• Types and levels of support are generally determined
by the language of the contract
• Can include training, opening assistance, operations
manual, communications, meetings and individual
and local marketing.
• Don’t t contractually promise what you don’t t intend on
delivering.

1. How Does The Duty To Support Arise?
The Duty of Good Faith and Fair Dealing
• The duty arises both under statute and in common
law. The statute simply codifies the common law and
provides for a statutory cause of action.
• The duty does not “create new, unbargained-for
rights and obligations” or alter the express terms of
the franchise agreement.
• However, the franchisor must perform and enforce
the agreement in good faith and with due regard to
the interests of the franchisees and reasonable
commercial standards.

1. How Does The Duty To Support Arise?
The Wishart Act outlines the duty of fair dealing as
follows:
• s. 3(1) – every franchise agreement imposes on each
party a duty of fair dealing in its performance and
enforcement.
• s. 3(3) – the duty of fair dealing includes the duty to
act in good faith and in accordance with reasonable
commercial standards.

1. How Does The Duty To Support Arise?
The case law makes it clear that the franchise
relationship imposes duties of “the utmost good
faith”;
• “Franchisors are not required to act selflessly placing
the interest of the franchisee ahead of their own.
However, it appears clear from the case law that a
franchisor is subject to the duty to act in utmost
good faith towards a franchisee” (Machias v. Mr.
Submarine Ltd.)

1. How Does The Duty To Support Arise?
Franchise Disclosure Documents
• Disclosure documents may contain commitments
concerning training (as required under the
legislation).
• Additional information concerning support may also
be offered in these documents.
• Great care should be taken, as there are statutory
causes of action available for disclosure document
misrepresentations (s. 7 of the Wishart Act)

1. How Does The Duty To Support Arise?
Oral and Written Representations
• Franchisors and their staff/sales people may make
oral and written representations concerning the type
and level of support offered.
• This could give rise to a claim for negligent
misrepresentation.

2. The Case Law
What is the level of support demanded by law?
• That depends...
• The case law is very fact-specific.
• Canadian courts will look at a variety of factors,
including the franchise agreement, representations
made by the parties, and the conduct of the parties.
• In essence, the courts will look at fairness and
whether the franchisee received the level of service
that they bargained for.

2. The Case Law
Machias v. Mr Submarine Ltd. (2002, Ontario)
• Franchisee in Montreal claims rescission of
agreement/ damages for misrepresentation.
• Franchisee promised promotional support, ongoing
visits.
• Court held that franchisor failed to provide the
promised support or deal with issues faced by
franchisee in isolated market.
• Plaintiff’s s claim for rescission allowed.

2. The Case Law
1005633 Ontario Inc. v. Winchester Arms. Ltd.
(2000, Ontario)
• Franchisee brought an action for breach of contract,
negligent misrepresentation and breach of the duty
of good faith in case involving failed pub.
• The promotional package to sell the franchise
promised a fully-equipped
“turnkey” pub, extensive
training and ongoing support.
• Little training provided, insufficient operations
manual given, and franchisees left “to operate
something they had not been adequately prepared to
run.”
• Franchisors unresponsive to requests for assistance.
• Franchisor found liable.

2. The Case Law
On the other hand...
TRC Enterprises v. Tobmar Newstands Inc.
(Gateway) (2010, Manitoba)
• Franchisee had failed newsstand business in a casino
and brought a claim against franchisor, alleging
(among other things) misrepresentation that
franchisor “had a system for doing business”.
• The court held that although the support system and
supervision in system were very weak, there was a
system. The franchisor found the location, ordered
opening inventory, trained the franchisee, assisted
with the opening, and were available when called
upon.

2. The Case Law
Gateway (cont.)
• The franchisee knows going in that the franchisor
would have minimal contact with him and would not
visit regularly. The franchisee also did not look for
the franchisor for ongoing support.
• The court examined the franchise agreement and
held that although the franchisee received
“shockingly little” for the monthly franchise fee, there
was no breach of contract as the terms of the
agreement were met.

2. The Case Law
Khagen Investments Ltd. v. 710497 Ontario Ltd.
(Ontario, 1999)
• Franchisee sued for breach of contract and negligent
misrepresentation due to failed donut shop franchise.
• Franchisee complained that he received no real
training, little supervision or assistance, and non-
existent promotional material.
• Court looked at the evidence and found that there
had been training and supervision.
• Operational support was not “generous”,, but did not
constitute a breach of contract.

2. The Case Law
Khagen (cont.)
• The court held that there was insufficient evidence as
to the standard of support that should have been
provided, and found no evidence that the lack of
support caused the business’ failure.
• The plaintiff franchisee also split his time between
the franchise and another business venture, and the
court found that the franchisee did nothing to assist
himself in ensuring the donut shop was successful.

2. The Case Law
Other Cases:
• Gerami v. Double Double Pizza Chicken Ltd. . (2005,
Ontario)
• Print Three Franchising Corp. v. McLennan Printing
Inc. . (2001, Manitoba)
• Bagai v. Sure Corp. (2000, Alberta)
• Allegra of North America Inc. v. Stevens (2008, B.C.)
• Zippy Print Enterprises Ltd. v. Pawliuk (1994, B.C.)

3. Hypotheticals
#1 - Training & Support
A franchisor of a national restaurant system specializing
in fried chicken has implemented a system-wide change.
The change involves switching from traditional deep-
fryers to high-speed pressure cookers (which cost
$50,000). The Franchise Agreement has a provision that
the franchisees must purchase the equipment that is
required by the franchisor. The franchisor has told its
franchisees that the new pressure cookers will reduce
cooking times as well as costs (through a reduced need
for cooking oil).

3. Hypotheticals
The franchisor offers a 3-day 3
training course to be
offered at its head-office in Burlington, Ontario and also
sets up a hotline for franchisees to call with questions.
One of the franchisees (Zed) can't afford to travel to
Burlington for training. Zed attempts to call the hotline
but is faced with severe waiting times due to the fact
that there is only one employee of the franchisor fielding
calls. Eventually Zed's pressure cooker is destroyed due
to operator negligence. Zed cannot afford a new
pressure cooker and reverts to using his deep-fryer.
As a result, the franchisor terminates the franchise
agreement. The franchisee counters that the franchisor
failed to provide adequate support.

3. Hypotheticals
#2 – Support Via The Operations Manual
In its 2009 disclosure document, a franchisor says
it has upgraded its operations manual from paper to
electronic format which will enable up-to
to-date
information to be provided to franchisees on a more
timely basis. Two years later, the franchisor notifies its
franchisees that high online production, maintenance
and administration costs prevent it from maintaining an
online operations manual any longer and, instead, it
will revert to a paper manual.

3. Hypotheticals
At all relevant times, the franchise agreement states
that the franchisor will provide an operations manual
either in hard copy or electronically, in its sole
discretion.
The franchisees find that reversion to a paper form of
ops manual has resulted in information and advice from
the franchisor which is neither complete nor
current. They complain about this to the franchisor,
saying they want a return to the electronic manual, but
the franchisor refuses. Has there been a failure of
support by the franchisor?

4. Best Practices:
Clear/Accurate/Flexible Disclosure Document
Clear/Accurate/Flexible Franchise Agreement
Training
• Initial
• Ongoing
• Training specialized to the system.

4. Best Practices
Operations Manual
• Initial
• Updating
• Electronic?
Answering questions, field support and giving
advice
Assistance with construction/renovation of premises
• plans, specifications and supervision

4. Best Practices
Maintaining internet/intranet
Assistance in dealing with landlords
Insurance programs and benefits
Ensure franchisor employees know what support is
offered and are honest and forthright with
franchisees
Keep records of interaction with franchisees.

5. Questions and Answers