By Frank Zaid
Clearly, the legal paradigms of franchising have changed from what they were 10 or even just five years ago—and they are still constantly changing. Legislators and judges have moved the pendulum from the starting point of legally binding ‘contracts of adhesion’ and one-sided business relationships to a more balanced scale by instituting statutory and common-law elements of good faith and fair dealing, extreme legal remedies like rescission (i.e. ‘unmaking’ the contract), strict requirements for disclosure and liberal interpretation of franchise legislation in favour of franchisees.
For many years, the duty of good faith and fair dealing in franchising was simply an extension of a common-law duty in contracts in general. Franchise legislation, however, codified the common-law duty and, arguably, extended it by defining it in the context of franchise agreements.
Today, both parties—franchisor and franchisee—are required to act in good faith and in accordance with reasonable commercial standards in the performance and enforcement of the franchise agreement.
Further, in some of the more recent provincial legislation, the duty is specifically stated to include the exercise of a discretionary right under the franchise agreement. What this means is when either party acts in accordance with the franchise agreement, it must do so in a commercially reasonable manner, taking into account the legitimate interests of the other party. The difficulty in applying this test is to determine, on a factually objective basis, what is ‘commercially reasonable’ and whether or not good faith has been exercised.
With little doubt, the greatest area of activity in franchise disputes has pertained to the statutory right of rescission in favour of a franchisee where the franchisor (a) has not delivered a disclosure document or (b) has delivered a deficient disclosure document.
In the former scenario, the franchisee has a right to rescind for two years after the agreement was signed. In the latter, the period is reduced to 60 days. In some cases, however, the courts have found a disclosure document was so deficient that it constituted no disclosure at all, so the two-year term applied.
Rescission is an extremely powerful remedy. The damages potentially available to a franchisee are very substantial, equal to virtually everything invested by the franchisee and any losses incurred in the operation of the business.