Generally, the conduct of the two parties will not be a factor in determining whether or not a termination is proper, so long as the wording of the franchise agreement was followed. If the terms of the agreement are uncertain, however, then the conduct of the parties may well be taken into consideration by a court in determining whether or not the franchisor was justified in terminating the franchisee.
When there has been a history of prior defaults, notices and/or terminations, both parties need to be certain all required steps have been taken to allow the most recent termination. A franchisee in such cases may allege the franchisor is ‘estopped’—i.e. restrained from asserting an unjust position before the court—because of the franchisor’s past conduct in allowing defaults or withdrawing terminations and thus giving the franchisee reason to believe the franchisor would not terminate the agreement in the future.
However, most franchise agreements contain non-waiver or non-estoppel clauses indicating past conduct or waivers cannot be used as a barrier to future termination. These cases must be considered carefully by both parties if termination is alleged.
Legislation and the courts
All provincial franchise legislation deals with the issue of termination both directly and indirectly.
The direct application relates to the required disclosure—i.e. within a franchise disclosure document—of the provisions of the franchise agreement that allow for termination. This obligation to disclose does not require a full recitation of the relevant clauses, just a summary with references to the exact clauses in the attached franchise agreement. Unless there has a been a failure on the franchisor’s part to disclose such information properly, then the franchisee will not find any remedy for termination under franchise legislation relating to rescission or an action for misrepresentation.
The indirect application of franchise legislation to the issue of termination, meanwhile, relates to the duty of fair dealing, which applies to the performance and enforcement of the franchise agreement by both parties. The legal duty of fair dealing does not mean a court can (a) rewrite the provisions of a franchise agreement to make them fair or (b) disregard portions of a franchise agreement that may not be fair. Rather, the issue is whether or not both parties have acted in a fair manner in following the provisions of the franchise agreement, particularly those allowing for termination.
If a franchise agreement allows for termination after the franchisee fails to make a royalty payment within five days of its due date, for example, and the franchisor then gives notice of default and terminates the agreement seven days after the due date, then the franchisor has acted within its clear rights under the franchise agreement and under the relevant legislation.
A court should not be able to insist on additional notice, even if the franchisee were to tender payment after the notice of termination was given. Similarly, if a court were to judge five days’ notice unfair and suggest 15 days’ notice should have been given, then that court would probably be considered to have acted outside its jurisdiction, because (a) the franchise agreement was clear as to the period of notice and (b) the franchisor followed the appropriate procedure.
In cases where the franchise agreement does not specify a period for termination, even when there has been a clear default, a court will likely consider what a ‘commercially reasonable period’ should be and not allow a termination on shorter notice. In such circumstances, the franchisor should not conclude it can terminate with no notice, as the court will likely determine that if both parties intended that to be the case, then the franchise agreement would have been clearer in that regard.
Indeed, these issues become less certain when the franchise agreement is unclear, ambiguous or silent as to the right to terminate or the procedures to be followed. Unfortunately, many franchise agreements are not well-drafted or do not effectively deal with the issues of default and termination. In these cases, the courts will review general principles of contract interpretation to attempt to arrive at a proper and reasonable analysis and decision.
With this in mind, it is worthwhile to summarize the general rules of contract interpretation that have been developed over many years by the courts and applied to a number of franchise—and other—business cases.