General rules of contract interpretation
The most fundamental rule, only recently pronounced by the Supreme Court of Canada, is in all cases, the parties must have acted honestly in performing and enforcing their franchise agreement. This does not override the duty of fair dealing, but simply means a party must not have been dishonest.
By way of example, a franchise agreement might allow for termination in the event a franchisee is in default for not maintaining specified hours for operating the business. If the franchisor informs the franchisee he/she may close his/her store early on a given holiday, but then notes the franchisee is in default for not being open for business that day, then clearly the franchisor is not acting honestly and, thus, will not be allowed to terminate the agreement.
The general principles of contract interpretation provide an agreement should be allowed to be enforced according to its clear and unambiguous wording, even if it is unfair. That said, in the case of franchise agreements—which are prepared by franchisors and do not allow for negotiation or for the franchisee to make changes—the courts will apply a higher standard requiring the franchisor to act fairly and in good faith in enforcing the contract. The franchisor must take the franchisee’s interests into account and act in a commercially reasonable manner.
In the provinces that have enacted franchise legislation so far, this general principle of the duty of fair dealing has been encoded into law. In all other provinces that do not have franchise legislation, except Quebec, the common-law duty of fair dealing will be applied. So, all franchisees in Canada’s common-law provinces can benefit from the duty of good faith and fair dealing, although the wording of the franchise agreement is still paramount if it is clear and unambiguous.
If the agreement is not clear, then the intention of both parties will be considered, as well as the facts leading up to the termination, including the conduct of each party. And if the agreement is uncertain, in the sense there may be differing interpretations of its terms, then normally the courts will apply the interpretation more favourable to the franchisee, if as mentioned the franchisee did not have an opportunity to negotiate the terms of what had been prepared as a standard-form agreement by the franchisor.
Finally, there may also be issues of jurisdiction and venue that can potentially prevent an otherwise proper termination.
If the franchise agreement requires disputes to be first submitted to mediation or to be determined through arbitration, then the appropriate court will stay the action and require the specified procedure to be followed.
If the agreement contains clauses that may be contrary to law, such as admissions by the franchisee that the franchisor is acting reasonably and in good faith by terminating in the event of default, then a court will normally declare such clauses unenforceable, as they were not subject to negotiation with the franchisee and the admissions could not possibly be given fairly before both parties knew the facts that led to termination.