One of the defining features of Canadian franchise legislation is the statutory obligation requiring parties to act in good faith and in accordance with reasonable commercial standards. While the concept of “good faith” is gaining traction in Canadian contract law, provincial franchise statutes elevate the obligation by imposing an express positive duty on franchisors and franchisees to act in good faith in the performance and enforcement of the franchise agreement. This article sets out some key guiding principles to better understand the scope and limits of the duty of good faith.
Good faith does not rewrite the contract
The courts have made it clear that the duty of good faith does not require a franchisor to renew a franchise agreement where the agreement contains no express right to renew. 1 In another case, the court disagreed with a franchisee that the duty of good faith required a franchisor to extend the franchisee’s protected territory beyond what was agreed upon, or to disclose the interest of other potential franchisees in an adjacent territory.2 Courts will not rewrite a clearly drafted contract to suit the interests of the parties.
Franchisors can implement reasonable system changes
Franchisors must consider the legitimate concerns of franchisees, but are not required to subordinate their own interests in proposing system changes. For example, the courts held that a major system-wide change which negatively impacted franchisee profits was not contrary to the duty, where the change was the result of a “rational business decision made … for valid economic and strategic reasons, having regard to both [the franchisor’s] own interests and the interests of its franchisees.”3 In another instance, the establishment of a print franchise in the same territory as an existing mainline franchisee—but under a different name and targeting different clientele—was not found to breach the duty of good faith or commercially reasonably standards as it did not materially impact the existing franchisee’s business.4
Good faith requires honesty
Parties must act honestly, reasonably, and without ulterior motive. A franchisor who withheld information about ongoing lease negotiations, instructed the landlord not to share information with the franchisee, and did not return the franchisee’s calls in order to frustrate the franchisee’s lease renewal and replace the franchisee with a preferred candidate, was found to have breached the duty of good faith.5 A franchisor who withholds royalty rebates or delays performance in order to gain leverage in a dispute, secure a bargaining advantage, or act vindictively, may be found to have breached the duty of good faith.6 A franchisor who withheld critical lease information from a franchisee and led them to believe that the lease had been renewed in order to keep them from walking away from the franchise was contrary to the duty of good faith.7
Bad faith includes malicious or arbitrary conduct
A franchisor who instructed a supplier to cut off supplies to a pizza franchisee was found to have acted in bad faith in a situation where it had manufactured defaults by the franchisee in order to justify its actions.8 The decision of a franchisor to unilaterally terminate a licence agreement due to its supply problems and thereafter offer the franchisee credits of $12,500 when its equipment costs were nearly $72,000 was found to be contrary to the duty of good faith.9 A franchisor who, without warning, revoked an offer for a relocation near the franchisee’s existing location, and then granted the new site to another franchisee, was found to be in egregious breach of the duty. In that case the court stated: “What is more readily identifiable is bad faith which is said to occur when one party, without reasonable justification, acts in a manner which substantially nullifies the bargained objective or benefit contracted for by the other, or to cause significant harm to the other, contrary to the original purpose and expectation of the parties.”10
Good faith is a two-way street
Both franchisors and franchisees owe each other a duty of good faith and fair dealing in the performance of the franchise agreement. Neither party may act in bad faith, or in such a manner that is contrary to community standards of honesty, reasonableness, or fairness.11 For example, in one case the court admonished a franchisee for sending mass disparaging and defamatory communications to all franchisees and writing threatening letters describing the franchisor’s president as a “liar and a dictator”. The court found that this aggressive behaviour was in breach of the standard of good faith and fair dealing required of the franchisee.12
Ultimately, the statutory duty of good faith and fair dealing is best understood as a framework governing commercial conduct rather than commercial outcomes. It does not require parties to abandon their own interests, nor does it guarantee that every decision will benefit both sides. Instead, it requires honesty, reasonableness, and fairness in process, and the exercise of contractual rights in a manner consistent with reasonable commercial standards and the legitimate expectations arising from the franchise relationship.
Richard LeBlanc
Partner
Miller Thomson LLP
rleblanc@millerthomson.com
1 TDL Group Ltd. v. 1060284 Ontario Ltd., 2000 CanLII 22758 (ON SC); 6646107 Canada v. The TDL Group Corp., 2019 ONSC 2240; and FPMG Hospitality Inc. v. Recipe Unlimited Corporation, 2021 ONSC 7156 (CanLII).
2 Ken Breau Corporation v. Dairy Queen, 2025 ONSC 126 (CanLII).
3 Fairview Donut Inc. v. The TDL Group Corp., 2012 ONCA 867 (CanLII).
4 Shelanu Inc. v. Print Three Franchising Corp., 2003 CanLII 52151 (ON CA) (“Shelanu”).
5 Salah v. Timothy’s Coffees of the World Inc., 2010 ONCA 673 (CanLII).
6 See Shelanu (supra).
7 Sirianni v. Country Style Food Services Inc., 2012 ONSC 881. See also Bhasin v. Hrynew, 2014 SCC 71, in which the Supreme Court of Canada recognized good faith as an organizing principle of contract law and requires parties to perform contracts honestly.
8 0923063 B.C. Ltd. v JM Food Services Ltd., 2019 BCSC 553 (CanLII).
9 1117304 Ontario Inc. (Harvey’s Restaurant) v. Cara Operations Limited, 2008 CanLII 56704 (ON SC).
10 Katotikidis v. Mr. Submarine Ltd., 2002 CanLII 49646 (ON SC).
11 See Shelanu (supra); and 1117304 Ontario Inc. (Harvey’s Restaurant) v. Cara Operations Limited, 2008 CanLII 56704 (ON SC).
12 See Anani v. Uniglobe Travel (Western Canada) Inc., 2004 CarswellBC 1380 (B.C. S.C.).