Franchisees’ Right to Associate: The Good, the Bad and the Unanswered

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This article, written by Ben Hanuka, was originally published by The Lawyer’s Daily on November 8, 2017. Click here to view the published article.

The statutorily protected right of franchisees to associate and form an organization for themselves is an important feature of modern provincial franchise legislation in Canada. Franchisors and franchisees should understand the scope and limits of this right.

All provincial franchise statutes afford franchisees the right to associate with other franchisees and form an organization of franchisees without interference or penalty from their franchisor, whether direct or indirect.  Franchisees have a right of action for damages if a franchisor breaches these rights.

These restrictions are broad in scope; they do not permit direct or indirect interference and specifically restrict penalizing franchisees.

Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000, British Columbia’s, New Brunswick’s and PEI’s Franchises Act, and Manitoba’s The Franchises Act impose these rights and obligations under section 4 of their respective statutes; Alberta’s Franchises Act does this in sections 8 and 11 of its statute.

But while a franchisor must not interfere in any way with its franchisees’ right to associate and any franchisee organization that they form, a franchisor has a right to expect that its franchisees – no matter their involvement in a franchisee organization, even its leaders – comply with all their obligations under the franchise agreement.  That some franchisees may be involved in a leadership capacity of a franchisee organization does not in any way lessen their obligation to fully comply with their respective franchise agreements.

The restriction against penalizing franchisees is important and needs to be understood in the context of the parties’ rights and obligations under the franchise agreement, and the duty of fair dealing.  All provincial franchise statutes impose a mutual obligation on the parties to a franchise agreement to perform and enforce their contractual rights in good faith and in a commercially reasonably manner.

Penalizing a franchisee typically happens when a franchisor imposes sanctions in their contractual relationship as a result of the franchisee’s involvement in the association.

Many different situations arise in franchise disputes, some of which are easier than others to answer.

Where a franchisor attacks the leadership of a franchisee organization with the goal of terminating their franchise agreements and booting them out the system under the pretext of breach of some contractual obligation, courts are bound to scrutinize this strategy with suspicion.  Our courts are equipped with wide-ranging abilities to determine the real motives of the parties, and where ulterior motives are at play, courts may find bad faith conduct and impose sanctions.

But other situations are more difficult.  For example, evidence may show that some members or leaders of a franchisee organization are in breach of their respective franchise agreements; this may include a breach of the obligation to use approved products, or more generally the obligation to operate the franchised business in compliance with the franchise system and operating manual.

Surely a franchisor has a right to insist that all franchisees comply with their obligations or face default, and ultimately termination, consequences under the franchise agreement, even if they are prominent members of the franchisee organization.

Yet a franchisor’s motives are bound to be called into question if has not enforced these obligations uniformly across the system; that the franchisor is singling out these franchisees because of their involvement in the franchise organization.

Does a franchisor have to enforce all franchisees’ obligations against all franchisees?  That is not realistic.  Most modern franchise agreements state that a franchisor does not have to note a franchisee in default for every violation, and that a franchisor does not waive its rights as a result.  A franchisor cannot be expected to police all franchisees all the time.

But it is helpful if the franchisor has evidence that it generally treats those obligations that are under attack (the obligations that in our example the franchisees are alleged to be in breach of) as important to the franchise system and that the franchisor has issued notices of default or other warnings in the past.

Another challenging area is the extent to which a franchisor must deal with the franchisee organization.  Often, a franchisee organization sends demand letters to a franchisor about issues that are of concern to its membership.  Does a franchisor have to communicate directly with the franchisee association?

Since each franchisee is bound by its franchise agreement, some franchisors say that they are not required to negotiate with the franchisee organization.  That has been the traditional approach of franchisors who find themselves having to respond to demands or other communications from franchisee organizations.  In fact, franchisors are not required to negotiate any term of an existing franchise agreement with anyone – those are existing agreements.

Maybe this ‘divide and conquer’ approach complies with a franchisor’s statutory obligations.  Can it be said that a franchisor interferes with the right to associate, even indirectly, by not taking any steps about the franchisee organization, not interfering in any way with the organization, and simply insisting on dealing with its franchisees on an individual basis under the terms of their franchise agreements?

On the flip side, does the right to associate imply that franchisees are able to communicate with their franchisor collectively; may franchisees claim that a franchisor interferes with their ability to associate because it insists on dealing with them individually on common issues of collective interest?

Another potential difficulty is the confidentiality obligation that many franchise agreements impose on the parties.  If each franchisee is required by contract to keep confidential all key elements of the franchise system, to what extent are franchisees allowed to discuss among themselves matters that are otherwise subject to the confidentiality restriction?  One would argue that the right to associate necessarily implies the ability to discuss any issues of interest about the franchise system and their franchise operations, but certain limits may have to be drawn about the extent to which confidentiality may be disregarded.

While some scenarios are relatively straightforward, much needs to be developed in this area of franchise disputes, where different rights and obligations interplay with each other: contractual rights and obligations, franchisees’ the right to associate and the parties’ mutual obligation of good faith and fair dealings.

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Ben Hanuka, J.D., LL.M., C.S., is principal of Law Works P.C. (in Ontario) and Law Works L.C. (in British Columbia).  He is a member of the Ontario and British Columbia Bars and Certified by the Law Society of Upper Canada as a Specialist in Civil Litigation.

For more information about Law Works’ expertise and how we may be able to help you, please contact Ben Hanuka at https://www.lawworks.ca/book-a-consultation or by phone in Ontario at (855) 978-5293 and in British Columbia at (604) 262-1711.