This article was originally published in The Lawyer’s Daily on May 14, 2020, under the same title. The assistance of Anthony Pugh, Associate at Law Works PC, in writing this article is acknowledged with thanks.
This article provides an outline of frequently claimed substantive franchise causes of action under common law. (Two earlier articles in this series addressed procedural issues in franchise litigation and substantive causes of action that are statute-based.)
A misrepresentation claim at common law may potentially be raised in the following scenarios:
- By franchisor: where it a franchisor alleges that the franchisee made pre-contractual misrepresentations about its operational qualifications or financial viability.
- By franchisee: where the disclosure document is alleged to contain misrepresentations but where the franchisor does not owe a statutory duty of disclosure.
An entire–agreement clause that is typically found in a franchise agreement may apply to bar claims for certain kinds of pre-contractual misrepresentations, including alleged misrepresentations by a franchisee in the pre-contractual phase (this type of a claim has to date not reached judicial treatment) and alleged representations by the franchisor that are not contained in the disclosure document or the franchise agreement.
In rare circumstances, common law rescission may be available as a remedy to common law misrepresentation, as an alternative to damages.
Breach of contract
- Claims by a franchisor
A typical claim by a franchisor is based on alleged breach by the franchisee of his or her obligations under the franchise agreement. A franchisee may end up breaching the franchise agreement when the business is failing. Many alleged breaches also happen when the business is financially viable.
Breaches may include failure to pay fees and related payment obligations to the franchisor, failure to pay rent to the landlord or suppliers, failure to undertake renovations as required, and failure to follow system standards as required in the operating manual.
The franchise and related agreements normally contain a cross-default clause, deeming a default of any franchise-related agreement to constitute a default of all others such agreements.
Breaches of a franchise agreement – where they are left uncured or where curing is not provided for in the agreement – may entitle the franchisor to terminate the franchise agreement.
The remedies may include damages and post-termination restrictive covenant. Some franchise agreements set out liquidated damages provisions that calculate the amount of damages the franchisee may be obligated to pay.
Post-termination covenants normally refrain the franchisee from competing with the franchisor, directly or indirectly, for a set period after expiry or termination of the franchise agreement.
A franchisee may also be alleged to be in breach of intellectual property obligations under the agreement, which may be especially relevant after termination or expiry if it is alleged that the franchisee has failed to adequately de–brand the business (assuming that there is no operating restrictive covenant).
In some circumstances, a franchisor may seek to enforce a termination of the franchise agreement or non-compete covenants by way of an injunction application. Interlocutory applications/motions require proof of the usual interlocutory injunction test, including irreparable harm and balance of convenience.
- Claims by a franchisee
In some cases, a franchisee may allege breach of contract against a franchisor. These are typically based on alleged failure to provide adequate support.
Other claims by a franchisee may be based on alleged breach of a franchisee’s exclusive territory.
In rare cases, the franchisee may claim the right to terminate a franchise agreement where it is alleged that a franchisor has essentially abandoned the franchise system.
Other noteworthy issues
In some cases, a franchisor may decide to take over the operation of the franchised business in the franchisee’s place. Examples may be where the franchisee is unable to continue operating the business. If the franchisor is operating the business for the franchisee’s account, it may raise an argument that the franchisor owes the franchisee a fiduciary duty in its operation of the business.
The statutory prohibition for choice of law or jurisdiction clauses only apply to statutory claims (franchise Acts in British Columbia, Manitoba, Ontario, New Brunswick and P.E.I.; the Alberta statute has somewhat different provisions). Depending on the wording of the franchise agreement, a franchisor may therefore require that common law claims be litigated in another jurisdiction or that they be adjudicated based on the laws of another jurisdiction. Practically, most franchisee’s claims are rooted at least in part on a statutory claim, such as a statutory good faith duty. This may make it difficult to enforce a choice of law or jurisdiction clause in a jurisdiction other than the province where the franchised business is located.
Finally, it should be noted that a franchise agreement may contain a provision allowing a franchisor to recover all of its costs in certain situations, including in the enforcement of the terms of the franchise agreement, which may be the basis for a franchisor claiming substantial indemnity costs for a successful common law claim against a franchisee.