The Ontario Superior Court of Justice recently declared that the duty of good faith under Ontario’s franchise legislation, the Arthur Wishart Act (Franchise Disclosure), 2000, does not automatically give rise to termination notice requirements. In C.M. Takacs Holdings Corporation et al. v 122164 Canada Limited o/a New York Fries, the Court granted the defendants’ summary judgment motion to dismiss the plaintiffs’ action claiming a breach of the duty of good faith resulting from a termination, finding that the action could not succeed.

The plaintiffs were franchisees of four New York Fries franchises. The defendant franchisor terminated the four franchise agreements and the subleases under which the franchises operated because the franchisees had been in default across the four operations and in arrears of approximately $500,000. The franchises also had significant unpaid taxes and owed ample sums to suppliers. The terminations were made without notice. The relevant franchise agreements permitted termination without notice upon the franchisee committing an act of bankruptcy. The Court held that “[i]t is widely accepted that not meeting obligations generally as they become due is an act of bankruptcy. These defaults, on this scale, were, in my view, acts of bankruptcy.”

The plaintiffs then took the position that on prior occasions of default, the franchisor had given notices to rectify and that the franchisor’s duty to treat franchisees with good faith in and of itself gives rise to a notice requirement.

Although the Court recognized the duty of good faith under the Wishart Act, it did not accept that a notice requirement arises out of it. The franchisees were sophisticated business entities with experience in the franchise industry. It was not possible that they were unaware of the defaults or had been misled by the franchise agreements. The Court further found no evidence that notice likely would have made a material difference in any event.

The Court also found that the plaintiffs’ case was further flawed from a damages perspective. The thrust of the plaintiffs’ case is that they incurred damages, in the form of lost profits, when the franchisor terminated the franchise agreements. In the face of a summary judgment motion where the issue of proof of damages has been plainly raised, it was necessary that the plaintiffs produce evidence of profitability for the franchises, which they failed to do.

The key takeaway from this decision is that the duty of good faith does not create notice requirements in respect of termination. As was succinctly stated by the Court, “the Arthur Wishart Act does not automatically mandate either the deletion or addition of contractual terms which years worth of hindsight indicate the franchisee might now find convenient. Context is important.”