International Law

What is Good Faith in Franchising?

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Paul Steinberg over at at BMM asks about good faith in franchising:

"Webster/Buchan/Spencer: when they speak of "good faith" they are dealing with a different concept than we are used to in the US.

Here in the US "good faith" is a gap-filler and generally not an independent cause of action. It also cannot be used to override explicit contractual language; for this reason jurists such as Scalia and Posner regard "good faith" as a near-useless concept to be applied only where there has been poor contract drafting.

(N.B.:In the case of auto dealers, "good faith" is defined by statute )

However, in Australia and Canada my understanding is that "good faith" has some bite and may be used to modify contractual terms.

Perhaps this could be clarified by those who still celebrate the Queen's birthday?"

Well, Paul there are a number of Canadian commentators who argue that the statutory tort in in the Arthur Wishart Act simply codifies the common law on good faith. This argument is not plausible: it makes the legislative idle, and few judges are going to accept this interpretation of a statute.

In a recent decision, the Ontario Superior Court stated about good faith:

"It is undisputed that the note in question is a promissory note.

A legal set-off is not available because the debt to the Ellisons, as currently pleaded, is not a liquidated sum that can be ascertained with certainty. An equitable set-off is also not available because the claim is for payment under a promissory note.

However, the Ellisons have raised the issue of what the impact of the Arthur Wishart Act is on the parties' respective obligations, the debt under the promissory note and the availability of a set-off.

The Act requires a duty of good faith; they claims that Tupperware has not established that it acted in good faith when it applied its debt to the Ellisons against the trade debt instead of to the promissory note. Furthermore, the Act provides that Tupperware must make certain payments to the franchisee upon the rescission of the franchise agreement.

Can those payments be set off against the promissory note?

The parties agree that whether their agreement was a franchise agreement under the Arthur Wishart Act is a triable issue. If it was a franchise agreement, there are further triable issues: whether Tupperware complied with its disclosure obligations and whether the notice of rescission that the Ellisons' counsel delivered qualifies as rescission under the Act.

It is also a triable issue whether the promissory note was part of a new franchise agreement in the summer of 2002.

If there was a franchise agreement and if there was non-disclosure and rescission, there is a question as to the effect of the provisions of the Arthur Wishart Act - whether the promissory note is of no force or effect or, in the alternative, whether the franchisor's obligations under s. 6 should be set off against the promissory note debt.

These issues cannot be determined on a summary judgment motion. The motion is therefore dismissed."

Full post as published by Misleading Advertising Law on December 01, 2008 (boomark / email).