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Is a Verbal Franchise Agreement Enforceable?

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July 20, 2020

Typically, franchise agreements are written documents that include detailed terms describing the legal rights and obligations of the franchisee and franchisor. Some terms that are common to such written franchise agreements include (i) the grant of a right or license to the franchisee by the franchisor to offer for sale goods or services using the franchisor’s trade-mark, (ii) the reservation by the franchisor of its right to exercise significant control over the franchisee’s method of operation, including the franchisor’s right to require the franchisee’s strict adherence to franchisor’s system standards, (iii) the term (length of time) over which the franchise agreement will be in effect, and (iv) details concerning the schedule and calculation of payments the franchisee will be required to make to the franchisor in exchange for the right being granted to operate as a franchisee. 

But what if a franchisee and franchisor only verbally agreed to enter into a franchise relationship? It is sometimes the case, for instance, that the parties will discuss and negotiate the terms of the agreement intending to record those terms in the future in the form of a written agreement, but never, in fact, do enter into a written agreement.

Would that oral franchise agreement be valid and enforceable? 

The answer appears to be “Yes, but…”: Canadian courts have demonstrated a willingness to recognize and enforce verbal franchise agreements; however, the Courts will only recognize and enforce a verbal agreement when presented with clear evidence that the parties verbally agreed to all of the essential terms associated with entering into a franchise relationship.

Thirty years ago, in its decision in Bawitko Investments Ltd. v. Kernels Popcorn Ltd., the Court of Appeal observed that franchise agreement are not “conventional documents that require only the filling in of blank spaces”, but rather were “specialized” contracts. The Court held that the “very nature of the franchisor-franchisee relationship mandates that there be express agreement on the detailed provisions set up to regulate the business relationship of the parties.” The Court in the Kernels Popcorn case found that the parties had not agreed on all of the essential terms, but only on some of them, and that the parties intended to negotiate further terms leading up to a final written agreement. 

A similar result can be found in the more recent 2020 decision of the Alberta Court of Queen’s Bench, 1384334 Alberta Ltd v. Buster’s Pizza Donair & Pasta Enterprises Ltd. The facts giving rise to that case were as follows. The defendants owned a number of “Buster’s Pizza” restaurants, which the defendants would lease and then sub-lease to third-party operators. The operators would pay the defendants certain fees in exchange for the right to operate the restaurants. 

The plaintiffs built a “Buster’s Pizza” restaurant pursuant to a verbal agreement. The plaintiffs refused to sign all of the agreements presented to them by the defendant, including those agreements that set out the terms of the payments they would be making to the defendant and the personal guarantee they were being asked to give in favour of the defendant. The plaintiffs eventually opened and operated the restaurant without, initially, the defendant’s knowledge, and without having signed all of the defendants’ standard documents. The defendants eventually discovered that the plaintiffs were operating the restaurant and permitted them to do so, providing them with training to improve the operation of the restaurant. 

When the restaurant failed, the plaintiffs claimed that the parties had verbally agreed to all of the essential terms of a franchise agreement, and they sought to rescind that agreement and recover their losses from the defendants. 

The Court in Buster’s Pizza found that the parties had not agreed to all of the essential terms, including the terms of payment and the terms of the personal guarantee the defendants had required of the plaintiffs; implicit in the Court’s analysis was that a franchise agreement could be verbal if the parties can be shown to have agreed to all of the essential terms.

In the 2014 decision France v. Kumon Canada Inc., the Ontario Superior Court of Justice recognized an oral franchise agreement that had been in effect for 30 years. Interestingly, the Court was prepared to recognize that agreement notwithstanding that the parties had only identified three terms contained in it: (i) the franchise was the franchisee’s to operate; (ii) the franchisee had to fulfill all of her training obligations; and (iii) the franchisee was required to pay the franchisor royalty fee. The court was additionally prepared to imply a term into the verbal franchise agreement that required of the franchisor to provide the franchisee with reasonable notice prior to termination. 

Canadian courts have also demonstrated a willingness to enforce subsequent verbal modifications to earlier written franchise agreements, even when the written franchise agreement contains a so-called “entire agreement” clause that purports to exclude any agreement made by the parties outside of the written terms of the contract. Perhaps most notably, in its 2003 Shelanu Inc. v. Print Three Franchising Corp. decision, the Court of Appeal recognized an oral agreement by the franchisor to permit the franchisee to close one of its stores, notwithstanding that the written franchise agreement contained an “entire agreement” clause. The Court was satisfied that the essential terms of the verbal modification had been agreed to.

The key takeaway is that Canadian courts are prepared to recognize and enforce oral franchise agreements, but only upon clear evidence that the parties have reached agreement on the essential terms of the franchise agreement.