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Mr. Claude J. Pellan,
L.L.B., B.Comm., Attorney

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The Obligations of a franchisor towards its franchisees

Number 13 – July 3, 2008

Question: In an article I recently published in Quebec Franchise (May-June 2008), I outlined the implicit obligations of a franchisor towards its franchisee in the province of Quebec stemming from the Provigo case. A franchisor situated in Quebec and operating a franchise network across Canada enquired as to whether or not these obligations apply to other provinces in Canada.

I personally believe that some, if not most of these obligations, apply to all franchisors in Canada. For this reason, I reproduce the unedited integral version of the article which I have also translated into English.

Part I - The Provigo Case 10 years later – The Obligations of a franchisor     
towards its franchisees

To underline the 10th anniversary of the Provigo case, a case which, for lack of specific legislation on franchising in Quebec, serves as a reference for franchisors in this province (and to a certain extent, to franchisors across Canada), I propose an article in two parts on this important case dealing specifically with franchising.

In this first part, I examine certain obligations of a franchisor towards its franchisees, namely those outlined in the Provigo case, followed by a more in-depth interpretation of those obligations. 

In the second part of this article (to appear in the July-August 2008 edition of Quebec Franchise), I propose the application of these obligations in the daily operations of a franchise network, that is, a practical approach to applying the obligations to the business of a franchisor. 

It is important to note that, contrary to certain common law provinces (Alberta, Ontario, Prince Edward Island and soon, New Brunswick), a franchise agreement is not defined in Quebec legislation. Therefore, Courts have had to fill this void by applying certain provisions of the Civil Code of Quebec to franchising (obligation of good faith, the contract of adhesion, the implicit obligations (non written) of parties to a contract, etc.) thereby developing case law on franchise law.

Despite a few cases dealing with franchising since the Provigo case, the latter remains the best reference with respect to the obligations of franchisors as concerns the franchisor-franchisee contractual relationship.

Even though the Provigo case addresses the obligation of good faith and the notion of the contract of adhesion, I propose a summary and an interpretation of the implicit obligations of a franchisor towards its franchisees because it is from this notion that derives the completive obligations of a franchisor to a franchise agreement.

Why are these obligations of such a capital importance to a franchisor? Their importance stems from the fact that they apply to the franchisor-franchisee contractual relationship even though they are not written in the franchise agreement signed between a franchisor and a franchisee. They may be qualified as completive in the sense that they complete the franchise agreement without being written therein. They can even have the effect of rendering a clause in a franchise agreement inapplicable because some of these obligations are of public order and cannot be excluded by contract.

PROVIGO CASE

In the Provigo case (J.E. 98-39 (C.S.)), Supermarchés A.R.G. Inc. (“ARG”), the franchisee, operates four (4) grocery stores under the Provigo banner. Provigo Inc., the franchisor, operates a hybrid network of grocery stores, that is, franchise and corporate grocery stores. 

During the 1980’s, Provigo Inc. inaugurates a new type of grocery store, Heritage, a corporate store concept with low margins. Some of these grocery stores were opened and operated by Provigo Inc. close to some of the grocery stores operated by ARG. Eventually, there was a decline in the sales of ARGs’ grocery stores. ARG had very little room to manoeuvre to compete with the corporate grocery stores operating under the Heritage banner because it was bound by franchise agreements with Provigo Inc. that obliged it to follow the pricing policies contained in the publicity program.

In this case, ARG claimed that Provigo Inc. was in breach of its obligation of loyalty because of a marketing strategy that it couldn’t compete with. Consequently, ARG filed a motion against Provigo Inc. claiming damages and exemplary damages (respectively $10,000,000 and $1,000,000).

Hereafter please find a summary of the seven (7) implicit obligations of a franchisor towards its franchisees that stem from the franchisor-franchisee relationship described in the Provigo case (Gilbert, Frédéric P. The end of the franchisor-franchisee relationship-Distinction between resiliation and non-renewal, 2008, to be published in the Quebec Bar Review)


GENERAL

It is interesting to note that the Court of Appeal of Quebec used both legal and business terminology to describe the implicit obligations of a franchisor. 

For this reason, I propose to address these obligations by an analysis that consists of a legal study of the terminology used and, when necessary, a laymen’s study (dictionary) of the terminology used.
 
In this case, the term that is referred to the most is obligation. In the general sense of the term, it is synonymous with a duty imposed by the law. In other words, it is imposed upon a franchisor to do and/or not to do certain things for and/or to franchisees in its network. 

A corollary to this term is a continuous obligation. For a franchisor, it implies that the relationship demands that the obligations must be executed numerous times or in a continuous manner for the duration of the franchisor-franchisee relationship, whether the duration is fixed or indeterminate.

1) Obligation to provide commercial and technical assistance and obligation to collaborate

The obligation to provide commercial and technical assistance implies the intervention of a person, the franchisor, for the purpose of helping and/or assisting another person, the franchisee. I believe the person that helps and/or assists must be present and the assistance must be included in a perspective of partnership and therefore, of collaboration.

In franchising, this obligation implies initial and continuous assistance from the franchisor. I am referring to training, the sharing of information (marketing, construction plans, software, operations, etc.) to enable the franchisee to properly operate its retail outlet and to remain up-to-date to continue to be competitive in its market.

By collaboration, a franchisor is held to a duty to work with one or a number of persons with a common goal and to practice a policy of collaboration.

I believe this obligation implies the establishment of a formal and/or informal communication structure between the franchisor and its franchisees and to share its objectives and strategies with franchisees so each will know its role in the general frame of the corporate strategy of the franchisor. 

2) Obligation to follow the evolution of the market and adopt its methods and techniques to new realities

By imposing upon a franchisor in business terms the general duty to follow the evolution of the market, one has to ask whether this duty applies to the market in general and/or to the local market of each franchisee. I believe that each franchisee has an obligation to follow its local market.

To determine the extent of this duty, I reviewed certain laws on franchising in other provinces. They also provide a general obligation of a franchisor to follow the market as a whole. I share this interpretation for Quebec and, at the same time, I believe that if a franchisor has information on the local market of a franchisee, this information must be disclosed to a franchisee in a timely manner to enable it to react as quickly as possible, with the assistance of the franchisor, as the case may be.

Another business expression, the duty of a franchisor to adopt its methods and techniques to new realities, implies applying, adjusting, fixing something to make it conform and to conform to a situation.

Again, this expression is general in nature and may apply to a number of situations.  For example, a new law that imposes a franchisor to adapt to something, a new technology, using internet/intranet, etc.

 3)  Obligation of loyalty
 
The term loyalty refers to a duty of fidelity to keep its commitments, to respect a code of honour and integrity and the laws of honesty, without having recourse to prohibited acts.

 In general, this implies that a franchisor must respect agreements entered into with franchisees of its network and treating all franchisees and all the same.

4)  Obligation to consult

By creating an obligation to consult, the Court of Appeal is imposing on franchisors a general duty to solicit the advice and opinion of its franchisees, namely from those that have a certain expertise or particular qualifications.

For a franchisor, this obligation implies consulting and working with its franchises. I believe this obligation is reciprocal and that a franchisor has a duty to give his opinion and advice to its franchisees for them to benefit from its expertise and particular qualifications.

5) Continuous obligation to maintain at all times pertinent franchisor-
franchisee relationships to avoid the lapse of said relationships

The words pertinent franchisor-franchisee relationships may be analyzed in legal and business terms. 

From a legal perspective, the word relationship implies a legal or factual relation between two or more persons (the franchise agreement) and to a document that reports on an activity or that contains information on a determined subject. From a business perspective, it is a presentation made to members of an assembly concerning the work of a committee and a proposal. It also implies a gathering and communication.

The word pertinent refers to something that purports directly to the substance of a cause; which tends to prove the merit of facts or means invoked by a party and consequently, to influence the decision to be made.

From this terminology, I extrapolate that a franchisor must always justify its “raison d’être” (its existence) in a franchise network, namely by the services and advice that it offers and must continue to provide to franchisees.  Furthermore, it implies that the franchisor must report to franchisees its results and inform each of them of their individual performances.

For this to happen, the franchisor must have and maintain a franchisor-franchisee communication structure. In this context, the franchisor also has a certain duty to listen to franchisees and franchisees a certain influence on the decisions to be made by the franchisor.

6) Obligation to provide franchisees with the necessary tools to face the competition

The duty of a franchisor to provide the necessary tools to face the competition is an expression that is evolutionary and which must be evaluated based upon the specific facts of each situation.

For example, it may be a situation where a competitor opens a new retail outlet in the local market of a franchisee. It may also apply to the situation where a competitor opens numerous retail outlets in a larger territory.

In the first situation, the duty of a franchisor may be to prepare a specific local marketing plan to assist the franchisee. Of course, they will have to agree on the sharing of the costs and expenses of the plan.

In the second situation, the duty of the franchisor may be to elaborate a corporate strategy which leads to a national marketing plan, including an important financial contribution from the franchisor.

I also believe that, like in the Provigo case, this duty also applies to the situation when a franchisor competes with its franchisees. In this context, the franchisor must provide the concerned franchisees with the necessary tools to compete with the franchisor (corporate retail outlets).

Furthermore, I can easily conceive this duty applying to the situation when certain franchisees from the same franchise network must compete between themselves in a given territory (whether the franchise concepts are identical and/or similar).

7) Obligation to put in place an adequate commercial response that will
enable franchisees to minimize their losses and to reposition them-
selves in an evolving market.

The business expression adequate commercial response means a swift reply to something that was said, written or happened that corresponds perfectly to its object. 

Whether the event that triggers this reaction is the franchisor, the competitor, a dispute between franchisees or the environment in which the franchise network operates, the franchisor must put in place a response that will permit the franchisees to minimize their losses and/or to reposition themselves in an evolving market place. The response will obviously vary according to the situation.

For example, the response may be to relocate and/or renovate retail outlets, to adjust a product line, to close and/reacquire certain retail outlets, to purchase a new computer system, to acquire a competitor, to create a strategic alliance, etc.

CONCLUSION

In summary, each situation that a franchise network will be confronted with will be different and the franchisor must interpret its obligations in each situation. Furthermore, a franchisor must, at all times, ensure that the contractual relation justifies the payment by franchisees of royalties and/or other fees to the franchisor.

I trust this interpretation of the implicit obligations of a franchisor expressed in the Provigo case will permit you to better determine your obligations as a franchisor.

 IMPORTANT NOTE: As previously mentioned, I do not give legal opinions in answers to questions in QUESTION CORNER. I provide my thoughts, comments and/or practical advice on issues that arise in the normal course of the activities of a franchisor. Therefore, I strongly advise that you consult an attorney from your province for a legal opinion on answers to questions asked in QUESTION CORNER.


THE SERVICE: For those that are receiving QUESTION CORNER for the first time, this is how the service works. To use this service, all you have to do is send a question on franchising or business law in general to c.pellan@hotmail.com. I will choose a few questions of general interest and answer them by email. The person asking the question will not be identified and there are no subscription or user fees.
The questions and answers will be sent to other franchisors throughout Canada (unless otherwise indicated in the email) that may have the same question or wish to comment my answer.


If an answer to a question is urgent, please specify it in the email. I will provide my best efforts to respond to the question as quickly as possible.



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