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Packed with valuable information, our publications help you stay in touch with the latest developments in the fields of law affecting you, whatever your sector of activity. Our professionals are committed to keeping you informed of breaking legal news through their analysis of recent judgments, amendments, laws, and regulations.

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  • How to be a Good Franchisor in the COVID-19 Era?

    In recent weeks, and especially in recent days, we have seen the serious repercussions of the spread of COVID-19 on Quebec businesses and SMEs. Government authorities are planning financial assistance measures for businesses, and some chambers of commerce have already announced that new services will soon be offered to businesses to help them deal with the crisis. We are as yet unaware of the details of this assistance and how it will be allocated.  In the meantime, what will happen to companies with a franchise business model that are required to meet certain financial undertakings and standards as part of their day-to-day operations? During these unpredictable and uncertain times, how can you be a good franchisor and support your franchisees? Assistance and guidance from franchisors is important in a situation like this. It can take different forms, some of which are described in this bulletin.  This is an extraordinary opportunity to show franchisees that you are a caring provider that considers the survival of their businesses to be a priority.  Here are a few suggestions for supporting your franchisees over the next few weeks, if not the next few months: Give them a temporary break from their financial obligations under the franchise agreement, both in terms of paying royalties and contributing to the advertising fund. In the short term, this will cause you to lose a source of income. However, it will ease the financial pressure on franchisees and allow them to get through this crisis and eventually return to normal operations. If your franchisees are lessees (whether they have a storefront or shopping centre lease), join them in their negotiations with the landlord to try to obtain temporary flexibility in the terms of their leases, such as a suspension of rent payments, a reduction of payable rent or a deferral of payments that will be spread out over several months once the effects of the COVID-19 crisis have subsided, since rental costs are generally a major expense for franchisees. On the other hand, if as a franchisor you are subletting premises to your franchisee, accept the risk of negotiating payment arrangements or taking on a portion of the rent to temporarily relieve the franchisee’s financial burden. Work in collaboration with franchisees to modify their services (take-out food, virtual workout program for gym clients, delivery, increase in online offerings, etc.) while respecting your standards and requirements in order to maintain consistency between the franchises. Allow your franchisees to temporarily cease operations or reduce business hours to minimize certain expenses such as payroll and supply (in this regard, we invite you to read The Coronavirus Guide for Employers: Everyday Measures for the Workplace). Revise some of your standards and policies and provide updates to be adopted by your franchisees (particularly for hygiene and sanitation). Take advantage of these turbulent times to develop new virtual training courses, encourage franchisees to participate in continuing training activities during this period by offering free webinars, or set up virtual brainstorming sessions to innovate and plan for after the COVID-19 pandemic. Temporarily share a portion of supplier rebates with your franchisees, if your franchise concept allows you to collect rebates directly with no obligation to remit them to the franchisees. Develop a marketing strategy for current services or a new temporary offering during the crisis in order to maintain brand visibility. For the benefit of your franchisees, renegotiate certain agreements with suppliers to get better services or rates (e.g. telephone service, internet, inventory, percentage discount on goods useful for operating the business). Facilitate your franchisees’ discussions with their financial institutions, which are currently sensitive to the tense financial situation of Quebec entrepreneurs and willing to find solutions. If you have an online sales platform, establish a policy that allows franchisees to benefit from it, at least temporarily, either by sharing a certain portion of revenues or, for example, delivering to the franchisee closest to the consumer. For franchisees that, tragically, will not have the financial capacity to overcome the crisis, support them through the end of their operations and transition, in order to minimize their losses. If necessary, offer your franchisees phone or virtual assistance and provide them with contacts who can answer their questions and support them. Provide the public with a general message on the status of your network’s products and services offering, and showcase your support to your franchisees in order to convey a clear and consistent message that will sustain your brand and approach. Most of these proposals involve a greater financial commitment on the part of the franchisor. However, it is important to remember that a franchisor has an obligation to collaborate and partner with its franchisees. Of course, no one is bound to achieve the impossible. A franchisor’s capacity to adequately support its franchisees during this difficult period will serve its interests and those of the network in the longer term. Assistance provided by the franchisor will allow more franchisees to survive and resume their activities when the situation improves. The franchisor’s support and, particularly, flexibility with respect to financial obligations arising from the franchise agreement will send a clear message to franchisees that they are not left to fend for themselves during this period of uncertainty, and a greater climate of trust will be established in your franchisor-franchisee relationship.  Moreover, all sectors of Quebec’s economy are affected by the pandemic and a solidarity movement is being established among institutions, financial partners and businesses to implement solutions and strategies to promote trade and the resumption of economic activities. We are following developments on a daily basis. Our franchising and distribution team and all our professionals are at your disposal and offer you their expertise in advising and supporting you in meeting the challenges that the current COVID-19 situation may create for your network. Please do not hesitate to contact us. It will be our pleasure to collaborate to find a solution that is right for YOU. It’s time to stand together!

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  • 5 keys to successfully sell your franchise system

    Though it doesn’t happen often, some franchisors start a franchise system with the goal of selling it in the short or medium term. However, the quality of the infrastructure required to build a viable franchise system and the amount of resources (financial or other) that need to be invested over time is likely to lead such franchisors to reconsider their initial goal and either develop a strategic partnership or simply cave in and sell their franchise system to a competitor. Given that a potential partner or buyer will likely carry out due diligence to substantiate the business opportunity, it is preferable to determine what issues may compromise or interrupt negotiations and try to resolve them in advance. Identifying issues in the relationship with franchisees and making the necessary adjustments Before thinking of selling all or part of your franchise system, you should assess the quality of your franchisees and your relationship with them. If you have conflicts with some of them, it is high time to resolve them. Unless faced with an isolated case that you have already taken steps to resolve, your potential partner or buyer may react negatively upon learning that some franchisees in your system are critical of the franchisor and may fear the impact that claims could have on the franchisor’s image, concept and brand. The most frequent criticisms against franchisors are related to a lack of support and collaboration, a lack of transparency in the use of national advertising funds, a concept and/or operations that aren’t viable, and the belief that the franchisor does too little for its franchisees. To learn if your system harbours any such criticisms, you should not visit your franchisees only to assess the quality of their operations. You should give them the opportunity to openly discuss the challenges and situations they face with your management team. It is always better to get franchisees to confide directly in their franchisor rather than letting dissatisfied franchisees discuss their points of contention between themselves. A better understanding of the state of your franchise system will make it possible for you to be more transparent in disclosing the issues underlying a potential transaction to your prospective buyer. Even if such transparency may lead to a lower sale price, it avoids the financial consequences of incomplete or inaccurate representations that you may make to the future buyer and helps to maintain trust. Reviewing and structuring documentation As part of its due diligence, the buyer and its lawyers and financial advisors will review all key aspects of the franchisor’s system, including contracts (franchises, leases, suppliers, etc.), intellectual property and accounting. Missing or incomplete documentation will likely discourage the buyer and justify a reduction in the sale price, or, even worse, withdrawal from the proposed transaction. It is therefore essential, before the buyer’s due diligence begins, that you instruct your resources to verify that your documentation is compliant and reliable, correct any deficiencies and obtain missing information, if any, even if it means hiring external consultants. Compiling your system’s financial information A potential buyer will undoubtedly want to analyze your financial statements and tax returns. It is also very likely that it will want to consult accounting records and verify some key performance indicators. Thus, your system’s monthly sales (compared to those of previous years), geographic trends, how profitable franchisees’ operations are and how frequently they pay their royalties will certainly be of interest to a buyer. In addition, a diligent buyer will pay close attention to a franchisor’s contractual obligations towards third parties, such as lessors and suppliers, and any warranties that it may have made to third parties. In short, full and structured disclosure of the financial information underlying your system will make it easy to demonstrate future profitability. Negotiating an advantageous Earn-out clause Negotiating the sale price of a franchise system can be done in different ways. In addition to the traditional EBITDA valuation of the business, it is not unusual for a franchisor (whose management will ensure an operational transition after the sale) to negotiate an upward adjustment to the sale price should the franchisor achieve, after a determined post-transaction period, better financial results than those on which the buyer based its valuation of the sale price (the “Earn-out”). For example, the sales agreement could provide that a sum equal to the increase in EBITDA that the franchisor achieves during the Earn-out period, multiplied by the EBITDA multiple applied to the transaction, be paid in addition to the sale price. Limiting the chances of your transaction failing by choosing a suitable buyer Make no mistake: a transaction isn’t concluded upon signing a letter of intent. There’s still a long way to go. A multitude of conditions in favour of the buyer generally need to be fulfilled in order for the transaction to proceed. Stipulated time limits often need to be extended by mutual agreement for the parties involved to cover all bases and close the sale. This doesn’t mean that you must consent to all the buyer’s requests to extend time limits. While delays in a transaction are usually well-founded, sometimes a buyer tries to buy time in order to exert pressure on the seller, or it will do so to finish due diligence that it deliberately made more complicated in order to find arguments justifying a decrease in the sale price./p> To avoid such an unfortunate situation, it is in your interest to be well informed about your potential buyer and how it handled past transactions. To assist you and make the best of your business model, feel free to contact a professional of our team!

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  • The 5 key factors to consider before becoming a franchisor

    Our team is frequently consulted by entrepreneurs asking the following question: we want to franchise our business concept, so where do we start? One of the most common scenarios involves a very enthusiastic customer approaching the owner of a new business concept with some local success (such as a restaurant) and offering to buy a franchise. It is quite common for the business owner to quickly accept this offer in hopes of becoming the next Subway. Unfortunately, many entrepreneurs do not realize that successfully running one or two locations requires very different skills and abilities than those required to develop a franchise network. So, rather than becoming the next Fred Deluca, they are soon faced with challenges resulting from the poor choice of franchisees, inefficient locations, an ineffective supply system and the inability to maintain a uniform concept with the few franchisees they have managed to recruit. As a result, one or more franchisees will most likely stop paying their royalties, close their doors and, guess what – blame the franchisor for the losses incurred. Having represented several franchisors over the past 15 years, we recommend that entrepreneurs pursue the franchise business model only if they are able to meet the following criteria: 1. The concept is viable and the business model is profitable The fact that one location is generating a profit does not guarantee that the concept is viable or that the business model is profitable. In order to be able to draw such conclusions, we strongly recommend that entrepreneurs run at least two, or ideally three, corporate branches (regardless of concept type) in different markets for a period of at least 18 months. Like any entrepreneur, a franchisee normally assumes some business risks related to the choice of location of the franchise and the quality of its operations. However, the franchisee should not share, or suffer from, business risks related to assessments that the franchisor should carry out before granting the franchise.Like any entrepreneur, a franchisee normally assumes some business risks related to the choice of location of the franchise and the quality of its operations. However, the franchisee should not share, or suffer from, business risks related to assessments that the franchisor should carry out before granting the franchise. 2. The concept and business model can be replicated Ideal demographics and geographic locations, supply costs (or sources), elements that may be difficult to replicate and even the unique expertise or charisma of the founder are all factors that influence the success of a business concept and should be taken into consideration before developing a franchise network. The franchisor must have a business concept that a qualified franchisee can operate without being in the same shoes as the franchisor. New franchisees, who will have different business experience than the founder in most cases and whose franchises will be located in different markets than the original, must still be able to easily replicate the franchisor’s concept with the same success by following the system that the franchisor carefully laid out in advance. 3. Recruiting franchisees is actually possible Wanting to sell franchises is an admirable goal, but there must also be a sufficient pool of candidates who meet the franchisor’s selection criteria. For example, franchising a shoe repair shop might seem like a good idea, in order to standardize customer service and modernize the environment in which this type of service is offered. Nevertheless, using the same example, it is important to determine whether there are enough candidates in the trade to consider developing a franchise network in the industry and to ensure that some shoemakers are ready and willing to convert their current businesses to franchises and continue operating under the branding of a third party. 4. The franchisor’s team has sufficient resources to properly train and support the franchisees Our team was recently called upon to resolve a franchisor-franchisee dispute that perfectly illustrates the issues that can arise from a lack of experience or resources on the part of the franchisor. The franchisor fell victim to the enthusiasm of many prospective franchisees for its seemingly viable concept and profitable business model and collapsed shortly after starting its franchising operations. After franchising some 20 businesses in a short period of time, the lack of support from the franchisor in choosing locations and layout, a poor understanding of key industry performance indicators, a flawed supply system and incomplete initial training of franchisees led to the collapse of the network. Even if it means slowing down the pace of development, franchisors must ensure that they have sufficient infrastructure in place to support the growth of the network. Poor choices made while developing a franchise network can have negative effects for several years, not to mention the impact these choices can have on the future success of the franchisor. 5. The franchisor has sufficient financial resources Developing a franchise network in accordance with the above recommendations requires excellent capitalization. The initial franchise fees and royalty payments from the first franchisees are not enough for the franchisor to cover the development of sufficient infrastructure to ensure the viability of the network. The vast majority of franchisors who have challenged this basic rule are now facing serious difficulties.

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  • How to expand your franchise network in Quebec?

    In the latest edition of the Franchise Voice magazine published by the Canadian Franchise Association (CFA), discover the article "Franchising in Quebec", illustrating some of the particularities that distinguish Quebec from other Canadian provinces in the Franchise industry. Whether you are a Canadian or foreign franchisor, this article written by our professionals reviews the legal essentials to grow your franchise Quebec project : Read and download this publication

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  • Artificial Intelligence and the 2017 Canadian Budget: is your business ready?

    The March 22, 2017 Budget of the Government of Canada, through its “Innovation and Skills Plan” (http://www.budget.gc.ca/2017/docs/plan/budget-2017-en.pdf) mentions that Canadian academic and research leadership in artificial intelligence will be translated into a more innovative economy and increased economic growth. The 2017 Budget proposes to provide renewed and enhanced funding of $35 million over five years, beginning in 2017–2018 to the Canadian Institute for Advanced Research (CIFAR) which connects Canadian researchers with collaborative research networks led by eminent Canadian and international researchers on topics including artificial intelligence and deep learning. These measures are in addition to a number of interesting tax measures that support the artificial intelligence sector at both the federal and provincial levels. In Canada and in Québec, the Scientific Research and Experimental Development (SR&ED) Program provides a twofold benefit: SR&ED expenses are deductible from income for tax purposes and a SR&ED investment tax credit (ITC) for SR&ED is available to reduce income tax. In some cases, the remaining ITC can be refunded. In Québec, a refundable tax credit is also available for the development of e-business, where a corporation mainly operates in the field of computer system design or that of software edition and its activities are carried out in an establishment located in Québec. This 2017 Budget aims to improve the competitive and strategic advantage of Canada in the field of artificial intelligence, and, therefore, that of Montréal, a city already enjoying an international reputation in this field. It recognises that artificial intelligence, despite the debates over ethical issues that currently stir up passions within the international community, could help generate strong economic growth, by improving the way in which we produce goods, deliver services and tackle all kinds of social challenges. The Budget also adds that artificial intelligence “opens up possibilities across many sectors, from agriculture to financial services, creating opportunities for companies of all sizes, whether technology start-ups or Canada’s largest financial institutions”. This influence of Canada on the international scene cannot be achieved without government supporting research programs and our universities contributing their expertise. This Budget is therefore a step in the right direction to ensure that all the activities related to artificial intelligence, from R&D to marketing, as well as design and distributions, remain here in Canada. The 2017 budget provides $125 million to launch a Pan-Canadian Artificial Intelligence Strategy for research and talent to promote collaboration between Canada’s main centres of expertise and reinforce Canada’s position as a leading destination for companies seeking to invest in artificial intelligence and innovation. Lavery Legal Lab on Artificial Intelligence (L3AI) We anticipate that within a few years, all companies, businesses and organizations, in every sector and industry, will use some form of artificial intelligence in their day-to-day operations to improve productivity or efficiency, ensure better quality control, conquer new markets and customers, implement new marketing strategies, as well as improve processes, automation and marketing or the profitability of operations. For this reason, Lavery created the Lavery Legal Lab on Artificial Intelligence (L3AI) to analyze and monitor recent and anticipated developments in artificial intelligence from a legal perspective. Our Lab is interested in all projects pertaining to artificial intelligence (AI) and their legal peculiarities, particularly the various branches and applications of artificial intelligence which will rapidly appear in companies and industries. The development of artificial intelligence, through a broad spectrum of branches and applications, will also have an impact on many legal sectors and practices, from intellectual property to protection of personal information, including corporate and business integrity and all fields of business law. In our following publications, the members of our Lavery Legal Lab on Artificial Intelligence (L3AI) will more specifically analyze certain applications of artificial intelligence in various sectors and industries.

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  • Your Contracts: a Systematic and Disciplined Approach is Called for

    Every day, and several times a day, we enter into contracts without knowing it or without considering and controlling their effects. This newsletter provides a brief and non-exhaustive summary to help you better understand, prepare for and monitor your contractual environment. Do you know that? a contract is a meeting of minds that may be expressed and entered into in different ways (written, verbal, e-mail, filling of orders, etc.); a contract may be amended or rights abandoned by actions, words or subsequent writings, or by failing to take action in a timely manner; the law governing the interpretation and performance of a contract is determined based on various factors and circumstances if the parties do not choose what law applies; the imperative provisions of certain statutes may take precedence over certain contractual clauses; the suppletive provisions of certain statutes may complete a contract which is silent with respect to matters covered by the suppletive provisions; the laws are not the same from one jurisdiction to another and some contractual clauses may be valid and enforceable under the laws of one state but not under the laws of another state; the courts are not bound by the designation, description or name given to a contract by the parties and will examine the true nature of the relationship and transactions between the parties; under the Civil Code of Québec (articles 6, 7 and 1375), the entering into and performance of contracts must be carried on in good faith; the Supreme Court of Canada also recognized a duty of honest performance in common law1;1 ; in Quebec law, good faith is not limited to the absence of malice, vindictiveness or bad faith; in Quebec law, the legality of a right does not necessarily mean that it is being exercised legitimately (the answer to the following question determines whether it is being exercised legitimately: “Would a reasonable person placed in the same circumstances act that way?”); under the Civil Code of Québec (article 1434), a contract binds the parties “not only as to what they have expressed in it but also as to what is incident to it according to its nature and in conformity with usage, equity or law”; under the Civil Code of Québec (article 1425), “the common intention of the parties rather than adherence to the literal meaning of the words shall be sought in interpreting a contract”; however, when the meaning of the words used, placed in the context of entering into and performing a contract is clear, the courts will not intervene; under the Civil Code of Québec (article 1435), “an external clause referred to in a contract is binding on the parties”; an external clause is one that is found in another document, such as the general conditions found on a website; also under the Civil Code of Québec (article 1428), a contract must be interpreted in a way that gives a clause “a meaning that gives it some effect rather than one that gives it no effect”; and a contract with a consumer is subject to specific rules, both as to its substance and its form. Examples of case law interpretations The case law provides us with several examples of the courts’ interventions and interpretations. Here are a few: in a service contract, unless he has unequivocally waived his termination right, a client is entitled to terminate the contract unilaterally and without cause before the expiry of the stated term, as provided under article 2125 of the Civil Code of Québec2; in a franchising or distribution contract, even in the absence of a territorial or geographical exclusivity clause or a non-competition clause, unfair competition by the franchisor will not be tolerated by the court3; the right to unilaterally terminate a contract may be set aside or be made subject to conditions by the courts if the particular exercise of the right constitutes a breach of the duty of loyalty or is abusive4; a unilateral amending clause is valid to the extent that it contains objective criteria and limits which do not depend upon the exclusive control of the beneficiary5; even where a party’s termination right (for example, upon 60 days’ prior notice) is set out in a contract with an indefinite term, a notice of termination that is longer than that provided for in the contract could be required by the court if the contract has been in effect for several years6; the common error of the parties to a contract may be corrected by them by mutual consent and the court may intervene to ascertain the legitimacy and necessity of the amendments made by the parties7. Practical advice before you enter into a contract Before entering into a contract, it is important to: verify the identity, capacity and solvency of the other party; understand the environment, goals and business expectations of both parties; avoid statements, or concealing or omitting facts, which could lead the other party into error regarding your abilities or aspects of your property, products or services; understand and define the nature and features of the property, products or services, the rights to use them, etc. (specifications); specify and understand the laws governing the contract and the legal framework which will apply (mandatory and suppletive provisions); be informed about the relationships and experiences involving the other party in general (other contracts, performance quality, disputes) and the purpose of the contract in particular (letter of intent, written communications, etc.); be aware of the relative strengths, time constraints and alternative solutions (e.g. withholding the financial consideration, the nonavailability of property, services or products, etc.); be prepared for the risks of failure to perform or insolvency of the other party and plan the steps which could be taken to reduce its adverse effects, through both contractual rights and practical means; clarify all the main elements of the contract to be drawn up, i.e. prepare a document, ideally working with the other party, in the form of a term sheet or checklist; choose the form, type of contract (letter, short contract, long contract, contract of adhesion or negotiated contract) and the language of the contract; provide for a dispute settlement procedure, but be wary of arbitration clauses conferring on one or several arbitrators the power to make business decisions or conferring upon persons who do not have legal training the authority to interpret contractual clauses; determine what will be the internal review and approval procedure for each party. Practical advice for drafting and negotiating contracts In drafting and negotiating contracts, it is advisable to: adopt a balanced, legitimate and reasonable approach; use simple language, readily understandable by persons who do not have legal training; beware of models which were negotiated under different circumstances; be consistent in the use of words and expressions and include definitions; avoid being overly complicated, but be precise enough; set out the common business goals and those which are specific to each party and state the context (in recitals), if they might be relevant in the case of a dispute; clearly provide for what will happen in the event of a default and at the end of the contract; describe how disputes will be dealt with and how any price, product and service adjustments will be made; if you are the client, favour the progressive payments approach and if you are the supplier, provide for payment guarantees; state how and by whom the contract may be amended and who can bind you; protect your intellectual property and the confidentiality of your information; define the exclusivities, non-competition restrictions and territorial or business sector protections required from each party. Advice regarding the performance and monitoring of contracts It is important to: not begin to provide products or services or to transfer property without having come to an agreement on the terms and conditions of the contract; not let deadlines expire and, therefore, to keep a schedule indicating which deadlines are coming up; not involuntarily waive rights; not amend the contract before those in authority have given their explicit approval; for instance, beware of purchase orders that modify the contract; document any failure to perform by either party; quickly determine what you intend to do if the other party is in default, quickly notify the other party about the default noted and, if there are discussions, clearly inform the other party in writing that they are being held under reserve of, and do not constitute any waiver of, your rights; avoid letting any ambiguity continue if it is not in your favour; designate a person in charge in your company to coordinate and monitor the performance of the contract; if you are the purchaser, check the compliance with the contract of any service, property or product provided by the other party immediately upon receipt and avoid signing any receipt or bill of lading which states in print that the property or product is in good condition; if you are the supplier, require that the property or product be examined and the purchaser acknowledge satisfaction quickly, or create a presumption of acceptance. Conclusion In summary, clarity, transparency, a mutual understanding of the goals and expectations of each party, good faith and the use of a systematic and disciplined approach should be favored. Bhasin v. Hrynew [2014] 3 S.C.R. 494. Centre régional de récupération C.S. inc. v. Service d’enlèvement de rebuts Laidlaw (Canada) Ltd., J.E. 96-1048 (C.A.); Société canadienne des postes c. Morel, 2004 CanLII 21187 (QCCA); Services Matrec inc. v. CFH Sécurité inc., 2014 QCCA 221. Provigo Distribution inc. v. Supermarché A.R.G. inc., [1998] R.J.Q. 47 (C.A.). E. & S. Salsberg inc. v. Dylex Ltd., [1992] R.J.Q. 2445 (C.A.); Mabe Canada inc. (Camco inc.) c. 2849-9937 Québec inc., 2008 QCCA 847. Laflamme c. Bell Mobilité, 2014 QCCS 525. Bertrand Équipements inc. v. Kubota Canada Ltée, REJB 2002-32020 (S.C.). Québec (Agence du revenu) v. Services Environnementaux AES inc. [2013] 3 S.C.R. 838.

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  • Franchisors’ duty to act in good faith and related implicit obligations: Dunkin’ Donuts ordered to pay nearly $18M to some of its franchisees

    The Court of Appeal of Quebec has issued an important judgment pertaining to a franchisor’s implicit obligations towards its franchisees. In June 2012, the Superior Court of Quebec ordered Dunkin’ Donuts Brands Canada Ltd. (“Dunkin’ Donuts”) to pay an amount of $16.4M (plus interests and costs) to 21 of its franchisees in Quebec on the basis that the franchisor had breached its fundamental obligation under the franchise agreements he had entered into with its franchises to adequately protect and enhance the Dunkin’ Donuts brand in Quebec. In a unanimous decision released on April 15, 2015, the Court of Appeal of Quebec confirmed the trial judgment, finding no errors of law in the trial judge’s analysis of the franchise agreements nor any palpable and overriding errors of fact in his findings of fault or respecting the causal link between the breaches of contract by Dunkin’ Donuts and the franchisees’ losses. However, the Court of Appeal reduced the award to $10.9M (plus interests and costs) to take into consideration errors in calculation and unpaid royalties, which were due by the franchisees despite Dunkin Donuts’ contractual fault. Summary of the Facts In less than a decade, more than 200 Dunkin’ Donuts stores in Quebec closed, and Dunkin’ Donuts’ market share in Quebec plummeted from 12.5% in 1995 to 4.6% in 2003. Expanding from 60 stores in 1995 to 308 by 2005, Tim Hortons captured the lion’s share of growth in the coffee and donut fast food market, thus materially contributing to the collapse of Dunkin’ Donuts in Quebec during this period. Despite the franchisees’ numerous alerts, the franchisor failed to meet its duty of good faith towards its franchisees by neglecting to take reasonable measures to support and protect the Dunkin’ Donuts brand in Quebec. The Court of Appeal Decision The Court of Appeal came to the conclusion that the franchise agreements between Dunkin’ Donuts and its franchisees explicitly imposed on Dunkin’ Donuts an obligation of means to take reasonable measures to protect and enhance its brand. The Court of Appeal further confirmed that the nature of a franchise agreement is one of a long term collaborative agreement. Accordingly, it imposes on the franchisor an implicit obligation to provide franchisees with the continuous collaboration and support that they legitimately expect in order to protect and enhance the brand, maintain high and uniform standards within the franchise system and, generally, preserve the integrity of the franchise system as a whole. While rejecting Dunkin’ Donuts’ arguments, the Court of Appeal reaffirmed that the intensity of a franchisor’s obligation towards its franchisee is one of means, and not one of result. A franchisor does not have an obligation of result requiring it to outperform the competition or to guarantee the profitability of its franchisees. However, franchisors are bound by a duty of good faith, from which flows an obligation to take positive actions to protect franchisees from market challenges. In other words, had Dunkin’ Donuts taken reasonable measures to counter Tim Hortons’ or another competitor’s expansion, the franchisees would have had no basis for complaint. Comments The Dunkin’ Donuts decision does not create new obligations for franchisors in Quebec and is the logical continuation of the 1997 Court of Appeal decision in the Provigo case1 which is recognized as the leading authority in franchise law in Quebec. It is nevertheless an important decision insofar as the Court of Appeal clarifies the extent of the implicit obligations of a franchisor. Since 1994, the Civil code of Quebec imposes on franchisors a duty to act in good faith which was interpreted in Provigo as an obligation for a franchisor to assist and support the franchisee in its operations. While a franchisor is justified to impose on its franchisees important restrictions as to how to operate and administer their franchise business for the purpose of maintaining uniform standards of quality and a strong brand across the franchise system, the franchisor must, in exchange, provide its franchisees with the appropriate infrastructure to sustain the execution of such requirements. Accordingly, the franchisor’s obligation to take reasonable measures in order to protect and enhance the brand constitutes an implicit obligation of franchise agreements and form part thereof. In light of the clarifications made by the Court of Appeal as to the concept of assistance and support to which referred the Provigo decision, we can reasonable expect that other components of the infrastructure generally required from a franchisor, such as an adequate protection of trademarks, the qualification and initial training of franchisees, the efficiency of the supply chain and ongoing operational support, will be challenged in the future. Lessons for Franchisors While a franchisor is not bound by an obligation of result towards its franchisees, it must take positive measures (i) to protect the integrity of its franchise system, namely the notoriety of its trademarks and concept, and (ii) maintain an infrastructure that will sustain the viability of the franchise system. As to any explicit obligation, a franchisor should review the performance covenants provided in its franchise agreement and make sure that it can live up to the standards which it imposed on himself. _________________________________________ 1 Provigo Distribution inc. v. Supermarché A.R.G. inc., 1997 CanLII 10209.

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