Franchisor-franchisee relationships: a review of franchisor’s obligations during a health crisis

As the COVID-19 pandemic takes its toll on companies and their business models, franchise systems are not immune. In this time of uncertainty, many franchisees have seen their revenues drop drastically and have been forced to suspend their operations. Faced with increased financial pressure, the franchisor’s support for its network and its proactivity are essential. Today, AVENS offers a brief analysis of the application of the main obligations of a franchisor amid the current pandemic.

A franchisor provides an operating system and a common identity to its franchisees. From a partnership perspective, the franchisor contributes to its network by providing both its experience and its know-how. In return, the franchisees must pay royalties and publicity fees, in addition to meeting the quality and performance standards set by the franchisor. While some Canadian provinces apply their specific franchise legislation, this is not the case in Quebec: here, franchisor-franchisee relationships are governed by the general law, i.e., the general provisions of the Civil Code of Quebec, the contracts between the parties and the interpretation given by the courts. In light of the above, an analysis of the case law is essential to identify the obligations and rights of the parties to a franchise agreement.

The Quebec courts have recognized certain implied obligations of the franchisor based on the general duty of good faith, which is incumbent on all parties in the performance of contracts. In the Dunkin Brands case, the Court of Appeal noted that it is in the nature of a franchise agreement to impose on the franchisor an obligation to provide the necessary support and cooperation to its franchisees so that they can face competition and the new realities of the market.

Such an obligation is burdensome in the context of the pandemic: a franchisor cannot hide behind the rigid framework of the franchise agreement without accommodating the needs of its franchisees. By refusing to collaborate and to propose certain compromises, the franchisor risks not only breaking the bond of trust binding it to its franchisees, but also seeing its network weaken due to the probable insolvency of some of its franchisees. In response to the crisis, the franchisor must instead be flexible and proactive.

For example, the franchisor may offer certain relief with respect to royalty payments and performance targets, ensure that it promptly communicates any information that may be useful to franchisees to ensure that the franchisees can enroll in government assistance programs, or modify its service offer to adapt it to the new health constraints. In addition, since the franchisor generally holds the main lease of the premises, which is then subleased to its franchisee, it can make arrangements with the main landlord and thus support its franchisee to ensure that the franchisee benefits from available and applicable government programs.

Basically, the franchisor must balance its interests with those of its franchisees. By communicating openly with its franchisees and monitoring the situation on an ongoing basis, the franchisor will be able to effectively determine the most appropriate accommodation and plan. In the long term, adequate and sustained support to his franchisees can only be beneficial to ensure the sustainability of its network. It is therefore important for the franchisor to perceive these challenges as an opportunity to collaborate and increase the confidence of its partners.

If you are party to a franchise agreement or intend to enter into one, at AVENS, we can help you ensure that your rights and obligations are respected.