For several years now, we have witnessed, in several sectors of activity (notably in the restaurant industry and in automotive after market services and products), the regrouping of franchise networks within the same organization.

As a result, some of these organizations now own and manage several franchise concepts, even dozens.

Obviously, the consolidation of several franchise networks within a single organization offers significant advantages: an economy of scale for the purchase of products and services, a better position to negotiate with real estate developers and landlords, savings through the centralization of certain functions common to the consolidated networks (for example, finance, property management, legal services, technology, etc.).

However, the ownership of several franchise networks by the same organization raises some specific risks and issues, particularly where outlets of one or more of these combined networks compete with one or more outlets of another of these networks.

In this regard, it is important to recall the teachings of the Quebec Court of Appeal in the important case of Provigo Distribution Inc. v. Supermarché A. R. G. Inc.

This case dealt with a situation in which the owner of several grocery retail concepts (Provigo Distribution Inc.) had launched, under the Heritage banner, a new grocery store concept in which certain outlets competed with affiliates of its Provigo banner.

The Quebec Court of Appeal first noted that the contracts signed between Provigo Distribution Inc. and its affiliates did not prevent Provigo Distribution Inc. from owning stores that competed with those of its affiliates.

However, based on the implied obligations arising from the very nature of the franchisor-franchisees' relationship, the Quebec Court of Appeal recalled that, even in a context of competition with its franchisees, a franchisor is bound by some important duties toward them.

Here are some relevant excerpts from the judgment rendered by the Quebec Court of Appeal in this case:

  • "When the franchisor signs an affiliation contract with a franchisee, it effectively enters into a partnership and obviously restricts its right to free competition against that party."
  • "One of the franchisor's fundamental obligations toward the franchisee, however, is the provision of technical and marketing support, which is an aspect of their partnership and thus of their duty of cooperation. Indeed, the franchisor has know-how and expertise in the specific market segment in which it operates, and this is part of what it sells to its franchisees. Of course, in doing so, it must follow the evolution of the market and adapt its methods and techniques to new realities; indeed it is in its own interest to do so. Because of its obligation of good faith and loyalty toward its franchisee, however, it must also provide technical support and cooperation, and therefore share its new tools with the franchisee or at least find other ways of keeping the contract relevant so that the underlying considerations of the contract of affiliation do not become void or inoperative."
  • "Faced with this new state of affairs, the appellant, bound by an obligation of good faith and loyalty toward the respondents, had the duty to work with its franchisee and provide it with the necessary tools at least to minimize the impact of any economic prejudice that could be caused, if not to prevent it altogether. Between doing absolutely nothing and maintaining the status quo, which might have cost it its place in the market, and exercising its right to compete freely with third parties, there is a middle ground. The appellant could not neglect its franchisees and reclaim the vulnerable segment of its order centre through the activities of its own Heritage stores. It should have worked with the franchisees to establish an adequate marketing response that would have enabled them to minimize their losses and reposition themselves in an evolving market."
  • "This is essentially where the appellant's fault resides: the failure to adequately fulfil its duty to cooperate and provide technical assistance, which constitutes a lack of loyalty, in failing to provide its co-contracting party with the tools necessary to commercially counter the competition as soon as it decided it would vigorously pursue the segmentation of the market of the order centre in 1990."

Although this case involved a situation where the franchisor itself was competing with its affiliates, the teachings of the Quebec Court of Appeal are equally applicable to a franchisor who operates several franchise concepts whose outlets may be in competition with one another.

We invite you to contact the author of this bulletin if you have any questions on this or any other subject relating to franchise law.

Fasken has all the expertise and resources necessary to help you structure your network properly, to provide you with adequate contracts tailored to your needs, and to properly prepare and execute any expansion project, whether in Quebec, in other Canadian provinces or anywhere else in the world.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.