Legal Impacts of the Economic Uncertainty Created by the Multiple Announcements of New Tariffs on the Quebec Franchise Sector

This article explores the legal implications of this situation, focusing on the obligations of Quebec, Canadian and American franchisors, as well as the importance of sound trademark management by franchisors operating a network of Canadian franchises, and more specifically Quebec franchises, in these times of economic change.

1. Business Context of Supply

The new tariffs currently being negotiated and the Canadian countermeasures have recently disrupted supply chains and will undoubtedly continue to do so, increasing costs for retail businesses. The Canadian economy is going through a period of uncertainty marked by trade tensions with the United States, which are already having an inflationary impact on the Canadian economy. This could also have an impact on GDP growth[1], which will inevitably lead to an increase in the cost of goods, according to economic experts on the subject.

The exclusive or quasi-exclusive nature of the franchising supply system makes it very different from other economic sectors. It is a common practice in franchise agreements for franchisors to impose suppliers and distributors on their entire network. This system requires franchisees to purchase exclusively or almost exclusively from their franchisor or from suppliers authorized by the franchisor. This obligation is designed to ensure the homogeneity and quality of the products or services offered by the entire network, while protecting the identity and reputation of the franchisor’s brand.

In franchise network procurement, whether local, national or international, the obligations related to this procurement system are often numerous and complex for the signatories of franchise agreements. First, franchisees must comply with contractual clauses, which generally state that only authorized suppliers can provide the products or services concerned. In return, the franchisor often agrees to negotiate favourable purchase terms for its franchisees, such as quantity rebates or payment terms in order to benefit its franchise network. The franchisor may also offer technical and commercial assistance to help franchisees optimize their supply and maximize the sale of its exclusive or quasi-exclusive products. At least this is the practice of some franchisors within their networks.

However, this system has significant legal implications given the current economic uncertainty and rising costs of goods, which could affect the franchisee profitability and the pricing of their various products and services. This, in turn, will undoubtedly influence supply and demand, indirectly impacting the profitability of franchisee-operated sites. It is also worth mentioning that some jurisdictions around the world strictly regulate competition law with respect to exclusive or quasi-exclusive supply clauses, which are required to meet certain conditions to be valid. This is not the case here in Quebec where, unfortunately, both history and practice have shown that some franchisees have often faced financial hardship due to the inflexibility of certain franchisors in supporting them to source products at competitive prices and quality. Some of these franchisors no longer operate franchise networks, or have significantly reduced their presence in Quebec and Canada over the years. This suggests that the impact on both franchisors and franchisees should not be underestimated.

While the exclusive or quasi-exclusive supply system has some benefits for franchisees and franchisors, it must be implemented with caution to avoid any anti-competitive risks. Today, more than ever, franchisors must show their franchisees a great deal of flexibility to support them in the process of sourcing their various products and services. One simple strategy for franchisors is to review the profit margin that a franchisor may occasionally generate from the various supply agreements with exclusive suppliers or one of their divisions, which may itself act as a supplier of products and services. Franchisors should also continue to negotiate advantageous purchasing conditions for their franchisees, and wherever possible, find suppliers of products and services that align with the local sourcing trend. Given the obligations of franchisors to help and assist their franchisees, they must consider their legal obligations comprehensively, and not individually, to ensure the profitability and sustainability of their network members, despite current supply chain disruptions.

2. Franchisors’ Duty to Assist

Quebec franchisors have implicit obligations in their franchise contracts to provide help and assistance to their franchisees, obligations that many banners have fulfilled through the various measures imposed by governments during the recent COVID-19 pandemic.

In today’s political context, franchisors must act to protect their network and support their franchisees in the face of current economic challenges. The potential changes to the business environment resulting from the ongoing discussions between our government and our southern neighbours require the adoption of new strategies and tools to enhance the efficiency, management, and financial performance of franchise networks. Franchisors must act as guardians of these measures and promote sustainable results for the future.

It is now clearly established in the Quebec franchise sector, since the Quebec Court of Appeal famously upheld the trial decision in Dunkin’ Brands Canada Ltd. v. Bertico Inc.[2], that the franchisor must support its franchise network. The franchisor was ordered to pay 21 Quebec franchisees nearly $18 million for breach of contract, misrepresentation and negligence. The Court found that the franchisor had an explicit and implicit obligation to take reasonable and timely steps to protect and enhance its brand, including in the face of market changes, and to assist rather than abandon its franchisees.

A Quebec franchisor has implicit obligations toward its franchisees, in particular those relating to technical and commercial assistance, collaboration, assistance and support in the face of market changes and adaptation of methods and techniques to new realities. Over the years, Quebec court decisions have established implicit obligations for franchisors, including the obligations of loyalty and consultation with franchisees, as well as providing them with the necessary tools to face competition. Franchisors will undoubtedly need to reinforce these principles and apply them to the various measures they may need to implement in the coming months to adapt their current processes and maintain their network’s viability and competitiveness in the evolving Quebec market. 

3. Impact of Tariffs on Ongoing Franchise Agreements

The new customs tariffs can make the execution of certain franchise agreements financially risky, considering the numerous factors that will impact the franchisee, which the franchisor may not have anticipated when the agreements were signed years ago. It should be noted that franchise contracts are often negotiated for extended periods, which accentuates the negative effects of unpredictable future measures.

While the doctrine of unforeseeability is not recognized in Quebec law as it is in common law, the Supreme Court of Canada, in the famous Churchill Falls[3] decision, recognized an implicit duty to renegotiate important and relational contracts, such as franchise contracts. When a situation becomes economically unviable for one of the partners in a contractual relationship, or when new measures affect one of the parties, it is crucial to consider renegotiating commercial terms and exercising flexibility to prevent significant risks of loss and insolvency, as well as broader negative impacts on a franchisor’s brand and goodwill, which could lead to a series of branch closures. Several major Canadian, American and European banners understood this years ago, demonstrating a flexibility that we often cite as an example in our practice in these specific circumstances.

4. The Importance of Protecting a Franchisor’s Trademarks in this Context

Trademarks are valuable assets for franchisors. The protection of Canadian trademarks is essential to maintaining the reputation and competitiveness of franchise networks, whether local, national or international.

Canadian franchisors must take reasonable steps to protect their trademarks and ensure their sustainability. This includes the registration of trademarks with the Canadian Intellectual Property Office and ongoing monitoring to avoid any misappropriation by third parties. Franchisors must also ensure that their trademarks remain distinctive and do not become generic.

At a time when the economy and the business practices are likely to evolve, it is increasingly crucial for franchisors to protect their intellectual property. I would also venture to say that franchisors have a certain implicit obligation to support their franchise network by providing strong, competitive and distinctive trademarks. This involves taking steps to enhance and protect their brands, including adapting methods and techniques to new market realities and providing technical and business assistance to their franchisees.

Franchisors must exercise strict control over the use of their trademarks by their franchisees to ensure that they are used in accordance with established standards in this increasingly volatile business environment. This includes incorporating specific contractual clauses in franchise contracts and user licenses, along with regular monitoring of franchisees’ activities to ensure compliance with these standards.

Franchisors must be proactive in preventing infringement of their trademarks. This involves monitoring applications for registration of similar trademarks and disputing any objections or unauthorized use. Franchisors must also be prepared to take legal action to protect their intellectual property rights for the benefit of their franchisees.

5. Roles and Responsibilities of U.S. Franchisors Operating in Quebec

U.S. franchisors operating in Quebec also have obligations toward their Quebec franchisees, regardless of the actions taken by the Canadian and U.S. governments. In the light of the current economic climate, characterized by populist and government calls to boycott American products, U.S. franchisors operating in Quebec will need to tread carefully. They play a crucial role in maintaining the confidence and satisfaction of their Quebec franchisees and clients. U.S. franchisors will have to find creative solutions to minimize the foreseeable negative impacts on the sale of products and services seen by Quebec and Canadian clients as imports from the United States. These franchisors will have to adapt their business practices to meet the new demands of this clientele and potentially increase their presence in Quebec and highlight Quebec characteristics within their American concept. This poses a significant challenge, as calls for economic protectionism grow louder while the Trump administration attempts to disrupt global economic practices.

U.S. franchisors with commitments and obligations to their Quebec franchisees will need to ensure that their brands and products meet the current expectations of Quebec consumers. These requirements will also apply to Quebec and Canadian master franchisors responsible for developing American concepts on Quebec or Canadian soil. They will need to adapt their communication and marketing strategies to reflect local preferences. In times of boycott, it’s essential for franchisors to demonstrate their commitment to the Quebec community, for example, by promoting locally made products or supporting local initiatives.

U.S. franchisors must be prepared to adapt their offerings and innovate to meet the changing needs of the Quebec market. This can include introducing local products or changing business practices to better align with consumer expectations. Quebec produces some very good cheese (among many other exceptional products), so why not innovate by changing your recipes and promoting these products on your American pizza? Many Quebec suppliers would be more than happy to take part in these measures and enter into commercial agreements with you—dare to think outside the box! 

Conclusion

The economic uncertainty surrounding new tariffs poses complex legal challenges for the franchise sector in Quebec and Canada. Franchisors must navigate these turbulent times with care, respecting their contractual obligations and protecting their trademarks and their entire franchise network. Although challenging, contract renegotiation may be essential to maintain the financial viability of franchisees and secure mutual long-term benefits. Quebec and Canadian franchisors should consider following the example set by our governments, who respond to adverse effects on businesses in specific sectors by establishing assistance programs and providing support. Prudent and diligent franchisors, those willing to weather the storm brought on by these impending measures, have the potential to gain a competitive advantage by implementing measures to listen to their franchisees and help them cope with these changes. Franchisors: be creative and attentive to the key stakeholders in your network, while embracing a global, long-term perspective! 

If you have any questions, or need support in this context, for your franchise network, please contact our franchise and distribution law team.