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Article | Bulletin

You Have Been Told That Franchise Disclosure Is Not Mandatory in Québec: This Is “Fake News”!

Fasken
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Franchising Bulletin

Along with Newfoundland and Labrador, Nova Scotia and Saskatchewan, Québec is one of the four Canadian provinces that do not have a specific franchise act.

Many persons (including lawyers) therefore believe that, in the absence of any franchise legislation, there is no franchise disclosure obligation in Québec unlike in the six Canadian provinces with franchise legislation.

Such a belief is incorrect: there is indeed, in Québec, a disclosure obligation on the part of a franchisor in favour of its potential franchisees. In Québec legal language, it is referred to instead as an information obligation.

The difference with the provinces that have franchise legislation is that the precise content of such disclosure, as well as its form and timing, is not specified in a regulation.

Rather, a franchisor's information obligation toward a prospective franchisee arises from the rules enacted by the Civil Code of Québec, as clarified by Québec jurisprudence in franchise law, which provides that a party to a contract is required to disclose to the other party, before or at the time of signing a contract, all material information known to it that is relevant to the contract and its purpose.

What is the material information that a franchisor is required to disclose to a prospective franchisee?

In Québec, material information can be defined as comprising any information that could reasonably be expected to have an impact on a prospective franchisee's decision to enter into the franchise agreement on the terms proposed by the franchisor.

Such material information may be internal information about the franchisor or its network as well as external information (which is not in the public domain) concerning, for example, the franchise network's line of business or its competition.

Examples of internal material information could include the fact that an agreement material to the franchise network is about to expire, litigation involving the franchise network's trade-marks, the recent demise of several franchisees, significant or multiple claims by customers for defects in products sold by the franchise network, etc.

The Québec Court of Appeal has already recognized that a franchisor was required to disclose to a prospective franchisee, prior to the signing of the franchise agreement, the results of the aptitude and psychometric tests that the franchisor had conducted regarding the prospective franchisee and an assessment made by one of its development managers regarding the proposed site for the new franchise to the extent that such information could reasonably have led the prospective franchisee not to sign the franchise agreement.

Material external information could include, for example, the imminent arrival of a major competitor in proximity to the location of the proposed franchise, a significant or prolonged decline in sales in the network's line of business (for example, by reason of a crisis like COVID-19 or of a recent increase in the cost of goods needed or sold by the network's franchisees), foreseeable restrictions on the merchandise that may be sold, and so on.

The franchisor's duty to inform the franchisee does not, however, replace the franchisee's duty to reasonably inform herself/himself about his proposed franchise.

Thus, the franchisee can hardly reproach its franchisor for failing to disclose to her/him information that is public knowledge (so as the fact than businesses had to temporarily close their doors during the COVID-19 crisis) or which the franchisee could easily have obtained by doing some basic research.

As for the time at which such disclosure must be made, according to the Civil Code of Québec, it is simply before the contract is signed.

In the absence of franchise legislation, this disclosure does not necessarily have to take any particular form. However, if a dispute arises, the franchisor has to be able to prove that disclosure of material facts has been duly made before the signing of the franchise agreement.

For this reason, if there are material facts to be disclosed to a prospective franchisee, although this is not mandatory, it is strongly recommended that such disclosure be made in writing.

Finally, what are the consequences of a franchisor's failure to disclose a material fact to a prospective franchisee?

The Québec law does not include an equivalent of the right to rescind by simple written notice found in most franchise laws.

The franchisee's recourse against its franchisor for failure to disclose material information is therefore a legal recourse for the annulment of the franchise agreement and for damages. Generally speaking, this recourse may be instituted within three years from the time the franchisee becomes aware of the franchisor's omission. It should, however, be noted that if the franchisee waits too long before instituting its recourse or in reproaching the franchisor for having failed in its duty to inform, a court may consider that there has been ratification on the part of the franchisee and dismiss its recourse.

In closing, it should also be noted that the Civil Code of Québec imposes a general obligation of good faith on both the franchisor and the franchisee, both before the signing of the franchise agreement and throughout its term and even after its termination.

Fasken has all the expertise and resources necessary to help you comply with the law and protect and enforce your rights while avoiding potential pitfalls.

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