Franchise Agreements: Beware of Misrepresentations
On January 18, 2016, the Quebec Court of Appeal rendered an interesting judgment as to the consequences of a contract which precluded future claims, by a franchisee against its franchisor on the basis of false representations.
In Presse Café Franchise Restaurants inc. c. 9192-6287 Québec Inc. et Pierre Demarais, Presse Café Franchise Restaurants Inc. ("Presse Café"), appealed the judgment requiring it to indemnify Mr. Pierre Desmarais and 9192-6287 Québec Inc. (together the “Franchisee”), a corporation formed by Mr. Desmarais for purposes of operating a Presse Café premium franchise.
Presse Café operates a network of franchises well known in Québec for its bistros and cafes. In March 2008, Mr. Desmarais made an offer on a business operated under the trade name Presse Café, located at 1801 Maisonneuve Street, Montréal (the "1801"), that was subject to: a) Presse Café approving Mr. Desmarais’ franchise application; and b) Mr. Desmarais’ review and approval of 1801’s financial records.
While Presse Café approved Mr. Desmarais’ franchise application, Mr. Desmarais did not waive the condition approving the financial records of the 1801 franchisee, and thus withdrew his offer. Presse Café then presented to Mr. Desmarais another business opportunity; a business previously operated as Café Vienne, located at 1408 Drummond Street, Montréal ("1408"). Despite requests from Mr. Desmarais, Presse Café did not disclose the 1408 franchisee’s income for the previous years, on the basis that the data was unreliable, but Presse Café' represented to Mr. Desmarais that he could expect sales of approximately $800 per day. While there was no back-up documentation offered to support this forecast, Mr. Desmarais believed this to be the case. The parties subsequently entered into a franchise agreement (the “Franchise Agreement”) on July 16, 2008. Shortly after opening of the café, Mr. Desmarais realized that the expected sales would not materialize.
The trial judge held Presse Café liable for the franchisee’s loss – even though the court acknowledged that the franchisee should have pressed for 1408’s financial information to confirm the projected sales figures. The reasons for the judgment were clear: the franchisor failed to disclose 1408’s financial records and instead Presse Café made representations that were faulty and fraudulent and which ultimately misled Mr. Desmarais as to the profitability of 1408.
Presse Café appealed on the basis that on January 7, 2009, in the context of Presse Café suing Franchisee for unpaid royalties and seeking termination of the franchise agreement, the parties entered into an agreement (the "Agreement") pursuant to which the Franchisee agreed to waive any claim for misrepresentations. The issue therefore turned on the proper interpretation of the Agreement and whether it barred the Franchisee from its claims for misrepresentations.
The Court of Appeal, analyzed the Agreement and reviewed extensively the applicable law, and noted that the Agreement had the authority of a final judgement between them, pursuant to sections 2631 and following of the Civil Code of Québec. Taking into account the terms and conditions of the Agreement, in particular the fact that it contained provisions pursuant to which the parties should seek to find a buyer for the franchise to which the Franchise Agreement would be transferred and the Franchisee’s offer to assign 1408 assets to Presse Café, the Court of Appeal found that the Agreement expressed the Franchisee’s implied intent to confirm the validity of the Franchise Agreement so that they could not claim the nullity thereof.
The Quebec Court of Appeal allowed the appeal in part and subtracted $56,000 to the amount due at first trial. Presse Café was ordered to pay an amount of $6,772.50 to Mr. Desmarais, representing franchise assignment fees claimed by the Franchisee which were not settled pursuant to the terms of the Transaction.
This judgment is a reminder of the precluding impact on future claims of an agreement putting an end to a lawsuit. Before entering into such an agreement, one should carefully analyze the scope of the contemplated agreement taking into account potential additional grounds for claims. This judgment also highlights the risk of entering into a material agreement such as a franchise agreement without first conducting a complete financial due diligence of the business.
claim franchise agreement misrepresentation