Canada: Fairview Donut Inc. v. The TDL Group Corp., 2012 ONSC 1252

Last Updated: April 3 2012
Article by Blair A. Rebane

Most Read Contributor in Canada, November 2017

This was an attempted class action brought by Tim Hortons franchisees against the franchisor claiming eroding profits from changes made to the franchisor's system.

The franchisees had two main complaints:

(1) that the shift from in-store baking to the "Always Fresh" model, where donuts, cookies and muffins were half baked then flash frozen, or "par baked", for later baking at retail outlets, resulted in franchisees paying unreasonably high prices for those products; and

(2) that the requirement to sell "Lunch Menu" items for extended hours was wrongful given that franchisees had to sell those items at break even prices, or even at a loss.

The franchisees made claims in breach of contract, breach of the common law obligation

of good faith, breach of the statutory obligation of good faith and fair dealing under franchise legislation, breach of Competition Act obligations and unjust enrichment.

The plaintiffs' breach of contract and breach of the duty of good faith claims centred around the allegation that Tim Hortons had misrepresented the cost of par baked goods to the franchisees as well as other benefits that would accrue to the franchisees under the "Always Fresh" system. They also claimed that Tim Hortons required them to buy Lunch Menu ingredients at higher-than-market prices, saying this was another form of breach.

Tim Hortons responded by denying that the change to the "Always Fresh" system resulted in an erosion of franchisees' profits and furthermore that it had the contractual right to determine the price at which to sell franchisees' ingredients. Since it had exercised those contractual rights reasonably and in good faith there could be no claim. It noted that the Lunch Menu had been part of the Tim Hortons system since the mid-1980s, thus the requirement to offer those items could not have come as a surprise to any franchisee. It further pointed to the fact that par baked goods, introduced widely in 2001, removed much of the difficulties, and consequent expense, of from-scratch baking that had formerly been done at Tim Hortonsretail outlets, thus improving franchisees' overall return.

The franchisees brought a motion to certify the class action and Tim Hortons countered with a motion to dismiss the plaintiffs' claims in their entirety. The motion was hard fought, with many individual affiants and several expert witnesses. However, in the end the Ontario Superior Court agreed with Tim Hortons and ordered all claims be dismissed.

On the certification of the class action, the franchisees had to show that:

(a) the pleadings disclosed a cause of action;

(b) there was an identifiable representative class;

(c) the claims or defences of the class members raised common issues;

(d) a class action was the preferable way of proceeding; and

(e) there was one or more suitable and organized representative plaintiffs.

The court skimmed over the class certification criteria because it had determined that the claims should be dismissed, making the certification point moot. However, it did express some concerns about the class definition, given that it had shifted over time and was divided into a complicated set of classes and sub-classes. Many of the common issues were overly complicated and framed in an adversarial way, contrary to the requirement that the issues to be addressed be presented in a neutral manner. It did find that a class action would have been the preferable way to proceed, should that have been necessary. The issue of whether appropriate representative plaintiffs had been presented was adjourned.

The summary judgment part of the application was unusual, since summary judgment motions are not normally heard at the same time as certification motions. The court found that this was an exceptional case where that was appropriate.

The test on the appropriateness of deciding a matter on summary judgment requires the court to have a "full appreciation" of the facts in issue and requires attention to both procedural and substantive fairness. This case had been ongoing for some time, and the evidence and written argument available was voluminous, making it possible for the court to make a summary decision on the merits.

The breach of contract claim involved allegations that Tim Hortons had breached express and implied terms of the franchise agreement by requiring the adoption of the "Always Fresh" model, and by requiring franchisees to purchase Lunch Menu ingredients at unreasonably high prices, along with other general allegations on failure to properly support franchisees in their merchandising and marketing efforts. In finding no breach of any term, express or implied, the court held that there was no requirement that a new Tim Hortons product or model had to be profitable in its own right. Rather, Tim Hortons was permitted to consider the profitability of the system as a whole. In any event, there was no dispute on the evidence that the "Always Fresh" system was beneficial to franchisees overall, and the Lunch Menu offering requirements had not changed since the mid-1980s (before most franchisee had obtained their franchises), leaving no change for the franchisees to complain about. The court also dismissed the claim that there was an implied term in the franchise agreements to the effect that Tim Hortons had to offer its franchisees products or ingredients at lower-than-market prices.

On the good faith and fair dealing point, the franchisees argued that even if Tim Hortons was strictly able to require compliance with the "Always Fresh" and Lunch Menu obligations, to do so was a breach of the obligation of good faith and fair dealing intrinsic to the franchisor-franchisee relationship. The court went through the history of the common law and statutory obligation and, while acknowledging it is undoubtedly alive and well, noted that the duty does not require the franchisor to consider the franchisees' interests at the expense of its own, and creates no obligation to ensure that a franchisee makes a profit on every item it sells. The franchisor's concern is for the system as a whole, and it is entitled to insist on uniformity across that system. Since the system remained beneficial to the franchisees overall, there was no breach of the duty of good faith and fair dealing, as alleged by the franchisees.

The court also held that the unjust enrichment claim must fail because even if there was a benefit from the "Always Fresh" or Lunch Menu operations that accrued to Tim Hortons at the franchisees' expense, there was a juristic, or legal, reason for Tim Hortons to retain that benefit, namely the existence of a valid contract (the franchise agreement) that allows Tim Hortons to make a profit on sale of products and ingredients to its franchisees.

Finally, the Competition Act issues related to a joint venture involving Tim Hortons to establish the Maidstone Bakeries, which supplied the par baked items to franchisees. The plaintiffs alleged that the establishment of Maidstone Bakeries was an attempt by Tim Hortons to divert profits from franchisees and that Tim Hortons was also engaged in price fixing. The court refused to accept these arguments, repeating the point that there is nothing legally wrong with selling items to a franchisee at a profit to the franchisor. Rather, "the balance between the franchisor's share of the profits and the franchisee's share is a matter to be determined in the market place". In any event, the court held that the Competition Act related claims had been brought too late and were, thus, statute-barred.

In summary, the court found that the action could not possibly succeed because the franchisees were essentially asking the court to rewrite their franchise agreements to make them more advantageous, which the court would not and could not do. While Tim Hortons had to abide by the terms of these contracts, and fairly deal with its franchisees in good faith and in accordance with reasonable commercial standards, it was entitled to make a profit and make rational business decisions applicable to the system as a whole. It had nothing but that in this case, and the plaintiffs claims were wholly rejected.

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