Canada: Donut Wars Part II - Dunkin' Donuts

On June 21, 2012, the Honourable Daniel H. Tingley of the Quebec Superior Court issued a 43 page judgment which ordered Dunkin' Brands Canada Ltd. (the "Franchisor") to pay 21 of its franchisees in Quebec (the "Franchisees") an aggregate sum of almost $16.5 million, plus interest and costs, for having failed "to protect and enhance the Dunkin Donuts brand in Quebec." The decision in Bertico Inc. et al v. Dunkin' Brands Canada Ltd. [Dunkin' Donuts] was a resounding victory for the Franchisees. The outcome in Dunkin' Donuts contrasts sharply with the Fairview Donut Inc. and Brule Foods Ltd. v. The TDL Group Corp. and Tim Hortons Inc. [Tim Hortons] decision, recently examined by this author, where Tim Hortons Inc. obtained summary judgment in the Ontario Superior Court of Justice against efforts by franchisees to certify a class action.

Background

Despite its historical success, Dunkin' Donuts' market share in Quebec was all but wiped-out in a single decade. By the time Tingley, J.S.C. wrote his decision in 2012, less than 13 outlets remained. Foreshadowing this spectacular decline were repeated warnings by the Franchisees to the Franchisor of what would eventually be known as the "Tim Hortons' phenomenon." According to Tingley, J.S.C., "[l]ittle was done that was effective to combat this â€Üphenomenon'."

Quebec versus English-Canada

As Dunkin' Donuts was decided in Quebec, which follows the civil law tradition for private law matters, the case is not binding at common law on the rest of Canada; correspondingly, Tim Hortons is not binding in Quebec. In practice, however, each of these legal systems will treat similar cases with reverence.

Reasonable Profits

At issue in both cases was the extent to which franchisees are entitled to earn a reasonable profit. In Tim Hortons, the franchisees argued that they did not earn enough profit, whereas in Dunkin' Donuts, the Franchisees had lost their businesses and their livelihoods. The seriousness of the financial claims resulted in two very different results. However, in Dunkin' Donuts, Tingley, J.S.C. cautioned that the Franchisor was neither "the insurer of the Franchisees nor a guarantor of their success."

Franchise Agreement

At issue in both Tim Hortons and Dunkin' Donuts was the language of the respective franchise agreements. In Tim Hortons, it was the language of its franchise agreement which provided the franchisor with wide discretion. In the franchise agreement in Dunkin' Donuts, the Franchisor specifically "assigned to itself the principal obligation of protecting and enhancing its brand." The Franchisor failed to meet this contractual responsibility, "thereby breaching the most important obligation it had assumed in its contracts."

Good Faith

In Tim Hortons, the Court noted that there are limits to what a franchisor can do, in that "[i]t must deal fairly with its franchisees and act in good faith and in accordance with reasonable commercial standards in the performance of its contract." In Dunkin' Donuts, Tingley, J.S.C. observed that "[f]ranchisors are bound by an obligation of good faith and loyalty towards their franchisees." Although both legal systems emphasize the importance of good faith, it should be noted that the Quebec model appears to take the extra step of requiring a franchisor to actively attempt to shield its franchisees from hardship.

Franchisor Negligence

There is nothing in the judgment of Dunkin' Donuts that explicitly refers to the Franchisor having been negligent. However, it is noteworthy that the Franchisees characterized the Franchisor as having acted negligently and in bad faith, which was cited by Tingley, J.S.C. in awarding damages. At a minimum, the concept of franchisor negligence was implicitly lurking at the back of Tingley, J.S.C.'s mind. However, there was no official recognition of franchisor negligence in Dunkin' Donuts, and no tort exists at Canadian common law or in the Quebec civil code.

Conclusion

The decisions in Tim Hortons and Dunkin' Donuts provide an important lesson for franchisors and franchisees alike. Though these cases come close to establishing a set of principles that could one day be the foundation for "franchise law" as a discrete area in Canadian common law, they instead reinforce the notion that the franchisor-franchisee relationship is predicated primarily on the contractual terms of a franchise agreement.

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.

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