An expensive lesson for a large franchisor operating in Quebec
was learned earlier this year. In the decision Bertico Inc. et
al v. Dunkin' Brands Canada Ltd. (2012 QCCS 2809), the
Superior Court of Quebec emphasized some of the consequences that
might be faced by a franchisor which let its brand
"slide" or failed to protect and enhance it.
Twenty-one Quebec Dunkin Donuts franchisees (the
"Franchisees") sued Dunkin' Brands Canada Ltd.,
formerly Allied Domecq Retailing International (Canada) Ltd.
("ADRIC"), alleging the latter's breach of its
principal obligation to protect and enhance the Dunkin Donuts brand
in Quebec – an obligation which the Court found not only to
be grounded in the franchise agreements between the parties but
which, the Court also held, implicitly results from the nature of
Until the mid-90s, the Dunkin Donuts brand enjoyed a significant
presence and success in the Quebec market for coffee and donuts,
experiencing very little competition. Around 1995, Tim Hortons
began to aggressively increase its share of the market in a
structured and well-executed manner, which concerned the
Franchisees. The Franchisees also argued that during the following
years, they struggled with ADRIC's high level of management
turnover, a reduction of services offered, the franchisor's
failure to remove underperforming franchisees from the Dunkin'
Donuts network, the deterioration of the brand's image and a
general lack of technical and management support from the
After listening to the Franchisees' concerns in 2000, ADRIC
proposed a voluntary remodel incentive program to the Franchisees
which met certain prior conditions and were otherwise in
compliance. Under this program, ADRIC agreed to contribute
financially to the facilities of the Franchisees who participated
and to invest $40 million in the "brand" in Quebec
– $20 million of which would be the responsibility of the
participating Franchisees. While ADRIC said that it would implement
the program only if at least 75 stores in good standing
participated, many Franchisees rejected the program, acting on the
advice of their experts regarding its feasibility. Moreover, the
general release in ADRIC's favour for any "faults"
committed by it in the past, a pre-condition to the Franchisees
receiving ADRIC's contributions, was a tough pill for them to
The Court, siding with the evidence submitted by the
Franchisees' experts, criticized the program as economically
unfeasible, and to the extent that ADRIC imposed the general
release, it was illadvised and abusive towards the drowning
Franchisees. Those Franchisees that participated in the program
never saw the 15% increase in gross sales in the first year that
ADRIC suggested they would enjoy and the latter did not inject
anything close to $20 million of its funds to protect and enhance
the brand. This misguided and poorly executed strategy to slow down
store closures and improve the profits of existing stores was a
The fallout from ADRIC's failure to protect and enhance its
brand? Aside from terminating the leases and franchise agreements
to which the Franchisees were subject, the Court awarded damages of
$16.4 million to the Franchisees consisting of the profits lost by
the Franchisees due to ADRIC's neglect, as well as their lost
investments representing the difference in value had the
Franchisees been able to sell their facilities at their traditional
This case serves as a cautionary note to franchisors operating
in Quebec (and elsewhere). Franchise agreements are generally
considered to be "contracts of adhesion" under the Civil
Code of Quebec, that is, a contract whose essential stipulations
are imposed by one party (in this case the franchisor) and are
generally nonnegotiable. Clauses in such a contract that are deemed
to be "abusive", as the Franchisees successfully argued
was the case with ADRIC's general release, may be annulled or
the obligations reduced by the courts.
This case also demonstrates that while franchisors are neither
the "insurers" nor the "guarantors" of the
success of their franchisees, they do have an ongoing, continuing
and successive obligation to protect, support and enhance their
brand, and they may be held accountable for their failure to do so,
notwithstanding the very protective language generally inserted in
franchise agreements for the benefit of and to protect the
It is to be noted that an appeal of the decision has been filed
by ADRIC. This appeal is not likely to be heard for approximately
two years. Until then, the franchise community awaits with interest
further direction from the Quebec Court of Appeal.
With the assistance of Jordi Montblanch.
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).