Canada: Québec Court Of Appeal Upholds Finding Of Franchisor’s Obligation To Maintain Brand Strength

Bertico Inc. et al v. Dunkin' Brands Canada Ltd. (Allied Domecq Retailing International (Canada) Ltd.)

In a highly anticipated decision released on April 15, 2015, the Québec Court of Appeal upheld the findings of Justice Tingley of the Québec Superior Court that the Dunkin' Donuts franchisor in Québec breached its franchise agreements with its Québec franchisees by failing to adequately support them in the face of the "Tim Hortons phenomenon" in that province. With the exception of certain aspects of Justice Tingley's assessment of damages, the Court of Appeal upheld his decision in full. Read more about the Québec Superior Court decision in our June 28, 2012 Osler Update.

This decision has been long awaited by the franchise bars in both Canada and the United States because of the potential impact on franchisors of Justice Tingley's reasoning regarding "implicit obligations" flowing "from the general nature of franchise agreements," including an implied obligation incumbent on all franchisors "to protect, improve and enhance the brand," and an "underlying assumption of all franchise agreements [to the effect] that the brand will support a viable commerce." As we reviewed in our May 23, 2013 Osler Update, given the perceived importance of the matters at issue in the case to North American franchisors, the Canadian Franchise Association had in fact moved for leave to intervene as a third party on the appeal, but was denied by the Court of Appeal.

While the breadth of the precedential effect of the decision remains to be seen – the decision is made pursuant to the Civil Code of Québec and based on extensive trial evidence and unusual specific contractual terms – it affirms a franchisor's obligation to take reasonable measures to maintain brand strength generally and especially in the face of market changes.


This case was a group action brought against Allied Domecq Retailing International (Canada) Ltd. (Dunkin' Donuts) by 21 plaintiff Dunkin' Donuts franchisees that collectively operated 32 Dunkin' Donuts franchises in Québec. Dunkin' Donuts was historically a strong brand in Québec with 210 stores in its heyday in 1998. However, its market share had been slipping in Québec, with a wave of Tim Hortons franchises flooding the province through the late 1990s and early 2000s. Under what Justice Tingley named the "Tim Hortons phenomenon," Tim Hortons stores had multiplied five times from 60 stores in 1995 to 308 by 2005, and in turn Dunkin' Donuts' market share plummeted from 12.5% in 1995 to 4.6% in 2003. The plaintiffs claimed that while they had voiced concerns to Dunkin' Donuts about rejuvenating the Dunkin' Donuts brand and business strategy in Québec as early as 1996, they found Dunkin' Donuts to be unsupportive and unresponsive to their concerns.

The plaintiffs brought an action against Dunkin' Donuts for the formal termination of their leases and franchise agreements together with damages totalling $16.4 million. The claim alleged a repeated and continuous failure by Dunkin' Donuts between 1995 and 2005 to fulfill its explicit contractual obligations to "protect and enhance" the Dunkin' Donuts brand in Québec. The plaintiffs' action was based on breach of contract, namely the franchise agreements between each plaintiff and Dunkin' Donuts.

The plaintiffs' claim succeeded in full and the franchisor appealed Justice Tingley's decision on several grounds. With the exception of the quantification of damages awarded to the plaintiff franchisees, the Court of Appeal upheld Justice Tingley's decision and reasoning, finding that counsel to the franchisor had failed to show an error of law in Justice Tingley's analysis of the obligational content of the franchise agreement, or any palpable and overriding error of fact regarding the franchisor's breach of this obligational content and the causality between this breach and losses sustained by the franchisees.

The Decision of the Québec Court of Appeal

As noted by the Court of Appeal, Dunkin' Donuts "radically" abandoned on appeal its wholly unsuccessful trial strategy of attempting to attribute blame to the failure of the brand in Québec to the performance and behaviour of its franchisees. Instead, Dunkin' Donuts chose to base its argument on Justice Tingley's alleged misapprehension of the evidence surrounding Dunkin' Donuts' efforts in favour of the brand, and his allegedly incorrect interpretation of both the explicit and implicit terms of the franchise agreements between the franchisor and the plaintiff franchisees.

In its decision, the Court of Appeal rejected the franchisor's arguments, finding, among other things, that Justice Tingley had

  • properly interpreted the obligational content of the franchise agreements, both in his analysis of, and reliance on, their explicit and implicit terms including the implied obligation of good faith [49-96]
  • acted appropriately by not applying the business judgment rule, as this rule is not to be used as a shield against civil liability of corporations arising from the breach of their contractual obligations [97-102]
  • properly considered the evidence of Dunkin' Donuts' efforts and initiatives to address franchisee concerns, support the brand and avoid franchisee losses, and had a basis for finding that in the circumstances these efforts nonetheless fell short of the "reasonable efforts to protect the brand" required by the franchise agreements and the duties inherent in the relationship [103-122]
  • properly adduced that there was a causal link between Dunkin' Donuts' conduct with respect to the network of franchisees as a whole, and the individual losses suffered by each individual plaintiff franchisee

The one instance in which the Court of Appeal respectfully disagreed with Justice Tingley was on his assessment of damages finding that he had erred in his failure to

  • apply the right limitation period to the calculation of damages (and was therefore over-inclusive by a period of three months) [172-174]
  • set-off against the damages award unpaid royalties owed by the plaintiff franchisees to the franchisor [175-178]
  • take into greater account competition that the plaintiff franchisees would have experienced from Tim Hortons in any event had the brand survived in the Québec market (which was the most significant error from a quantum perspective) [180-192]

The Court of Appeal therefore reduced the damages awarded at trial by approximately $5.5 million.

Key Points of Interest

Implied Contractual Obligations

A number of the Court of Appeal's findings relate to the provisions of the Civil Code of Québec (article 1434) providing for implied terms in agreements, including franchise agreements. Franchisees may take a broader interpretation of certain points made by the Court as grounds for expanding the scope of a franchisor's implicit obligations to a franchisee. It is important to keep in mind, however, that the implied obligations found by the Court of Appeal that are central to its decision and summarized below, arise out of the express language of the franchise agreements and the intent of the parties.

The Court of Appeal's main findings on implicit obligations in the franchise agreements and implied obligations of good faith included:

  • "Implicit obligations formed a part of a long-term collaborative relationship between the franchisor and each individual franchisee, within an established network in which service and quality of experience were imagined as nearly identical from restaurant to restaurant." [63]
  • "Given the role the franchisor assigned to itself in overseeing the on-going operation of the network and the uniform system of standards, it is fair to characterize the obligation of means to protect and enhance the brand as a "complement necessaire" of the contracts due to their nature. It was thus appropriate in my view, for the judge to infer that the Franchisor had implicitly agreed to undertake reasonable measures to help the franchisees, over the life of the arrangement, to support the brand. This included a duty to assist them in staving off competition in order to promote the on-going prosperity of the network as an inherent feature of the relational franchise contract." [64]
  • "In characterizing the essential obligation of the Franchisor as a duty to protect and enhance the brand, the judge did not assign a new and unintended obligation on the Franchisor, but he drew on the explicit terms, supplemented by implicit obligations flowing from the nature of the agreement that in both cases, reflected the intention of the parties." [65]
  • "This implied obligation of good faith requires a franchisor, by reason of superior know-how and expertise upon which the franchisees rely, to support individual franchisees and the whole of the network through its on-going assistance and cooperation." [70]
  • "[T]he franchisees were entitled to rely on the franchisor, as a matter of contractual fairness and as a reflection of their own presumed intentions, to take reasonable measures to protect them from the market challenge presented by Tim Hortons." [72]
  • "[I]t was in the franchisor's interest, broadly speaking, to assist its franchisees, to supervise the network, and to collaborate with them by proposing reasonable measures to combat a competitor, who in the longer term, threatens the value of the brand for both parties." [75]
  • There was a "duty to respond with reasonable measures to help the franchisees as a group to meet the market challenges of the moment and to assist the network of franchisees by enforcing the uniform standards of quality and cleanliness it holds out as critical to the success of the franchise." [77]
  • "It is up to the Franchisor to police the network by taking reasonable measures to root out the free-riders. It is up to the Franchisor to enforce the authority it has given itself under the franchise agreement. The explicit contractual right it has to insist that the franchisee respect the uniform standards of the system brings with it a correlative obligation of means, owed collectively and individually to the complying franchisees, to see that the franchisees adhere to those standards. This is part of its obligation to protect the brand – an obligation "owed to the network" that, juridically, is a duty owed to each of the franchisees as part of the agreement, whether that duty is explicit or not." [85]

The Court of Appeal further implies that in marketing its particular system and brand for sale, a franchisor makes a form of "representation" of the strength of its brand to prospective franchisees and that when a prospective franchisee enters into a franchise agreement with that franchisor, it does so in reliance on that representation.

  • "The Franchisor held out to each franchisee, individually, that the brand is something of value as an inducement to join the network. . . .The franchisee naturally, relied on this in deciding to join the network. . . .By denying that it has a duty to protect and enhance the brand, the judge rightly saw the Franchisor as going back on its word in each individual contract by denying the existence of the very cause of the arrangement." [81]

Finally, this decision is significant because it puts to rest a largely held notion in Québec (argued by the franchisor before the Court of Appeal) that a prior decision of the Court of Appeal, Provigo Distribution Inc. v Supermarché A.R.G. Inc., limited the duty of good faith and the implied obligations in the context of a franchise agreement to a duty incumbent upon a franchisor to not compete unfairly with its franchisees or to wrongfully take actions that would harm them.

The Court of Appeal rightly points out that Provigo speaks of a wider duty incumbent upon a franchisor to provide its franchisees with technical support and cooperation in order to maintain the relevance of the franchise relationship, and that Provigo could be applied in the present context in a way that was "merely an application of established law to a new set of facts." [76]


The undeniable silver lining on this cloud of a decision for the franchisor was the Court of Appeal's significant reduction in the damages award against Dunkin' Donuts. While only about one sixth of that reduction was attributable to the setting-off of the plaintiffs' unpaid royalties against the damages award, the underlying reasoning for that set-off is an important legal point for both franchisees and franchisors. In a situation of an ongoing franchise agreement, obligations continue to flow both ways, and even in a situation of fundamental breach by the franchisor, the franchisees are not relieved of their obligations under the franchise agreement until the resiliation (termination) of that agreement.

Putting the Decision into Context

When considering the decision, franchisors should keep in mind that it is a Québec decision, applying civil law pursuant to the Québec Civil Code, and is not binding on any court outside of Québec. Under the Québec Civil Code, franchise agreements create implicit contractual obligations, which in this case, included the obligation to undertake reasonable measures to help the franchisees support the brand of the franchise. Although central to the decision, the implicit obligations found by the Court of Appeal arose out of the express language of the franchise agreements at issue and the intent of the parties.

Furthermore, the case is very fact specific. There was a very lengthy trial heard over 67 days with evidence of a "host of failings" of Dunkin' Donuts on various fronts for over a decade (1995 to 2005). These failings were established both by the plaintiffs and by acknowledgments and admissions from several of Dunkin' Donuts' witnesses and exhibits.

If nothing else, this case reinforces that franchisors, and those who act for them, should be diligent in enforcing the standards contained in their franchise agreements when faced with uncooperative, under-performing and/or potentially rogue franchisees, because the risk of not doing so on the overall franchise system could create a situation like the one in this case, and attract the franchisor's liability.

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

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
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).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.