The Québec Court of Appeal has issued its
reasons in the appeal of a trial decision awarding $16M in damages
to former Dunkin' Donuts franchisees. In a 63-page ruling, the
Court upheld the 2012 trial court decision which held Dunkin'
Donuts liable for failing to protect its brand in
Québec, but reduced the damages awarded to
franchisees from $16.4M to $10.9M.
The claim, brought by several franchisees following an
aggressive incursion by Tim Hortons into the
Québec market, alleged that the franchisor had
failed to take reasonable steps to protect and promote the
Dunkin' Donuts brand in the face of increasing competition. The
trial court awarded the franchisees 100% of the damages sought for
lost profit and for lost investment.
The Appeal Court rejected the franchisor's argument that the
trial judge had imposed a "new unintended obligation to
protect and enhance the brand, outperform the competition and
maintain indefinitely market share." The Court concluded that
the trial decision applied, rather than extended, the
franchisor's duty of good faith described in the Court of
Appeal's earlier decision in Provigo Distribution Inc. v.
Supermarché A.R.G. Inc.
Highlights of the Appeal Court's decision include:
A clause in the franchise agreements
obliging the franchisor "to protect and enhance its
brand" was not merely a "hoped-for result" but a
binding contractual obligation.
The franchisor's obligations were
based not just in the text of the franchise agreements but
"also on duties that it had implicitly assumed in respect of
the whole network of franchisees."
A franchisor's obligation of good
faith is not limited to refraining from competing unfairly
with its franchisees.
The franchisor's obligations in
respect of protecting the brand were "ongoing" and
"successive," and included an obligation to
"undertake reasonable measures to help the franchisees, over
the life of the arrangement, to support the brand," including
"a duty to assist them in staving off competition in order to
promote the ongoing prosperity of the network," which the
Court found to be "an inherent feature of the relational
The franchisor also had a duty to
assist and co-operate that included an obligation "to take
reasonable measures to protect them from the new market challenges
presented" by the entry of an aggressive competitor (Tim
Hortons) into the market.
Continuing to adopt a "business
as usual approach" in the face of a competitive threat is
not sufficient to satisfy the franchisor's contractual
Releases obtained from franchisees in
exchange for help from the franchisor at a time when the
franchisees were "struggling just to survive" were null
and void because obtaining them under such circumstances was
abusive, and because franchisees were induced to sign based on
factual misrepresentations from the franchisor.
While the decision was rendered under
Québec's civil law, franchisors across
Canada should take note. The Appeal Court's pronouncements
could be attractive to franchisees throughout Canada, given the
duty of fair dealing under provincial franchise legislation and the
Supreme Court of Canada's recognition of a common law duty of
good faith performance in contractual relations in Bhasinv.Hrynew.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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