Canada: Dunkin' Donuts: Quebec's Court Of Appeal Considers A Franchisor's Duty To Protect The Brand

On April 15, 2015,  the Court of Appeal of Quebec partially upheld a 2012 Superior Court judgment in favour of franchisees of Dunkin' Donuts. The franchisees have been embroiled in a legal battle with the franchisor for more than a decade. The Court of Appeal panel in the case, (Dunkin' Brands Canada Ltd. v. Bertico Inc.1) unequivocally affirmed the finding of fault as well as the finding of causation between the franchisor's failure to enhance and protect the brand from competition and the losses suffered by the franchisees. However, for reasons discussed below, it did reduce the damages award significantly, from $16,407,143 to $10,908,513.

Facts

Fearing "a gradual crumbling" of Dunkin' Donuts due to the "Tim Hortons phenomenon", the franchisees alerted the franchisor and asked for a rescue plan. The franchisor responded with a costly remodeling program, which came too late and failed to attract the minimum number of participants as it required the execution of a general release in favour of the franchisor. While the number of Dunkin' Donuts stores dropped from over 200 to 13 from mid-1990s to 2012, the number of Tim Hortons stores increased fivefold, going from 60 to more than 300 from 1995 to 2005. In May 2003, a group of franchisees sued the franchisor, claiming millions of dollars in lost profits for the previous three years, as well as the loss of investment value that resulted from the closure of their restaurants.

Overview of the Court of Appeal's findings

Applying the express terms of the franchise agreements in dispute, the Court of Appeal upheld the trial judge's determination that the franchisor undertook to "protect and enhance the value of the brand, beyond the time of the franchise start-up, through the assistance it provided to individuals and by ensuring that franchisees across the network maintain and improve standards of cleanliness and quality." The Court of Appeal made it clear, however, that such an obligation is one of "means" only, requiring the franchisor to undertake reasonable efforts.

General duty to protect and enhance the value of the brand

Applying  Article 1434 of the Civil Code of Quebec (CCQ) in the context of franchising, the Court reiterated that the obligations owed by the franchisor are not only those explicitly stated in the agreements, but also "implicit obligations that flow from the nature of the franchise agreement", which obligations took on a contractual status in the circumstances of this case (i.e. a relationship of long-term collaboration between independent businesses).

Noting the role that the franchisor had contractually assigned to itself in overseeing the ongoing operation of the network and the uniform system of standards, the Court concluded that the franchisor's obligation to undertake reasonable efforts to protect and enhance the brand also stems, implicitly, from the franchise agreements, which encompassed a duty to assist the franchisees, individually and as a group, in remaining competitive in the market. In the Court's view, "not only would each franchisee receive assistance and benefit from the collaboration of the franchisor, but the franchisees were entitled to count on the franchisor to see that the system would be supervised and that the weaker links in the chain of franchisees be corrected or excised." Hence, for the benefit of its network, the franchisor has an implied obligation to deal with the "delinquent franchisees" and, if necessary, take appropriate steps to ensure compliance. A failure to do so could result in an actionable breach of an obligation, as in the case at bar.

The franchisor's good faith obligation

Referring extensively to its well-known  Provigo2 ruling (1997), the Court of Appeal reiterated that the franchisor is also bound by an implied obligation of good faith, the applicability of which is not limited to cases where franchisors compete unfairly with their franchisees. In the Court's view, this implied obligation requires the franchisor, in virtue of superior know-how and expertise on which the franchisees rely, to support them individually and collectively as a network through ongoing assistance and cooperation. Applied to the case at bar, this meant that the franchisees were entitled to rely on the franchisor to take reasonable measures to protect them from competition. The Court recognized, however, that this implied obligation of good faith does not prohibit certain competition or divergent interests between the franchisor and its franchisees, nor does it require from the franchisor a degree of collaboration with its franchisees that "mandates altruistic business practices or self-sacrifice."

Business judgment rule does not apply

In affirming the finding of liability against the franchisor, the Court of Appeal rejected the argument that the business judgment rule should prevent it from second-guessing business decisions made in good faith by the franchisor. In the Court's view, it would be inappropriate in the present circumstances to extend the protection afforded to corporate directors to shield the franchisor from contractual liability to its franchisees.

Calculating damages

As a small but significant "moral victory" for the franchisor, the damages awarded to the franchisees were reduced by about $5.5 million.

Loss of profits

Although the Court of Appeal considered the "comparable" method used by the trial judge to be a reasonable approach to the calculation of loss of profits (with Tim Hortons as the comparable business), it nevertheless reduced the franchisees' claim for lost profits by 10% to allow for imponderables or external factors, as was also done in the Provigo decision. The Court further reduced the lost profits by 15% given the trial judge's failure to take into account the competition that Dunkin' Donuts would have faced from Tim Hortons even if the franchisor had not committed a civil fault. The royalties and other fees the franchisees would have paid to the franchisor had the latter performed its obligations were also deducted from the damages awarded by the trial judge. Finally, the Court limited the franchisees' claim to the limitation period of three years.

Loss of investments

Unlike the claim for loss of profits, no expert evidence was adduced in support of the franchisees' claim for lost investments. Even though this created a quantification challenge for the Court, where the evidence shows that some damages flow from a civil fault, it is the duty of the presiding judge to evaluate - or estimate - the damages as best as he can, based on admissible evidence. Applying the same principles as for the claim for lost profits, the Court of Appeal reduced the franchisees' compensation for lost investments by 25%.

Conclusion

Most of the principles applied in the Dunkin' Brands decision are derived from the Court of Appeal decision in Provigo, which remains a key judgment in Quebec franchise law. While it is expected that this recent Court of Appeal decision will be cited by unhappy franchisees in support of future claims against franchisors, the latter might use it as well in support of their ongoing efforts to seek compliance in their network given the Court's comments about the importance for the franchisors to deal with delinquent franchisees or "bad apples".

Footnotes

1. Dunkin' Brands Canada Ltd. v. Bertico Inc., 2015 QCCA 624 (CanLII).

2.Provigo Distribution Inc. v. Supermarché A.R.G. Inc. (1997), [1998] R.J.Q. 47 (C.A.).

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.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions