Canada: Québec Court Of Appeal Decision Results In Significant Victory For Franchisors

In a victory for franchisors, the Québec Court of Appeal confirmed the application of the doctrine of the indivisibility of contracts in a franchise context, supporting significant retroactive royalty awards for breaches of franchise agreements.

Background

On April 25, 2014, the Québec Court of Appeal rendered its decision in Les billards Dooly's inc. c. Les entreprises Prébour ltée, 2014 QCCA 842. The franchisor, Les billards Dooly's inc. (Dooly's) brought the underlying action on the basis that the franchisee, Les entreprises Prébour ltée (Prébour), was in breach of a series of agreements relating to the establishment of two Dooly's franchises. The agreements included two offers to purchase franchises, two franchise agreements and a partnership agreement (the Initial Agreements). Pursuant to the Initial Agreements, Prébour undertook to convert an establishment in Hull to a Dooly's franchise location for a trial period of one year, and to open a new Dooly's franchise location in the Gatineau area for a period of ten years (together the Dooly's Franchises). Due to external circumstances, Prébour was unable to establish the Dooly's Franchises by the stipulated time and the parties entered into a new agreement on November 23, 2004 (the Protocol) to reaffirm the parties' intention to continue with the planned Dooly's Franchises. Progress was subsequently made on the establishment of the Dooly's Franchises, but in April 2005, Prébour purported to terminate its relationship with Dooly's. On July 26, 2005, Dooly's brought a claim for damages pursuant to the Initial Agreements and the Protocol, including a claim for the full amount of unpaid royalties.

Decision

The Superior Court held that the franchise agreements entered into as part of the Initial Agreements had terminated on April 30, 2004 and on October 1, 2004, for the Gatineau and Hull locations respectively, in light of clauses prescribing a missed deadline for final implementation. However, it did award damages to Dooly's for unpaid franchise fees and an amount for the value of property Dooly's would have co-owned pursuant to the Initial Agreements. Dooly's appealed, in part on the basis that the Initial Agreements as a whole, together with the Protocol, governed the relationship between the parties and that Dooly's was entitled to lost profits arising from Prébour's failure to establish the Dooly's Franchises. Prébour cross-appealed, challenging the damages awarded in respect of the value of the lost co-ownership of the property.

The Court of Appeal granted Dooly's appeal in part. Overturning the Superior Court on its finding with regard to the automatic termination of the Initial Agreements, the Court of Appeal held that the Initial Agreements remained enforceable and that pursuant to the Protocol, Prébour therefore owed Dooly's one year's worth of royalties for one of the Dooly's franchises and ten years' worth of royalties for the second, in addition to a portion of the franchise fees awarded by the Superior Court. Interestingly, while the Court of Appeal was prepared to award a higher amount, it capped its award at $250,000 because Dooly's had limited its claim to that amount in its Appeal Factum. Prébour's cross-appeal was rendered moot as the Court of Appeal calculated the damages award based solely on the Protocol.

Key Points and Implications

In reaching its conclusion that royalties were owed to Dooly's, the Court of Appeal applied the doctrine of the indivisibility of contracts - a doctrine rarely applied in Québec. This doctrine holds that where a contract is entered into as part of a series of related contracts, in making a determination with regard to the parties' common intent, the Court cannot consider the contract in question in isolation but must rather consider it within the whole context of all of its related contracts. In applying this doctrine, the Court of Appeal held that the Initial Agreements and the Protocol were clearly related and interdependent, having been entered into with the overarching goal of establishing the Dooly's Franchises, and that they must therefore be considered together. The Court of Appeal then reviewed the parties' conduct after entering into the Initial Agreements and concluded that their willingness to extend deadlines far past those initially agreed to for the establishment of the Dooly's Franchises was consistent with an intention to continue to work together in a flexible way and not to rely on formal deadlines. The franchise agreements in the Initial Agreements were therefore found to be ongoing despite the parties having missed the deadlines for implementation, and it was held that royalties were therefore owing for the time periods agreed upon in the Protocol, being ten years for one of the Dooly's Franchises and one for the other. This is a significant victory for franchisors in Québec, where franchisor victories of this magnitude are rare.

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