The Quebec Court of Appeal’s decision in Dunkin’ Brands Canada Ltd. v. Bertico et al.1 is of tremendous importance, as it undertakes an in-depth and thorough examination of the rights and obligations of the parties to a franchise agreement.
The judgment is the culmination of a decade-long court battle that Langlois Kronström Desjardins and Fasken Martineau waged on behalf of 32 Dunkin Donuts franchisees.
The franchisee plaintiffs suffered a steady and progressive deterioration of their operating results during the 1990s, to the point where, without vigorous intervention, their outlets seemed doomed to disappear altogether. They naturally turned to their franchisor for assistance and support. But despite numerous discussions, the franchisees did not receive the assistance and support to which they felt they were entitled from the franchisor. They concluded that Dunkin’ Donuts had effectively abandoned them by not performing its contractual obligations, and they therefore instituted legal proceedings against it in 2003.
After a 71-day trial, the Superior Court allowed their action and ordered Dunkin’ Donuts to pay the franchisees more than $16 million in damages.2
On appeal, the trial judgment was upheld with respect to the judge’s interpretation of the contract and his finding of liability on the part of Dunkin’ Donuts, but partially revised by reducing the damages award to slightly more than $10 million in order to correct certain calculation errors and reimburse the franchisor for unpaid royalties.
While the appeal judgment deals with several important issues, our analysis will be limited to the obligational content of the franchise agreement. In other words, what are the rights and obligations of the parties to such an agreement, namely the franchisor and the franchisees?
The franchisor argued on appeal that the trial judge had interpreted its obligation in the agreement “to protect and enhance the brand” as entailing the duty to “outperform the competition”, which in this case was essentially Tim Hortons. Ultimately, it argued that the obligation imposed on it by the Superior Court was one of result.
The Court of Appeal rejected that argument. It pointed out that the franchisor was impugning the trial judge’s interpretation of the agreement, which was a question of fact or of mixed fact and law, in respect of which the Court of Appeal can only intervene if a palpable and overriding error is shown to have been made.
Justice Kasirer, writing on behalf of the unanimous Court, found that such a showing had not been made and, moreover, that the appellant had incorrectly interpreted the decision of the Superior Court, rendered by Justice Tingley. He had expressed the view that in addition to the obligations expressly stipulated in the agreement, the franchisor had implied obligations, due to the nature of a franchise agreement, one of the characteristics of which is that it is performed over a long period of time. In such a context, the franchisor and its franchisees have a collaborative relationship involving rights and obligations spanning the entire term of their contractual relationship, despite the fact that their interests may occasionally diverge.
Justice Kasirer pointed out that protecting the Dunkin’ Donuts brand was too important for the franchisor not to take an active part in the operation of the business. The successful operation of this chain of fast-food outlets required an ongoing interaction between the franchisor and each of its franchisees, in which the franchisor played a role by:
- choosing each new franchisee, whether it was opening a new outlet or acquiring one that was already operating;
- providing new franchisees with assistance, support and adequate training;
- continuing to provide technical and commercial assistance throughout the contractual relationship and ensuring that the standards on which the group’s reputation was based were maintained on an ongoing basis, which in certain cases can require sanctioning underperforming franchisees.
Justice Kasirer concluded on this note by stating: “This would continue over the life of the agreement. In this sense, the agreement was a “relational” one which, as is often the case in such long-term arrangements, did not spell out all of its terms.”3
The Court went on to emphasize the obligation of good faith inherent in all contractual relationships including, as the Court of Appeal had previously pointed out in the Provigo4 case, franchise agreements.
Finally, the Court dealt with the franchisor’s implied obligation towards its entire network of franchisees. The Court acknowledged that this network is not, formally, a contracting party. But in its view the franchisor’s duty to maintain the health and prosperity of the network is relevant to every individual contract and constitutes an implicit duty in each contract upon which a franchisee can take action in the event of a breach. The prosperity and success of a chain of fast-food outlets through the enforcement of recognized and stringent standards benefits all of the parties, franchisor and franchisees alike.
This implies, according to the Court, the obligation to take reasonable measures to support the franchisees as a group and counter the competition.
In this case the Court found that reliance on the franchisor was a key element of all the franchise agreements. The franchisor represented to each franchisee that its network and brand were valuable assets for the franchisee. Moreover, the preamble to the franchise agreement emphasized the value of the reputation of the brand and of the public’s esteem for it, as well as the established renown of the network and the franchisor’s track record in the fast-food business. This express contractual representation constituted an inducement to join the Dunkin’ Donuts network.
The franchisees were thus naturally inclined to want to profit from these benefits as represented to them and had every reason to believe that Dunkin’ Donuts would respect and enforce the contractual obligations ensuring that quality standards would be maintained throughout the entire term of their agreements:
“The franchisee, naturally, relied on this in deciding to join the network. The franchisee signs the franchise agreement in order to profit from the established renown of the network, and he or she both understands and expects that this established track record will be maintained through a rigorous programme of imposed standards of quality and cleanliness, of training, of assistance and support. The opportunity to join the Dunkin’ Donuts network, with its promised reputation for quality and uniform experience and the sense that the Franchisor would be present over the life of the agreement to ensure that quality, induces them to invest in the franchise.”
The Court essentially recognized that the franchise agreement implied that there would be an ongoing active business relationship between the franchisor and the franchisees that, despite occasional divergences or even conflicts of interest, would require coordination and collaboration in the conduct of the business and the continuous and ongoing obligation on the part of the franchisor to sustain and improve its network and brand. This obligation of support and assistance even extends to requiring the franchisor to sanction underperforming franchisees, when required to uphold quality standards. By the same token, the franchisee is involved in an ongoing operating system and must accordingly respect its obligations, which are the inevitable quid pro quo of its rights vis-à-vis the franchisor. This specific legal relationship is nothing new, as the Court of Appeal reaffirms in this decision, but the Court sheds important new light on that relationship. The clarity and scope of the Dunkin’ Donuts judgment will no doubt make it a leading case in franchise law.
This litigation was exceptional in scope and gave rise to considerable difficulties. The Superior Court recognized this by awarding $240,000 in special costs to law firms Langlois Kronström Desjardins and Fasken Martineau. This award was contested, but was upheld by the Court of Appeal.