Historically, franchising in Canada was often considered to be a “matter of contract.” Franchisors and franchisees were free to contract with each other as they saw fit, constrained only by the usual limitations contract law imposed on all contracting parties.
To address the recognized power and informational imbalance between the parties, various provinces saw it necessary to pass franchise legislation. Legislation was enacted in 5 Canadian provinces and a sixth (B.C.) is expected to join the ranks. Legislation introduced pre-contractual disclosure obligations and created a duty of fair dealing and rights of association.
Courts, however, have also weighed in to comment on the franchise relationship. These decisions have not just interpreted the legislation. They have provided important statements about franchising which potentially impact all franchise systems.
The latest pronouncements came from the Quebec Court of Appeal in what is known as the “Dunkin’ Donuts” case1, written by the well-respected former dean of McGill University’s Faculty of Law, its pronouncements are expected to have implications for franchising across Canada.
The case arose as a result of Dunkin’s decision to exit the Quebec market because of what it perceived to be its inability to compete against the Tim Horton’s brand in that province. It was the view of the affected franchisees that their franchisor had abandoned the brand.
The trial judge found Dunkin’ Donuts had breached its obligations to its franchisees and awarded over $16 million in damages to the franchisees. The Court of Appeal was asked to reconsider this decision on the strident urgings of Dunkin’s counsel who suggested that the judge had made the most egregious of errors. In equally strident terms, Justice Kasirer disagreed with Dunkin’. Although he reduced the damages to just less than $11 million, he made pronouncements which are expected to have long term implications for franchising in Canada.
In a four part series of blogs to follow this, we will be re-examining these important aspects of franchising addressed or affected by the Dunkin’ decision:
- Private equity investors are reminded to perform important due diligence on their potential franchisor acquisitions and re-assess their exit strategies;
- Franchisors need to understand what obligations the courts are prepared to imply against them;
- Franchisors must address the community of interest which they and each of their franchisees share in the franchise system as a whole and what that means for how they address underperforming franchisees;
- Releases sought and obtained in the course of a franchise relationship continue to have special considerations.
The Dunkin’ decision has been portrayed as a negative development for franchisors in Canada. The message of our blogs, though recognizing these concerns, will also comment on the positive and practical business effects of this decision.
Franchising represents an important part of the Canadian economy. Our legislatures and our courts are doing their part to support franchising practices which Canada’s best franchising companies engage in which will continue to promote successful franchise systems and encourage the growth of Canadian franchising.