After a legal proceeding that lasted nine years, the Superior Court of Québec's Justice Daniel H. Tingley ordered Dunkin' Brands Canada Ltd. to pay plaintiffs $16.4 million in damages, plus legal interest and expert witness costs.
In his ruling, Justice Tingley found in favour of Dunkin' Donuts' former franchisees, which were suing the franchisor for incompetence, negligence, lack of support and assistance, as well as breach of the contract entered into between the franchisor and its franchisees, notably to protect and enhance the brand between 1995 and 2005.
Justice Tingley stressed that:
"(40) It is a sad saga as well of how a once successful franchise operation, a leader in its field — the donut/coffee fast food market in Quebec — fell precipitously from grace in less than a decade; literally, a case study of how industry leaders can become followers in free market economies"
"(57) But the greatest failing of all was ADRIC's failure to protect its brand in the Quebec market. No doubt the host of failings chronicled by the Franchisees contributed to the collapse of the Dunkin' Donuts' brand in Quebec. A successful brand is crucial to the maintenance of healthy franchises. However, when the brand falls out of bed, collapses, so too do those who rely upon it. And this is precisely what has happened in this case."
"(58) ADRIC has assigned to itself the principal obligation of protecting and enhancing its brand. It failed to do so, thereby breaching the most important obligation it had assumed in its contracts. It must accept the consequences of such a failure. As noted above, Franchisees cannot succeed where the system has failed. After sustaining several years of stagnant sales, narrowing profit margins and then losses, the Franchisees have all had to close their stores. Their losses follow hard upon the heels of ADRIC's failures as night follows day."
"(61) Were the Franchisees poor operators? Not by a long shot. They were amongst the best and most successful in the Quebec "réseau". Their owners were amongst the most active committee members. Several of them chaired these committees at one time or another. Many of the owners operated several stores. They were for the most part the leaders amongst the Quebec Franchisees. ADRIC failed miserably during the first sixty-six days of trial to paint the Franchisees as poor operators. This was a defence utterly devoid of substance."
The Tingley judgment will have major repercussions on how franchisees are protected and how franchisors' responsibilities are defined. However, franchisors who fulfill their contractual obligations have nothing to fear from this "Dunkin' Donuts" ruling. Indeed, the judgment does not create new obligations for the franchisor nor does it impose a duty on the franchisor to defeat the competition. The Tingley decision indicates that franchisors must take appropriate and reasonable measures to support their brand, therefore, its franchisees, when the banner is under attack from competition. This is not new law in the province of Québec. It follows the previous 1998 Court of Appeal ruling in the Provigo case, which dealt with, inter alia, the existence of implicit contractual obligations. In the Dunkin' Donuts matter, Justice Tingley enforced explicit provisions of the franchise Agreement, which contained explicit language requiring a franchisor to protect the brand.
Justice Tingley has issued a rigorous judgment that has all the makings of a leading case on franchising in Canada. This decision will become a reference tool for setting the basic guidelines governing contractual relations between parties.