The Québec Court of Appeal has issued its reasons in the appeal of a trial decision awarding $16M in damages to former Dunkin’ Donuts franchisees. In a 63-page ruling, the Court upheld the 2012 trial court decision which held Dunkin’ Donuts liable for failing to protect its brand in Québec, but reduced the damages awarded to franchisees from $16.4M to $10.9M.

The claim, brought by several franchisees following an aggressive incursion by Tim Hortons into the Québec market, alleged that the franchisor had failed to take reasonable steps to protect and promote the Dunkin’ Donuts brand in the face of increasing competition. The trial court awarded the franchisees 100% of the damages sought for lost profit and for lost investment.

The Appeal Court rejected the franchisor’s argument that the trial judge had imposed a “new unintended obligation to protect and enhance the brand, outperform the competition and maintain indefinitely market share.” The Court concluded that the trial decision applied, rather than extended, the franchisor’s duty of good faith described in the Court of Appeal’s earlier decision in Provigo Distribution Inc. v. Supermarché A.R.G. Inc.

Highlights of the Appeal Court’s decision include:

  • A clause in the franchise agreements obliging the franchisor “to protect and enhance its brand” was not merely a “hoped-for result” but a binding contractual obligation.
  • The franchisor’s obligations were based not just in the text of the franchise agreements but “also on duties that it had implicitly assumed in respect of the whole network of franchisees.”
  • A franchisor’s obligation of good faith is not limited to refraining from competing unfairly with its franchisees.
  • The franchisor’s obligations in respect of protecting the brand were “ongoing” and “successive,” and included an obligation to “undertake reasonable measures to help the franchisees, over the life of the arrangement, to support the brand,” including “a duty to assist them in staving off competition in order to promote the ongoing prosperity of the network,” which the Court found to be “an inherent feature of the relational franchise contract.”
  • The franchisor also had a duty to assist and co-operate that included an obligation “to take reasonable measures to protect them from the new market challenges presented” by the entry of an aggressive competitor (Tim Hortons) into the market.
  • Continuing to adopt a “business as usual approach” in the face of a competitive threat is not sufficient to satisfy the franchisor’s contractual obligations.
  • Releases obtained from franchisees in exchange for help from the franchisor at a time when the franchisees were “struggling just to survive” were null and void because obtaining them under such circumstances was abusive, and because franchisees were induced to sign based on factual misrepresentations from the franchisor.

While the decision was rendered under Québec’s civil law, franchisors across Canada should take note. The Appeal Court’s pronouncements could be attractive to franchisees throughout Canada, given the duty of fair dealing under provincial franchise legislation and the Supreme Court of Canada’s recognition of a common law duty of good faith performance in contractual relations in Bhasin v. Hrynew.