May 7, 2015

The Dunkin’ Donuts Decision: Business as Usual for Good Franchisors

It is not often that Civil Code decisions from the Quebec Court of Appeal cause ripples in other provinces, but that has been the effect of the Court’s recent decision known as the Dunkin’ Donuts case 1 .

The Court of Appeal concluded the franchisor was required to support, promote and protect the brand, and held Dunkin’ Donuts liable for almost 11 million dollars to its franchisees for many years of neglecting its franchise system in Quebec.

While there are arguments to say the decision should not be applied outside Quebec, prudent franchisors will plan for the possibility that its principles could apply elsewhere. The Quebec Court of Appeal referred to the Quebec Civil Code in its decision but also cited binding common law principles from the Supreme Court of Canada and the Ontario Court of Appeal in its analysis, opening up the possibility the principles would be applicable outside Quebec.

The decision is definitely an interesting franchise one for lawyers and very important to franchisors because the Court of Appeal implied a number of principles into the contract based on rights and obligations commonly contained in many franchise agreements. It concluded there were implicit obligations based on the existence of “a long-term collaborative relationship, between the Franchisor and each individual franchisee, within an established network in which service and quality of experience were imagined as nearly identical from restaurant to restaurant.” This type of relationship will exist in many other franchises too, leading to the possibility for arguments about implied obligations in other cases. The Court of Appeal was clear that while “a business has a degree of latitude in deciding […] the appropriate measures to be taken in conducting its affairs,” no decisions are insulated from review by the courts.

While some are critical of the decision for its potential to second-guess business decisions based on the use of implicit obligations, the core conclusion of the Court of Appeal is straightforward, based on common sense and of little surprise to good franchisors: a franchisor is required to protect and promote the brand. Successful, entrepreneurial franchisors building excellent systems do this every day. Of course, requiring the franchisor to protect and promote the brand is no guarantee of profitability.  It is still expected that franchisors will be free from exposure from bad business decisions made in good faith in developing their brands.

Whatever courts will make of implicit obligations in future cases based on Dunkin’ Donuts, the decision turned on the facts of the case. The franchisor in Dunkin’ Donuts fell well short of the mark. The basic conclusion of the decision is “business as usual” for committed, entrepreneurial franchisors.

1 Dunkin’’ Brands Canada Ltd. v. Bertico Inc.