Dunkin’ Donuts decision has limited application outside Quebec

Dunkin’ Donuts decision has limited application outside Quebec
On April 15, 2015, the Quebec Court of Appeal released its highly anticipated decision in Bertico Inc. v. Dunkin’ Brands Canada Ltd., a group action brought against Dunkin’ Donuts by 21 of its franchisees in Quebec.

Dunkin’ Donuts was historically a strong brand in Quebec with 210 stores in its heyday in 1998. However, a wave of Tim Hortons franchises flooded the province through the late 1990s and early 2000s, resulting in Dunkin’ Donuts’ market share plummeting to 4.6 per cent in 2003 from 12.5 per cent in 1995.

The plaintiffs brought an action against Dunkin’ Donuts for the termination of their leases and franchise agreements together with damages totalling $16.4 million. The claim alleged a repeated and continuous failure by Dunkin’ Donuts between 1995 and 2005 to “protect and enhance” the Dunkin’ Donuts brand in Quebec.

The plaintiffs’ claim succeeded in full at the trial level and the franchisor appealed on several grounds. With the exception of the quantification of damages awarded to the plaintiff franchisees (resulting in the reduction of the damages awarded at trial by approximately $5.5 million), the Court of Appeal upheld the trial judge’s decision and reasoning. This included respect to the implicit obligations that flow from the general nature of franchise agreements, namely a duty incumbent upon a franchisor to provide its franchisees with technical support and co-operation in the aim of maintaining the relevance of the franchise relationship.

Last November, the Supreme Court of Canada found in Bhasin v Hrynew there is a common law duty that applies to all contracts to act honestly in the performance of contractual obligations.

Some commentators have argued Bhasin, combined with Bertico, increases the duties of franchisors across Canada. We disagree, as Bertico is based on concepts contained in the Civil Code of Quebec that are not mirrored in the law of other Canadian provinces, and in any event, is not binding on courts outside of Quebec.

Indeed, at the core of the Court of Appeal’s decision in Bertico is article 1434 CCQ, which provides that “a contract validly formed binds the parties who have entered into it not only as to what they have expressed in it but also as to what is incident to it according to its nature and in conformity with usage, equity or law.” Pursuant to this provision, courts in Quebec are empowered to read into contracts obligations based on the nature of the contract in question, in the absence of evidence that the parties intended to exclude such implicit obligations.

This was most famously done in the franchise context by the Quebec Court of Appeal in its 1997 decision, Provigo Distribution Inc. v. Supermarché A.R.G. Inc. In the absence of any specific contractual language (there was express language in the agreements at issue in Bertico), the court found the franchisor had an implicit duty, as a result of a duty of good faith and loyalty towards its franchisees, to provide them with technical support and co-operation in a manner that would ensure that the underlying considerations of the franchise agreement remained relevant.

In Bertico, the Court of Appeal found this same implied obligation to provide franchisees with technical support and co-operation meant, irrespective of the express contractual language contained in the parties’ franchise agreements, Dunkin’ Donuts had an obligation to take reasonable measures to support the brand in Quebec.

Similar to Provigo, the Court of Appeal in Bertico referred specifically to the implied obligation of good faith in support of this finding. At para. 70 of the decision, the court makes clear the implied obligation of good faith that results in heightened obligations incumbent on the franchisor is based on art. 1434 CCQ and not the obligation to conduct oneself in good faith pursuant to art. 1375 CCQ:

“This Court noted in Provigo that the franchisor owed an obligation of good faith and loyalty to its franchisees that brought with it a duty to provide technical and commercial assistance and what it called “collaboration” during the life of the agreement. It may be recalled that the Court made this finding not on the basis of the duty to perform contracts in good faith as set forth in article 1375 C.C.Q. but rather on the distinct theory of implied obligations, citing specifically the “nature” of the franchise agreement and “equity” in article 1434 C.C.Q.”

Since Bertico merely applies the law established in Provigo to a new set of facts (as acknowledged by the Court of Appeal at para. 76 of Bertico), this decision has not increased the duties incumbent upon franchisors in Quebec. At most, it has clarified that these implicit duties are general in nature and can be invoked in franchise contexts other than the particular fact pattern in Provigo, which was one of direct competition by a franchisor with its own franchisees.

The court also states, however, that a franchisor can exclude such implied obligations by way of express contractual language. It is therefore advisable for franchisors in Quebec to consult with their legal counsel as to whether the exclusions in their agreements are broad enough to exclude such implied obligations.

As for the impact outside Quebec, the mere reference to the concept of “good faith” in both the Bertico and Bhasin decisions is not sufficient to allow franchisees to argue that Bertico can be applied outside of Quebec. Bertico is not even about a breach of the duty of fair dealing — it is a breach of contract case — one in which both express and implied obligations were breached.

The conceptual treatment of the notion of good faith is also radically different in these decisions.

In Bhasin, the new general duty of honesty in contractual performance is simply a requirement not to lie or mislead the other contracting party; it is a duty that more closely resembles that contained in art. 1375 CCQ, which is in fact the provision of the CCQ referred to by the Supreme Court in Bhasin. The duty of good faith contained in art. 1375 CCQ, however, as discussed above, is not the basis upon which the Court of Appeal in Provigo and Bertico imposes implied obligations upon a franchisor, but rather art. 1434 CCQ, which is unique to Quebec law and is much broader in the franchise context as a result of these decisions.

As such, while franchisees across the country will undoubtedly attempt to invoke Bertico in the context of disputes with franchisors, it is the franchisors who hold the better arguments on whether or not the decision can be applied outside of Quebec.

Jennifer Dolman and Alexandre Fallon are lawyers in the franchise practice at Osler Hoskin & Harcourt LLP.

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