Judge Takes a Bite out of Dunkin’ Donuts

Jennifer Dolman

June 26, 2012

By Jennifer Brown, Canadian Lawyer Magazine

After a nine-year legal battle, the Superior Court of Québec’s Justice Daniel H. Tingley has ordered Dunkin’ Brands Canada Ltd. to pay plaintiffs $16.4 million in damages and costs — exactly what was claimed by the franchisees.

In his ruling in Bertico Inc. v. Dunkin’ Brands Canada Ltd., Tingley found in favour of Dunkin’ Donuts’ former franchisees, who were suing the franchisor for incompetence, negligence, lack of support and assistance, as well as flagrant breach of the contract entered into between the franchisor and its franchisees. The latter applied, in particular, to protect and enhance the brand between 1995 and 2005 — a period when Tim Hortons and other coffee franchises in the province were rising in popularity.

The case is unique says Jennifer Dolman, a commercial litigation partner with Osler, Hoskin & Harcourt LLP, because the judge treated it as a fundamental breach of the contract.

“That’s very rare. I can’t think of another case like it. Franchisees do try to take the position they’ve had a fundamental breach but that’s really for total failure of consideration when one of the contracting parties is not getting any benefit from their bargain,” she says.

However, Dolman says it is important that the judge stipulated that franchisors are not entirely the guarantor of success.

“A franchisee enters into a franchise agreement with the expectation that they are going to be somewhat successful and make that choice to go into a franchise as opposed to hanging up their own shingle because there is a system to rely on. In this case though Tim Hortons was coming on in a big way and Dunkin’ was not supporting its franchisees, so facing competition, one by one, they started closing. Whenever franchisees close franchisors want to avoid that because it’s not good for their reputation.”

Dolman says the leading case in Ontario is Shelanu Inc. v. Print Three Franchising Corp. but unlike the Dunkin’ Donut case, the judge did not find there was a fundamental breach of contract.

“The trial judge in that case felt there was a fundamental breach but it went to the court of appeal and the court said no, because even with a litany of complaints the court couldn’t find a substantial failure of consideration under the contract because the franchises still had the right to use the mark, the system and the brand,” she says.

In most cases, even if franchisees are unhappy, Dolman says there is still value to the brand they are using.

“In this case the judge felt what was crucial was the brand and this brand had been completely devalued in the Quebec market and franchisees had very little to show for their investment.”