Ruling Could Extend Franchisor Duties

Jennifer Dolman

Jul 10, 2012

By Julius Melnitzer, Lexpert

News that a Quebec judge has ruled that franchisors have a fundamental, ongoing, continuing and successive obligation to support their brands has sent shockwaves through the industry.

On June 21, Superior Court Justice Daniel Tingley found that Dunkin' Donuts had fundamentally breached its agreements with its Quebec franchisees by failing to adequately support the brand and stem the rapid rise of arch-competitor Tim Hortons in Quebec. He awarded $16.4 million in damages to the franchisees.

Still, franchise lawyers says that the industry has for the most part overreacted to the decision. "The panic arises from the perception that franchisors must now ensure the success of their franchisees," says Jennifer Dolman in Osler, Hoskin & Harcourt LLP's Toronto office. "But that's an exaggeration of what the case says."

Dolman points out that the decision in Bertico Inc. v. Dunkin' Brands Canada Ltd. turned on a unique contractual provision requiring Dunkin Donuts' to protect the demand for its products in the relevant market.

"It is extremely rare to find in a franchise agreement an explicit obligation of this kind that effectively requires the franchisor to protect its brand from competition," Dolman says. "And it's reasonable to presume that the outcome would have been quite different absent such specific language."

But Dolman agrees that the decision is unprecedented. "This is the first franchise case in which a court has found that fundamental breach has occurred," she says. "Historically, courts have been reluctant to make this finding even in fairly egregious cases where the franchisor has engaged in a whole litany of defaults."

And the lawyer has little doubt that franchisees' lawyers will be trying to make the most of the decision. "Even though Justice Tingley acknowledged that franchisors are not the guarantors of franchisees' success, we will be seeing franchisees' lawyers trying to hold franchisors responsible for closures and for the impact of competitive tides," Dolman says.