Québec ruling clarifies franchisor’s obligations

Alexandre Fallon, Jennifer Dolman

May 8, 2015

Luis Millan, The Lawyers Weekly

(Recap)

In a “sad saga” of a successful franchise operation that suffered a meltdown in Québec following fierce competition, the Québec Court of Appeal has upheld a lower court ruling and ordered Dunkin’ Brands Canada Ltd. to pay 21 franchisees in the province nearly $11 million – an amount that rises to $18 million with interest and additional indemnity – for breach of contract, misrepresentation and negligence.

The appeal court decision is “really about giving a new lease on life” on the notion of implied obligations emanating from the nature of franchise agreements under article 1234 of the Civil Code, a concept that was established by the landmark 1997 Québec Court of Appeal decision in Provigo Distribution Inc. v. Supermarché A.R.G. Inc., according to Alexandre Fallon, a Montréal lawyer with Osler, Hoskin & Harcourt LLP. The appeal court ruling is significant because it puts to rest a largely held notion in Québec, and one that was argued by the franchisor before the appeal court, that Provigo limited the duty of good faith and the implied obligations in a franchise agreement to a duty incumbent on the franchisor to not compete unfairly with its franchisees or to wrongfully take actions that would harm them.

“The Court of Appeal is quite right that Provigo was never meant to be interpreted in such a restrictive fashion,” said Fallon. “It clarified that and has really made it clear that this is meant to be a long-term relationship and there are implicit duties that flow from that, and that is something that was perhaps not well understood by the bar.”

Toronto franchise lawyer Jennifer Dolman doubts the ruling will have an impact beyond Québec.

“I fully expect franchise counsel to try to use it and rely on it,” said Osler’s Dolman. “I am not too concerned about this case outside of Québec. I don’t see courts outside of Québec imposing positive duties in a vacuum or in the absence of some language (in the franchise contract) that is going to ground a court in implying some obligations.”

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