Nathalie Beauregard, Guillaume Falardeau
On April 25, 2014, the Québec Court of Appeal rendered its decision in Les billards Dooly’s inc. c. Les entreprises Prébour ltée, 2014 QCCA 842. The franchisor, Les billards Dooly’s inc. (Dooly’s) brought the underlying action on the basis that the franchisee, Les entreprises Prébour ltée (Prébour), was in breach of a series of agreements relating to the establishment of two Dooly’s franchises. The agreements included two offers to purchase franchises, two franchise agreements and a partnership agreement (the Initial Agreements). Pursuant to the Initial Agreements, Prébour undertook to convert an establishment in Hull to a Dooly’s franchise location for a trial period of one year, and to open a new Dooly’s franchise location in the Gatineau area for a period of 10 years (together the Dooly’s Franchises). Due to external circumstances, Prébour was unable to establish the Dooly’s Franchises by the time stipulated in the contracts. For this reason, the parties entered into a new agreement on November 23, 2004 (the Protocol) to reaffirm the parties’ intention to continue with the planned Dooly’s Franchises. Progress was subsequently made on the establishment of the Dooly’s Franchises, but in April 2005, Prébour purported to terminate its relationship with Dooly’s. On July 26, 2005, Dooly’s brought a claim for damages pursuant to the Initial Agreements and the Protocol, including a claim for the full amount of unpaid royalties.
The Superior Court held that the franchise agreements entered into as part of the Initial Agreements had terminated automatically on April 30, 2004 and on October 1, 2004, for the Gatineau and Hull locations respectively, in light of clauses prescribing a missed deadline for final implementation of the Dooly’s Franchises. However, the Superior Court did award damages to Dooly’s for unpaid franchise fees and an amount for the value of property Dooly’s would have co-owned pursuant to the Initial Agreements.
The Court of Appeal overturned the Superior Court’s decision with regard to the automatic termination of the Initial Agreements and granted Dooly’s appeal in part. To reach its conclusion, the Court of Appeal applied the doctrine of the indivisibility of contracts and therefore considered the Protocol within the context of all of its related contracts. In applying this doctrine, the Court of Appeal held that the Initial Agreements and the Protocol were clearly related and interdependent, having been entered into with the overarching goal of establishing the Dooly’s Franchises. It also held that the parties’ conduct confirmed their intention to be bound by the Initial Agreements even after their expiration. The franchise agreements part of the Initial Agreements were therefore found to be ongoing despite the parties having missed the deadlines for implementation, and Prébour consequently owed Dooly’s one year’s worth of royalties for one of the Dooly’s franchises and 10 years’ worth of royalties for the second, in addition to a portion of the franchise fees awarded by the Superior Court.
Key Points and Implications
This is undoubtedly a significant victory for Québec franchisors. However, it is a reminder that without properly drafted agreements, franchisors are always at risk of opportunistic attempts by their franchisees to terminate their contracts. To discourage such behavior and avoid spending time and money in disputes, franchisors should clearly establish the contractual status of the parties after they have missed the deadline for final implementation of a franchise.
Part of the October 2014 - Franchise Review