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After a legal proceeding that lasted nine years, the Superior
Court of Québec's Justice Daniel H. Tingley ordered
Dunkin' Brands Canada Ltd. to pay plaintiffs $16.4 million in
damages, plus legal interest and expert witness costs.
In his ruling, Justice Tingley found in favour of Dunkin'
Donuts' former franchisees, which were suing the franchisor for
incompetence, negligence, lack of support and assistance, as well
as breach of the contract entered into between the franchisor and
its franchisees, notably to protect and enhance the brand between
1995 and 2005.
Justice Tingley stressed that:
"(40) It is a sad saga as well of how a once successful
franchise operation, a leader in its field — the
donut/coffee fast food market in Quebec — fell
precipitously from grace in less than a decade; literally, a case
study of how industry leaders can become followers in free market
economies"
"(57) But the greatest failing of all was ADRIC's
failure to protect its brand in the Quebec market. No doubt the
host of failings chronicled by the Franchisees contributed to the
collapse of the Dunkin' Donuts' brand in Quebec. A
successful brand is crucial to the maintenance of healthy
franchises. However, when the brand falls out of bed, collapses, so
too do those who rely upon it. And this is precisely what has
happened in this case."
"(58) ADRIC has assigned to itself the principal obligation
of protecting and enhancing its brand. It failed to do so, thereby
breaching the most important obligation it had assumed in its
contracts. It must accept the consequences of such a failure. As
noted above, Franchisees cannot succeed where the system has
failed. After sustaining several years of stagnant sales, narrowing
profit margins and then losses, the Franchisees have all had to
close their stores. Their losses follow hard upon the heels of
ADRIC's failures as night follows day."
"(61) Were the Franchisees poor operators? Not by a long
shot. They were amongst the best and most successful in the Quebec
"réseau". Their owners were amongst the most
active committee members. Several of them chaired these committees
at one time or another. Many of the owners operated several stores.
They were for the most part the leaders amongst the Quebec
Franchisees. ADRIC failed miserably during the first sixty-six days
of trial to paint the Franchisees as poor operators. This was a
defence utterly devoid of substance."
The Tingley judgment will have major repercussions on how
franchisees are protected and how franchisors' responsibilities
are defined. However, franchisors who fulfill their
contractual obligations have nothing to fear from this
"Dunkin' Donuts" ruling. Indeed, the judgment does
not create new obligations for the franchisor nor does it impose a
duty on the franchisor to defeat the competition. The Tingley
decision indicates that franchisors must take appropriate and
reasonable measures to support their brand, therefore, its
franchisees, when the banner is under attack from competition. This
is not new law in the province of Québec. It follows the
previous 1998 Court of Appeal ruling in the Provigo case,
which dealt with, inter alia, the existence of implicit
contractual obligations. In the Dunkin' Donuts matter, Justice
Tingley enforced explicit provisions of the franchise Agreement,
which contained explicit language requiring a franchisor to protect
the brand.
Justice Tingley has issued a rigorous judgment that has all the
makings of a leading case on franchising in Canada. This decision
will become a reference tool for setting the basic guidelines
governing contractual relations between parties.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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