[1] Dunkin’ Brands Canada Ltd. has appealed a judgment of the Superior Court, District of Montreal (the Honourable Mr. Justice Daniel Tingley presiding), rendered June 21, 2012, which maintained the respondent-plaintiffs’ action for breach of franchise agreements, dismissed the appellant-defendant’s defences and cross-claims, annulled the releases signed by certain respondent-plaintiffs, resiliated all the contracts (leases and franchise agreements) between the parties, and ordered the appellant-defendant to pay the respondent-plaintiffs’ a total of $16,407,143 in damages, divided between the plaintiffs as indicated in paragraph [128] of the judgment, with interest and the additional indemnity provided by law from the later of the date of the institution of the action and the last day of each fiscal period during which lost profits were sustained or lost investments were realized due to store closes, with costs, including the fees and disbursements of Plaintiffs' experts.
[2] For the reasons of Kasirer, J.A., with which Gagnon and Vauclair, JJ.A. agree, THE COURT:
[3] ALLOWS the appeal for the sole purpose of striking paragraphs [125] and [128] from the judgment, and replacing them with the following paragraphs:
[125] MAINTAINS the defences and cross-claims to the sole extent of granting an amount of $899,528 as cross-claims to be deducted from damages for lost profits in respect of unpaid amounts due by certain Plaintiffs to the Defendant under the franchise agreements; and an amount of $249,316 as a cross claims to be deducted from damages for lost investments in respect of Defendant’s contribution to renovations paid to certain Plaintiffs;
[128] ORDERS Defendant to pay Plaintiffs the aggregate sum of $10,908,513.25, to be divided amongst them as follows:
- Jacques Doyon and Monic Huard, for the establishment located at 8950, boul. Lacroix, Saint-George-de-Beauce: $772 106,50
- Les Entreprises Doyon et Huard Inc., for the establishment located at 11 511, 1re Avenue Est, Saint-George-de-Beauce: $338,751
- 3089-8001 Québec Inc. (Noemia de Lima and Joao de Lima), for the establishment located at 1456, boul. Saint-Martin, Laval: $323,266.25
- 9067-0308 Québec Inc. (Noemia de Lima and Joao de Lima), for the establishment located at 1600, boul. Le Corbusier, Laval: $193,792.50
- Les entreprises Lucien Stephens Inc. (Mariette Long), for the establishment located at 1062, boul. Industriel, Val-Bélair: $280,439.50
- Bertico Inc. (Sylvain Charbonneau), for the establishment located at 535, boul. Arthur-Sauvé, Saint-Eustache: $814,975.25
- Bertico Inc. (Sylvain Charbonneau), for the establishment located at 171, boul. Arthur-Sauvé, Saint-Eustache: $414,464.25
- 3024032 Canada Inc. (Sylvain Charbonneau), for the establishment located at 180, 25e Avenue, Saint-Eustache: $223,869.75
- 3176941 Canada Inc. (Sylvain Charbonneau), for the establishment located at 506, rue Principale, Lachute: $586,999.50
- 3155412 Canada Inc. (Sylvain Charbonneau), for the establishment located at 367, boul. Arthur-Sauvé, Saint-Eustache: $289,583
- 3481191 Canada Inc. (Sylvain Charbonneau), for the establishment located at 38, rue Sainte-Anne, Sainte-Anne-des-Plaines: $328,796.50
- Les Entreprises Charloise Inc. (René Joly and Charlotte Lévesque), for the establishment located at 1577, boul. Talbot, Chicoutimi: $ 166,785
- Les Entreprises Charloise Inc. (René Joly and Charlotte Lévesque), for the establishment located at 200, rue Racine, Chicoutimi: $183,263.25
- Les Entreprises Pierre Maclure Limitée (Pierre Maclure), for the establishment located at 108, route du Président-Kennedy, Lévis: $489,966.75
- Les Entreprises Pierre Maclure Limitée (Pierre Maclure), for the establishment located at 7520, boul. de la Rive-Sud, Lévis: $357,189.50
- Les Entreprises Pierre Maclure Limitée (Pierre Maclure), for the establishment located at 8035, avenue des Églises, Charny: $306,710.25
- Les Entreprises Pierre Maclure Limitée (Pierre Maclure), for the establishment located at 880, rue Commerciale, Saint-Jean-Chrysostome: $285,765.25
- Les Entreprises Pierre Maclure Limitée (Pierre Maclure), for the establishment located at 600, route 116, Saint-Nicolas: $151,997.75$
- 2622-6282 Québec Inc. (Jean Rioux), for 3 combined restaurants in Rimouski: $660,995.50
- 2857-8664 Québec Inc. (Mario Corbeil), for the establishment located at 471, boul. des Laurentides, Saint-Antoine: $388,088
- 2857-8664 Québec Inc. (Mario Corbeil), for the establishment located at 1050, boul. Labelle, Saint-Jérôme: $356,370
- 3089-3309 Québec Inc. (Claude St-Pierre and Lynda Viel), for the establishment located at 198, boul. Hôtel-de-Ville, Rivière-du-Loup: $543,843.50
- 3089-3309 Québec Inc. (Claude St-Pierre and Lynda Viel), for the establishment located at 298, boul. Thériault, Rivière-du-Loup: $236,929.50
- 3089-3309 Québec Inc. (Claude St-Pierre and Lynda Viel), for the establishment located at 248, rue Témiscouata, Rivière-du-Loup: $243,600
- 3092-5077 Québec Inc. (Claude St-Pierre and Lynda Viel), for the establishment located at 701, route de l’Église, Saint-Jean-Port-Joli: $267,408.25
- 9009-6694 Québec Inc. (Claude St-Pierre and Lynda Viel), for the establishment located at 601, 1re Rue, La Pocatière: $215,059.25
- 9064-0947 Québec Inc. (Claude St-Pierre and Lynda Viel), for the establishment located at 17, chemin des Érables, Cabano: $419,112
- 9116-5399 Québec Inc. (Claude St-Pierre and Lynda Viel), for the establishment located at 82, boul. Cartier, Rivière-du-Loup: $91,326.50
- 2968-7654 Québec Inc. (Raymond Massi and John A. Costin), for the establishment located at 7955, boul. Décarie, Montréal: $ 590,413
- 2968-7654 Québec Inc. (Raymond Massi and John A. Costin), for the establishment located at 7630, boul. Lacordaire, Montréal: $386, 646
[4] CONFIRMS the conclusions of the judgment a quo in other respects;
[5] With 75% of costs on appeal against the appellant.
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REASONS OF KASIRER, J.A. |
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[6] In the preamble to its 60-page factum on appeal, Dunkin’ Brands Canada Ltd. (the Franchisor) sets a dramatic tone for its argument before this Court. The judgment of the Superior Court ordering it to pay $16.4 million in damages for breach of contract to a group of its Dunkin’ Donuts franchisees (the Franchisees) is styled as “unprecedented in the annals of franchise law, not only in Quebec and Canada but also in the United States”. The Franchisor says the court mistakenly imposed on it “a new unintended obligation to protect and enhance the brand, outperform the competition and maintain indefinitely market share”. After having “almost completely ignored” the evidence it adduced over a lengthy trial, the Franchisor says the judge wrongly characterized its contractual obligations as having an intensity of “result”, which “effectively guarantees the financial success of all Dunkin’ Donut franchisees”.
[7] The Franchisor is harsh in its characterization of the judge’s work: his assessment of liability is “result-oriented”; he showed “extraordinary sympathy” towards the Franchisees; the judge erred by referring uncritically to an incomplete document of argument prepared by them to establish fault; he made a myriad of “gross errors of law” and “blatant” mistakes of fact. Overall, his conclusions are said to have “resulted in a gross miscarriage of justice” for the Franchisor, which, as victim of this supposed affront, describes itself as a “globally renowned quick-service restaurant (QSR) brand that franchises over 10,000 restaurants in 32 countries worldwide”.
[8] In describing the case as one that is “unprecedented” in the annals of franchise law, the Franchisor has, in my respectful view, wrongly characterized aspects of franchise arrangements widely understood by courts and legal scholars in this province as uncontroversial, in particular in respect of duties that may be inferred from the nature of agreements such as the ones in the case at bar. The collapse of the Dunkin’ Donuts chain may well have no match as a financial misfortune in the annals of the quick-service restaurant business in Quebec - that is not an issue for this Court to decide - but nothing in the judge’s account of the Franchisor’s obligations was “unprecedented” or even demonstrably wrong-headed; in point of fact, he was expressly careful to follow precedent, namely the doctrine of implied obligations under article 1434 C.C.Q. and the duty of good faith set forth in Provigo Distribution inc. v. Supermarché A.R.G. inc.,[1] decided by this Court eighteen years ago and generally recognized as the leading authority in Quebec law since that time.
[9] For the reasons that follow, I see no error of law in his analysis of the obligational content of the relevant franchise agreements, and the Franchisor has shown no palpable and overriding error of fact in the judge’s findings of fault or in respect of the causal link between the Franchisor’s breaches of contract and losses suffered by the Franchisees. While I find myself in respectful disagreement with the trial judge on some aspects of his evaluation of damages to be awarded, the outcome is very far from anything approximating a miscarriage of justice, even allowing for the occasional rhetorical overstatement that is to be expected as part of appellate pleadings.
I Context
[10] The Dunkin’ Donuts quick-service restaurant chain has been present in the Quebec marketplace since 1961. Until the mid-1990s, the franchise was a leader in the fast-food industry in the province with upwards of 200 stores.
[11] The Franchisees operated 32 restaurants in the Dunkin’ Donuts chain for differing periods in the 1990s and 2000s. They brought proceedings for breach of contract against their franchisor, Allied Domecq Retailing International Ltd. (referred to as “ADRIC” by the judge), of which the appellant is successor in title. The Franchisees alleged, in the main, that the Franchisor failed to protect and promote the Dunkin’ Donuts brand in Quebec as it was bound to do by contract at a time when the franchise was faced with especially intense competition from another fast-food chain offering a similar product. They alleged at trial that this constituted a contractual fault that caused them lost profits and lost investments as part of what they describe as the collapse of the Dunkin’ Donuts coffee-and-doughnut brand in the province.
[12] The Franchisees mark the beginning of the decline of the fortunes of the Dunkin’ Donuts chain the 1990s when Tim Hortons, which also concentrated on the quick-service coffee and doughnut market, began to assert its presence in Quebec.
[13] In 1996, the Franchisor convened a three-day meeting at a hotel in St. Sauveur in response to concerns voiced by a number of franchisees that the success of Tim Hortons represented a threat to the viability of their businesses. They complained that the Franchisor was insufficiently attentive to their needs, citing in particular the lack of support and collaboration offered to contend with this newfound source of competition. Moreover, they alleged that the Franchisor had repeatedly failed to enforce properly the standards associated with the Dunkin’ Donuts “system” across the “réseau”, or network, of franchisee restaurants in the province, in particular through its inappropriate tolerance of underperforming franchisees who devalued the public perception of the brand.
[14] The parties disagree as to the extent to which the Franchisor took proper measures to correct the situation following the St. Sauveur meeting.
[15] According to many of the franchisees, the situation worsened between 1996 and 2000. On February 15, 2000, a group of them wrote a detailed letter to Jeff Brookhouser, Vice-President of Development and Operations of the Franchisor, to ask that a new plan of action be put in place to remedy the situation. The letter reiterated the complaints made at the 1996 meeting in St. Sauveur and cited what some franchisees considered to be breaches of the obligations incumbent on the Franchisor under the individual agreements signed by each of them, including “the investment of the required money, time and resources that are necessary to protect and increase the trademark’s image and value”. According to the letter, these failures had resulted in “the gradual crumbling of its image in the Province of Quebec”.
[16] In response to the complaints, the Franchisor dispatched two representatives from its Boston office to propose a plan to address problems the Dunkin’ Donuts brand faced in the Quebec market. They met with representatives of the group of dissatisfied franchisees and set out their views as to the possible solutions to improve performance of the brand, including a program of renovations of the restaurants.
[17] Certain franchisees followed up with fresh letters sent to the Franchisor in March and April of 2000 in which they stressed the importance of identifying short-term solutions rather than merely proposing long-term plans for renovations.
[18] At a meeting at a hotel in Vaudreuil on September 21, 2000, the Franchisor presented franchisees with a document entitled “Marché du Québec, Plan de croissance quinquennal, Années 2001-2005” with three principal proposals: (i) a plan for the renovation of existing restaurants and the opening of new restaurants; (ii) a marketing plan; and (iii) a new plan for operations.
[19] The key feature of the plan was the proposal for renovations that encouraged all franchisees to remodel their restaurants as soon as possible rather than waiting for the date at which renovation was required pursuant to the franchise agreements. The plan, which, among its specified conditions, alluded to the fact that “une adhésion d’au moins 75 magasins est requise”, included incentives to undertake this work estimated at approximately $200,000 for each restaurant. The Franchisor promised to contribute an amount up to $46,200 to the costs, subject to conditions. In exchange, participating franchisees were required to sign a general release (“quittance générale”), according to which the franchisee released the Franchisor from any and all claims, cast in very broad terms (“pour quelque raison ou cause que ce soit depuis la création de l’univers jusqu’à ce jour”).
[20] The renovation plan proved unsuccessful. It failed to attract the minimum number of participants and those who signed on claimed that the plan did not stave off the competition from Tim Hortons that continued to intensify.
[21] On May 11, 2001, a group of franchisees wrote directly to Jack D. Shafer, jr., the Chief Executive Officer of the Dunkin’ Donuts group of companies in the United States, in what they described as a “last cry of desperation” with respect to the Franchisor’s “numerous contractual failures and its blatant lack of real interest in saving the Dunkin’ Donuts banner in the province of Quebec”. Many of the complaints stated in the letter of February 15, 2000 were restated. The franchisees claimed that their businesses were struggling to survive in the marketplace; that the Franchisor was not taking the necessary measures to ensure that standards of quality and cleanliness were being respected by all franchisees; that there was a lack of support, both commercially and operationally, including a lack of competent personnel supplied by the Franchisor to train and assist franchisees in the running of their businesses; that there was an unusually high turnover of management personnel that hindered proper business development of the brand; and that there was no proper communication plan in place to assist in raising the profile of the brand. The letter detailed as well the failings of the proposed renovation plan, described as poorly conceived and too costly. While they recognized the potential usefulness of renovations over the long-term, the signatories of the letter demanded that the overall plan be revised by May 22, 2001 to provide franchisees with assistance allowing them to survive in the short-term.
[22] Mr. Shafer answered on May 23, 2001 to say that the Franchisor stood by the plan as announced in September 2000.
[23] Numerous franchisees remained unhappy with the Franchisor’s response as the market conditions continued, in their view, to worsen. On February 7, 2003, some of their number sent a formal notice of default to the Franchisor calling on it to fulfil its contractual obligations under the franchise agreements and to compensate them for damages suffered by reason of the breaches of contract as of that date. The list of civil faults alleged in the letter of default included intimidation, tolerance of underperforming franchisees, unfair economic pressure to sign the releases, poor management practices, failure to provide proper support to the franchisees, failure to protect and enhance the value of the brand in Quebec, an absence of a proper marketing plan, bad faith in the performance of the franchise agreements and violation of the general obligation of loyalty owed to the franchisees. A detailed account of the losses attributed to the Franchisor’s wrongful conduct as of January 31, 2003 was sent, which, they said, stood at $7,488,820.
[24] The notice of default elicited no satisfactory response and, accordingly, the respondent Franchisees filed an action in damages against the Franchisor on May 20, 2003. In their motion to institute proceedings, each of the named Franchisees in the group asked for damages for breach of contract and demanded the resiliation of the franchise agreements and leases then in force. They also asked the Superior Court to operate compensation for any amount they might owe to the Franchisor.
[25] In the months that followed, the Dunkin’ Donuts chain across the province continued its decline. On August 28, 2003, an initial ten-year agreement was signed between the Franchisor and Alimentation Couche-Tard inc., the owner of a chain of convenience stores, whereby Couche-Tard would become the master-franchisee for the brand in Quebec. The business entailed the projected opening of 100 new restaurants. Stated simply, the plan failed and the arrangement was terminated prematurely in 2008. In 2010, Couche-Tard announced that it would close all Dunkin’ Donut restaurants under its direct responsibility within the next year because they were not profitable and had no apparent resale value.
[26] The motion to institute proceedings was amended and, late in the proceedings, the Franchisees added a claim of $9 million for lost investments to the amount previously asked for relating to lost profits under the agreements. At the time of the judgment of the Superior Court in 2012, only a handful of Dunkin’ Donut franchises remained in operation in the province.
II The Judgment of the Superior Court
[27] The trial was something of a marathon: there were 71 days of hearings, punctuated by a reopening of the case after it had initially been taken under advisement; some 478 exhibits were filed; and upwards of 30 witnesses, including four expert witnesses, were heard by the judge. The whole comprises nearly 100 volumes of transcripts, proceedings and other materials in the joint record on appeal.
[28] The judge maintained the action by the Franchisees for breach of contract in the full amount of their claim.[2]
[29] At the start of his 42-page decision, the judge described the general parameters of the action, noting that the Franchisees sought formal termination of their lease and franchise agreements, as well as an aggregate award of $16.4 million in damages. He detailed the plaintiffs’ allegations that the Franchisor had failed to meet its contractual obligations to take proper measures in support of the brand that were explicitly provided for in the franchise agreements or that flowed implicitly from the general nature of the franchise arrangement. He also set forth the principal defences raised by the Franchisor in denying liability: (a) it had fulfilled its contractual obligations; (b) the Franchisees had themselves failed to operate their establishments in accordance with the standards of cleanliness and efficiency required by the Dunkin’ Donuts system; (c) the Franchisor was not the insurer of the Franchisees nor did it guarantee their success; and (d) that, in any event, numerous Franchisees had released the Franchisor from liability after 2001 when they signed the “quittances générales”. The judge noted that the Franchisor sought payment of $2.2 million by way of cross-demand for unpaid royalties, advertisement contributions and other sums.
[30] The judge summarized the competing experts’ positions on the Franchisor’s conduct, noting that François Desrosiers, retained by the Franchisees, recounted a series of faults committed by the Franchisor starting in the mid-1990s that, he said, meant that the franchise could not contend with the competition offered by Tim Hortons. The judge wrote that Mr. Desrosiers’ conclusions were “amply supported by the evidence adduced at trial” (para. [41]). The report and testimony of the Franchisor’s expert, Douglas Fisher, was also detailed at length by the judge. In the main, Mr. Fisher blamed the Franchisees’ losses on their own mistakes: poor operations, poor service, unclean stores and unresponsiveness to the substantial efforts and solutions proposed by the Franchisor to counter competition from Tim Hortons. The judge rejected Mr. Fisher’s conclusions, observing that they were “largely unsupported by the facts adduced at trial” (para. [48]).
[31] The judge quoted extensively from the standard-form franchise agreements concluded in the 1990s and 2000s. He then presented the applicable law and, specifically, his view that the agreements included explicit obligations as well as obligations that may be inferred from their nature. He relied as well on the duty of good faith owed by franchisors as recorded by this Court in Provigo (para. [53]).
[32] Applying the law to the facts, the judge decided that the most important explicit obligation agreed to by the Franchisor was its promise “to protect and enhance both its reputation and the ‘demand for the products of the Dunkin’ Donuts System’; in sum, the brand” (para. [54]). In his view, the Franchisor had done neither. He ascribed “a host of other explicit and implicit failings” to the Franchisor during the period from 1995 to 2005: failure to consult, support and assist the Franchisees; absence of a corporate store to train new staff and test new products; inordinately high turnover of its executives; too few consultants for the network of franchisees; failure to remove underperforming franchisees from the network; and the implementation and subsequent withdrawal of frozen products, “to name but a few - all chronicled in considerable detail at pages 278 to 341 inclusive of Plaintiffs’ “‘Plan d’argumentation’” (para. [55]). He concluded that these faults had “for the most part been substantiated convincingly from the evidence adduced by the Franchisees and from the acknowledgments and admissions flowing from several of Defendant’s witnesses and exhibits” (para. [56]).
[33] The judge rejected, in very strong terms, the Franchisor’s defence that the Franchisees’ poor business practices were responsible for their own losses, finding instead that it was the breach of the Franchisor’s obligations that caused the losses sustained. Furthermore, the judge held that the releases signed by the Franchisees as an inducement to renovate their premises after 2001 were signed under false pretences as to the amount the Franchisor would itself invest in the renovations, and on misrepresentations as to the increase in sales that the renovations were to produce. He decided that the releases were null, that they were abusive and that the necessary consent from the Franchisees was missing or vitiated (para. [69]).
[34] Having found the Franchisor liable, the judge devoted paragraphs [70] to [122] to a consideration of the Franchisees’ claim in damages for lost profits and lost investments and to the counterclaim for unpaid royalties and other amounts by the Franchisor. He awarded the Franchisees $7,360,000 for lost profits and $9,047,143 for lost investments, dividing the total among the various franchisees according to his calculation of their individual losses (para. [112]).
[35] The judge dismissed the Franchisor’s counterclaim for unpaid royalties and the like as well as damages for defamation and abuse of process. The judge explained his refusal to award damages for unpaid amounts under the agreements on the basis of the doctrine of fundamental breach and the exception of non-performance. He dismissed the claims for defamation and abusive proceedings as unfounded on the evidence.
[36] In sum, the Superior Court maintained the Franchisees’ actions, dismissed the cross-claims, annulled the releases, resiliated the leases and the franchise agreements, and awarded an aggregate sum of $16,407,143, with interest at the legal rate and the indemnity of article 1619 C.C.Q. from the later of the date of institution of the action and the last day of each fiscal period during which lost profits were sustained or lost investments were realized due to store closures.
III Summary of Arguments on Appeal
[37] The Franchisor says the judge erred in finding it liable for breach of contract. It argues that the judge misread the franchise agreements, imposing obligations that it had never assumed, and held it to a standard that would force it to guarantee profits to the Franchisees. In any event, whatever view one takes of its conduct, it claims the alleged breaches did not cause the losses claimed. In the alternative, the Franchisor argues that the judge erred in his evaluation of damages: he overstated the amount of lost profits by a substantial margin and he awarded an amount for lost investment that was not properly asked for and for which the proof was sorely deficient. The Franchisor also seeks amounts due to it under the agreements as counterclaim.
[38] The Franchisees answer by saying the judge made no mistake in either his measure of the explicit or implicit contractual obligations agreed to by the Franchisor or in his finding that the latter’s conduct failed to satisfy its obligation of means to protect and enhance the brand under the agreements. The finding of fault by the judge turned on questions of fact that the Franchisor simply seeks to retry on appeal. They defend the judgment by noting that the judge was not bound to answer in detail each and every one of the Franchisor’s arguments relating to specific measures taken to support and enhance the brand, nor was he required to explain why the evidence of each of the various witnesses for the defence was not retained. As to the causal link, they argue that the damages claimed were the direct and immediate consequence of the Franchisor’s failure to take reasonable steps to protect and enhance the brand. Moreover, the judge made no error in applying a general analysis of causation to the whole group of plaintiffs. As to damages, the Franchisees contend that the judge had to decide between conflicting accounts of the evidence and that no palpable and overriding error has been shown that would allow the Court to disturb the various amounts awarded at trial.
IV Analysis
IV.A Liability
[39] In contesting the judge’s finding of civil liability, the Franchisor divides its arguments into seven main points: first, the judge’s alleged error in law in identifying the obligational content of the franchise agreements; second, he was mistaken, in law, in discerning the intensity of the contractual obligation imposed on the Franchisor; third, the judge’s finding of fault was mistaken, in law and in fact, by reason of his failure to apply the business judgment rule that precludes courts from second-guessing commercial decisions of management; fourth, the judge erred in fact and in law in his appreciation of the evidence of the appellant’s contractual fault, specifically by reason of his failure to consider the reasonable measures taken by the Franchisor to avoid losses by the Franchisees; fifth, the judge should have enforced the general releases from liability signed by some Franchisees to the advantage of the Franchisor; sixth, the judge was allegedly mistaken in finding a causal link between the Franchisor’s conduct and the individual losses suffered by the Franchisees; and, seventh, the judge mistakenly ignored its arguments on prescription and certain of its objections to the evidence.
[40] I propose to consider each of these arguments in turn. As a preliminary note, however, it should be observed that the Franchisor’s strategy on appeal is radically unlike the one it took up at trial, at least in its principal line of argument. One of the central propositions the Franchisor developed before the trial judge was that, by reason of their poor performance in running their businesses, the Franchisees were the artisans of their own misfortune. It was alleged that they had failed to respect the business model imposed by the franchise agreements, and that they had not adhered to the norms for restaurant cleanliness and other operating standards required by the Dunkin’ Donuts “system”. This conduct was said to constitute a fault under the agreements that explained why the Franchisees lost money individually and why the Dunkin’ Donuts brand collapsed as a franchise chain in Quebec. Much of the proof adduced at trial by the Franchisor - including its principal expert report relating to liability filed by George Fisher - sought to establish this fault on the part of the Franchisees that, argued the Franchisor, relieved it from liability. The gravamen of this argument was that the Franchisees’ losses were not caused by the Franchisor, or even by Tim Hortons, but resulted from their own business failures.
[41] After observing that the Franchisor’s defence that the Franchisees were poor operators was “utterly devoid of substance” (para. [61]), the judge wrote that the underperforming franchisees were not party to the action. In fact, noted the judge at para. [62], the Franchisor “allowed these underperforming stores to remain open to the evident prejudice of the “réseau”, setting poor examples by their continuing presence”.
[42] On appeal, this line of defence and the evidence that supported it - to which the judge devoted significant attention at trial and in his reasons for judgment - was largely abandoned in favour of the arguments set out above.
IV.A.1 The Obligational Content of the Franchise Agreements
[43] The Franchisor submits the judge erred in law by misinterpreting the franchise agreements, in particular by wrongly concluding that the Franchisor had assumed a contractual obligation “to protect and enhance” the Dunkin’ Donuts brand. The express terms of the agreements, it argues, unambiguously preclude that reading. In particular, the judge is said to have wrongly held the Franchisor to an obligation of guaranteeing the profitability of the brand. Moreover, his use of implied obligations and the obligation of good faith to supplement the clear terms of the contracts was unwarranted and unjustified in the circumstances.
[44] On appeal, the Franchisor contends that what the judge saw as the Franchisor’s principal obligation “to protect and enhance its brand” was a duty that it never assigned to itself, and that the judge’s references to paragraph 3.C of the 1992 franchise agreement and one of the recitals amongst the “whereas/considérant” clauses in the 2002 agreement did not create and cannot support that obligation. These contractual provisions, upon which the “entire reasoning” of the judge is said to have been based, referred instead to mere “efforts” to be undertaken in service of the parties’ shared aspiration for success in business. The judge mistakenly transformed this common objective - what the Franchisor calls “a hoped-for result” - into a binding, contractual obligation that he wrongly imposed, exclusively, on the Franchisor. This flaw, it argues, amounts to “a distortion of the very nature and essence of the franchise agreements in issue and of franchising generally”.
[45] In short, the Franchisor disputes the judge’s interpretation of the agreements.
[46] Insofar as the exercise requires the judge to discern the intention of the parties to a contract, this argument is generally understood to raise a question of fact or, at most, a mixed question of fact and law, in respect of which the Court owes deference to the trial judge.[3] The burden on appeal falls then to the Franchisor to show, with the exacting degree of precision required by the decided cases, that the judge committed a palpable and overriding error in reading the contracts.[4]
[47] Did the judge err by imposing an obligation on the Franchisor that it had not assumed under the franchise agreements?
[48] In my view, the Franchisor has failed to show an error committed by the judge in his interpretation of the contract. In arguing that the judge’s “entire reasoning” was based on paragraph 3.C of the 1992 contract and the recital of the standard form of 2002, the Franchisor has misread the judgment to suit its argument. The obligation of means to protect and enhance the brand imposed on the Franchisor is not incompatible with the explicit terms of the contracts. But, just as importantly, the judge’s interpretation of the duties owed to the Franchisees rests on the whole of the agreements, including the implicit obligations based on the nature of the franchise arrangement and, in particular, the implied obligation of good faith incumbent on both parties. I see no palpable and overriding error in his conclusion that the Franchisor promised to take reasonable measures to protect and enhance the brand. But I hasten to say that even if one was to consider the inference of obligations based on the nature of the contract under article 1434 C.C.Q. or the obligation of good faith as raising a question of law, I am of the view that no error of law has been shown either.
a) Express Terms of the Agreements
[49] Given the Franchisor’s insistence that the judge misread clauses of the franchise agreements, a review of the express contractual terms is in order.
[50] The judge considered the two franchise agreements in force at the relevant times in his effort to identify the Franchisor’s obligations, in particular one standard form prepared by the Franchisor in the 1990s and the other in the early 2000s. These two standard forms were not identical, but neither provided a robust account of the full extent of the duties incumbent on the Franchisor.
[51] By way of example, the agreement signed by Franchisee Bertico inc. and the Franchisor in 1992, which is 25 pages in length, contains approximately one page of explicit obligations imposed on the Franchisor, along with a general allusion to its duties in the several introductory recitals at the start of the standard form. By contrast, Bertico’s explicit obligations make up the bulk of the 1992 agreement. When the business setting changed, in particular after the period of complaints made at the St. Sauveur meeting and thereafter, the Franchisor proposed a new standard form franchise agreement that was even more laconic in its account of its obligations. Beyond the representations made in the recitals and the granting of the right to use proprietary marks associated with the brand, the contract that the same respondent signed in 2002 contains no apparent explicit obligations for the Franchisor.
[52] The parties disagree as to the interpretation the judge gave to paragraph 3.C of the 1992 franchise agreement and the last recital of the 2002 agreement. Paragraph 3.C and the recital read as follows:
3. Dunkin’ Donuts Canada agrees [...]
3.C. To continue its efforts to maintain high and uniform standards of quality, cleanliness, appearance and service at all DUNKIN’ DONUTS SHOPS, thus protecting and enhancing the reputation of DUNKIN’ DONUTS CANADA, DUNKIN’ DONUTS OF AMERICA, INC. and the demand for the products of the DUNKIN’ DONUTS SYSTEM and, to that end, to make reasonable efforts to disseminate its standards and specifications to potential suppliers of the FRANCHISEE upon the written request of the FRANCHISEE;
2002 Recital:
ET CONSIDÉRANT QUE le franchisé comprend et reconnaît l’importance, pour chaque système, des normes et spécifications élevées en matière de qualité, de propreté, d’apparence et de service, ainsi que la nécessité d’exploiter l’établissement conformément à celles-ci afin d’accroître l’achalandage créé par l’élaboration et l’amélioration de chaque système; […]”.
[53] The Franchisor says that the trial judge wrongly read paragraph 3.C and the recital to include an obligation for the Franchisor to “outperform the competition” to which it never agreed.
[54] The Franchisor is mistaken. The judge said nothing about a contractual duty to outperform the competition or to guarantee a market share to the Franchisees. Moreover, reading the judgment as a whole, it is plain that the judge did not only rely on these two provisions to substantiate his finding that the Franchisor agreed to undertake reasonable efforts to protect and enhance the brand. But in any event, I would add that the text of paragraph 3.C, alluding to “efforts” that the Franchisor must undertake that would have the effect of “protecting and enhancing the reputation” of the brand as well as “the demand for the products”, is consonant with the judge’s finding of the parties’ intention in the 1992 agreement. His interpretation of the recital in the 2002 agreement was also a reasonable one.
[55] Moreover, the direction in paragraph 3.C that the Franchisor continue its efforts to maintain high and uniform standards of quality “thus protecting and enhancing the reputation of DUNKIN’ DONUTS CANADA […] and the demand for the products” was not the only text of the 1992 agreement on which the judge’s finding rested. He quoted from paragraphs 2 and 3 in which the Franchisor committed to take different steps to assist the franchisees at the start of the franchise operation and over the life of the contract (in the case of the example the judge used, the term was 15 years, 4 months). It agreed to make available a training program (2.D), to provide operating procedures (2.E), to make available assistance in the pre-opening, opening and initial operation of the shop (2.F), to maintain a “continuing advisory relationship, including consultation in the areas of marketing, merchandizing and general business operations,” with the franchisee (3.A); to provide operating manuals, with on-going revisions, setting out standards, specifications, procedures and techniques for the franchisee to follow (3.B); to review and approve proposed advertising prepared by the franchisee through the life of the agreement (3.D); and to administer the franchise owners’ advertising fund composed of contributions from all franchisees and to provide for programs “designed to increase sales and enhance and further develop the public reputation and image of DUNKIN’ DONUTS CANADA” (3.E). In connection with the long-term, collaborative relationship that the parties established, these provisions support the judge’s view that the Franchisor would protect and enhance the value of the brand, beyond the time of the franchise start-up, through the assistance it provided to individuals and by ensuring that franchisees across the network maintain and improve standards of cleanliness and quality. While these express undertakings, as he said, were an incomplete account of the Franchisor’s duties to its franchisees, it was not unreasonable for the judge to cite them in support of the interpretation of the standard-form agreement used in the 1990s.
[56] What about the 2002 standard form in which the relatively few express duties assigned to the Franchisor in the previous standard form were not carried forward? The judge made mention, at paragraph [18], of the revisions made to the agreement in 2002 and the last recital in the preamble thereto which, he wrote, was “[a]bout the only place in the 34 page 2002 form of [the] franchise Agreement where ADRIC recognizes the importance to both the franchisor and the franchisee of improving or enhancing the Dunkin’ Donuts brands […]”. He characterized this undertaking as “of the essence of any franchise agreement”, noting that the rest of the contractual form only spoke to the obligations of the franchisees.
[57] Was the judge wrong to see an obligation to protect and enhance the brand in the 2002 agreement like the one that came before?
[58] The judge’s finding that the recital of the 2002 contract amounts to a recognition, by the Franchisor, that both parties committed themselves to supporting the brand is a reasonable interpretation of that clause. But more importantly, by excising other express allusions to the Franchisor’s obligations, the parties did not intend to establish an arrangement wherein the franchisees had all the obligations and the Franchisor had none beyond making the system available to its franchisees with a modest degree of technical assistance.
b) Implied Obligations Incidental to the Nature of the Franchise Agreements
[59] It was by no means unusual for the Franchisor to understate its duties in standard-form franchise agreements, and generally it has not prevented courts from recognizing implicit obligations on a franchisor to complete the contract.[5] Here, the judge cited article 1434 C.C.Q. to explain that the obligations owed by the Franchisor were not only those explicitly stated in the agreements but also implicit obligations that flowed from the nature of the franchise arrangement (para. [50]).[6] He made no mistake in holding that the Franchisor’s obligations rested not just on the texts of the agreements, but also on duties that it had implicitly assumed in respect of the whole network of franchisees. Indeed, it is only when one recognizes the incomplete account of the parties’ rights and obligations given by the explicit terms of the contracts that the true nature of the arrangement - an innominate contract of franchise based on a relationship of long-term collaboration between independent businesses[7] - becomes apparent.
[60] By arguing that it had virtually no obligation to support the brand much beyond a narrow duty of technical assistance, the appellant paints an inaccurate picture of the nature of its agreements with the Franchisees. At the hearing on appeal, the Franchisor paid only lip service to its implicit duties, resisting questions from members of the bench who sought to understand their substantive content that fitted with a multi-year franchise agreement in which the Franchisor had given itself an active role in overseeing the network of all franchisees. Respectfully stated, in minimizing its implicit obligations to the network of franchisees, the Franchisor has given a disingenuous account of the nature of this long-term collaborative arrangement.
[61] What then is the “nature” of these particular franchise agreements that justifies the inferences made by the judge under article 1434 C.C.Q.?
[62] The contracts established a relationship of cooperation and collaboration between the Franchisor and its franchisees, reflecting both common and divergent interests, over a long period of time. Unlike in other arrangements where a franchisor might merely provides a licence and some modest start-up advice, the Dunkin’ Donuts franchisees were by no means left to their own devices after their launch in this quick-service restaurant business. Protecting the brand was no doubt too important to the Franchisor not to take an active hand in the arrangement over the course of its term. Sustaining the “system” as a flourishing restaurant chain required, as the terms of the agreement made plain, an on-going interaction between the Franchisor and each of its franchisees. The Franchisor took on a role in choosing appropriate franchisees and approving new acquirers of existing franchises, of advising franchisees at the start of the venture, of offering assistance to them along the way to be sure that each franchisee respected the system upon which the reputation of the brand rested. The franchisee relied on the Franchisor assuming this role to justify his or her investment. Not only would each franchisee receive assistance and benefit from the collaboration of the Franchisor but the franchisees were entitled to count on the Franchisor to see that the system would be supervised and that the weaker links in the chain of franchisees be corrected or excised. This would continue over the life of the agreement. In this sense, the agreement was a “relational”[8] one which, as is often the case in such long-term arrangements, did not spell out all of its terms.[9]
[63] These implicit obligations formed part of a long-term collaborative relationship, between the Franchisor and each individual franchisee, within an established network in which service and quality of experience were imagined as nearly identical from restaurant to restaurant. The judge might well have explained more fully what was the nature of these particular agreements that justified the inference of substantial obligations that were not spelled out in the contracts. That said, I take as important his recognition that the character of this specific franchise arrangement was an “on-going” one in respect of a “system” that the parties agreed to sustain as critical to the success of the brand. As a result, the judge found that the obligations the Franchisor has in respect of the brand were necessarily “continuing” and “’successive’” (para. [59]). The collaborative nature of these quick-service restaurant franchising agreements that extended upwards of 20 years is central to explaining why article 1434 C.C.Q. served to import the obligations it did.[10]
[64] Given the role the Franchisor assigned to itself in overseeing the on-going operation of the network and the uniform system of standards, it is fair to characterize the obligation of means to protect and enhance the brand as a “complément nécessaire”[11] of the contracts due to their nature. It was thus appropriate, in my view, for the judge to infer that the Franchisor had implicitly agreed to undertake reasonable measures to help the franchisees, over the life of the arrangement, to support the brand. This included a duty to assist them in staving off competition in order to promote the on-going prosperity of the network as an inherent feature of the relational franchise contract.
[65] Moreover, this necessary complement to the express terms rests on the presumed intention of the parties to these particular agreements. The judge inferred the Franchisor’s obligations flowing from the nature of the agreements not from a body of suppletive or public order rules, but from his sense of the unstated intention of the parties, consonant with articles 1425 and 1426 C.C.Q. As scholars who have studied the theory of implied obligations have demonstrated, this is a principal justification for obligations inferred from the nature of the agreement under article 1434 C.C.Q.[12] In other words, in characterizing the essential obligation of the Franchisor as a duty to protect and enhance the brand, the judge did not assign a new and unintended obligation on the Franchisor, but he drew on the explicit terms, supplemented by implicit obligations flowing from the nature of the agreement that, in both cases, reflected the intention of the parties. The “élargissement du cercle contractuel” in this case, to use a helpful expression, is based on the judge’s finding of fact as to parties’ intent.[13] I hasten to note that the Franchisor pointed to no express term that would have ousted the implied obligations that came with the nature of this long-term agreement.
c) Implied Obligation of Good Faith
[66] In addition, the judge quoted extensively from the Provigo[14] judgment to explain that the Franchisor owed an obligation of good faith towards the Franchisees, including a duty, in cooperation with them, to respond and adjust to new market conditions (para. [53]) This duty of good faith - an implied obligation in these agreements as the judge rightly held - serves to reinforce his view that even where it is not stipulated as such, the Franchisor had the obligation under the 1992 and 2002 agreements to take reasonable measures to support the brand.
[67] The Franchisor recognized in argument that it owed an obligation of good faith, but read it down to such an extent that the duty recognized in Provigo in 1997 could not ground its contractual liability. At the hearing, counsel argued that the obligation of good faith should be limited to precluding a franchisor from competing unfairly with its franchisees, in keeping with the setting for the dispute in Provigo.
[68] The Franchisor is mistaken on this point.
[69] The judge was correct to rely on Provigo as support for an implicit obligation of good faith which, in connection with the present franchising arrangement, buttressed the obligation to protect and enhance the brand based on the parties presumed intent. The judge rightly decided that the duty outlined in Provigo is not confined to the circumstances of franchisors who compete unfairly with their franchisees.
[70] This Court noted in Provigo that the franchisor owed an obligation of good faith and loyalty to its franchisees that brought with it a duty to provide technical and commercial assistance and what it called “collaboration” during the life of the agreement. It is may be recalled that the Court made this finding not on the basis of the duty to perform contracts in good faith set forth in article 1375 C.C.Q. but rather on the distinct theory of implied obligations, citing specifically the “nature” of the franchise agreement and “equity” in article 1434 C.C.Q.[15] This implied obligation of good faith requires a franchisor, by reason of superior know-how and expertise upon which the franchisees rely, to support individual franchisees and the whole of the network through its on-going assistance and cooperation:[16]
[Le franchiseur] doit cependant aussi, en raison de l'obligation de bonne foi et de loyauté qu'il assume à l'égard de son franchisé, faire bénéficier celui-ci de son assistance technique, de sa collaboration donc de ses nouveaux outils ou, au moins, trouver d'autres moyens de maintenir la pertinence du contrat qui le lie pour que les considérations motivant l'affiliation ne soient pas rendues caduques ou inopérantes.
[…]
Le franchiseur doit, en effet, maintenir l'ensemble du réseau à un haut niveau de performance ce qui suppose, dans certains secteurs, une grande souplesse d'adaptation aux nécessités du marché.
[71] In circumstances where the parties must work together to achieve the object of the franchise arrangement over a long period of time, Provigo thus recognizes that both the nature of the agreement and equity allow a “duty to cooperate” to be inferred as a contractual obligation for the Franchisor.[17] In the present case, the nature of the agreement, on the one hand, and equity, on the other, provide two distinct normative justifications for this implied obligation of good faith under article 1434 C.C.Q.[18] Where the nature of the agreement justifies the inference, the implied obligation is best viewed as a reflection of the presumed intention of the parties. Parties to a long-term franchise agreement like the ones in the case at bar can typically be presumed to have intended reasonable standards of cooperation based on the relational nature of the arrangement. Equity does not depend on presumed intention, but is more closely connected to the law’s concerns for fairness in contract. Here, equity mandates the Franchisor’s due regard for the Franchisees’ interests - taking into account what the Court called in Provigo the franchisor’s superior know-how and expertise[19] - without which long-term common objectives of both parties could not be met. The implied duty of good faith under article 1434 acts to reinforce and confirm the duties of assistance and cooperation for the Franchisor associated with the nature of the contract. In sum, good faith brings with it, as an implied obligation based on both equity and the long-term nature of these franchise agreements, an “intensification de la coopération qui reste la caractéristique fondamentale de tout contrat relationnel”.[20]
[72] Beyond the duty not to take actions that would wrongfully cause them harm, the Franchisor assumed, on the basis of this implied duty of good faith in the 1992 and 2002 agreements, a duty to assist and cooperate with the Franchisees by taking certain active measures in support of the brand.[21] This meant that the Franchisees were entitled to rely on the Franchisor, as a matter of contractual fairness and as a reflection of their own presumed intentions, to take reasonable measures to protect them from the market challenge presented by Tim Hortons. The judge correctly identified these two sources of implied obligations in our case. Where a violation of these implied obligations incident to the nature of the contract and in conforming to equity was established, he was entitled to conclude that there was a contractual fault as this Court held in Provigo.
[73] It is of course important not to exaggerate the content of the implied obligation of good faith and its attendant “duty to collaborate” here. Despite some shared objectives, franchisors and franchisees also have divergent interests but are no less wrapped up in a relationship of collaboration. Stated simply, in our case the franchisees sold coffee and doughnuts; the Franchisor sold franchises and reserved for itself a right to take royalties based on the performance of the franchisees who it both assisted and supervised along the way to make sure the system worked. The Franchisor increased its return, through royalties, when gross sales increased; the Franchisee increased its profits where he or she made efficient use of its time and resources. In these circumstances, a franchisor does not want any franchisee to cut corners to increase profits at the expense of gross sales; a franchisee may see things differently. He or she may not want to sell more doughnuts at unprofitable hours, for example, or prefer not to renew inventory that is still suitable for use. The pursuit of these divergent interests is possible, but only within the parameters of the terms of the contract and the implied obligation of good faith.
[74] In this light, it is fair to see the parties - despite the aspirational language of “partnership” sometimes used in connection with the arrangement - as having some different goals. They are entitled, within the bounds of the execution of the contract in good faith (article 1375 C.C.Q.) and the content of the obligation of good faith that is implicit in their agreement (article 1434 C.C.Q.), to pursue those divergent interests. As the Supreme Court has held in a comparable context, the obligation of good faith does not displace the “legitimate pursuit of economic self-interest” that is at the core of freedom of contract.[22] On its facts, for example, Provigo even allowed for some competition between franchisor and franchisee and, in my view, the duty of good faith applied here does not require of this Franchisor a degree of collaboration or contractual ‘solidarity’ with its franchisees that mandates altruistic business practices or self-sacrifice.[23]
[75] But in the present case, the judge did not impose on the Franchisor, through the duty of good faith, an unfair standard of disinterested behaviour or require it to confer a liberality on the franchisees - it was in the Franchisor’s interest, broadly speaking, to assist its franchisees, to supervise the network and to collaborate with them by proposing reasonable measures to combat a competitor who, in the longer term, threatens the value of the brand for both parties. When established, the failure to do so is a contractual fault that gives rise to damages not as an arbitrary measure of redistribution of wealth but as an ordinary contractual remedy based on corrective justice. In any event, it is enough in the present case to observe that the judge made no error in identifying an implicit obligation, for the Franchisor to take reasonable measures to promote and enhance the brand, and that this conclusion found justification both in the nature of the agreement and in equity. Whether the doctrine of the implied obligation of good faith might have a more robust or more expansive content, including the question as to whether “good faith” and “loyalty” are qualitatively different sources of contractual duty, is a matter best left to another day.
[76] None of this is controversial and the judge made no mistake in his account of this aspect of the applicable law. While it endeavoured to read down the import of its obligation of good faith and rely only on the minimalist duties set out by the express terms of the agreements, the Franchisor did recognize (to quote from its own factum), that both parties are “bound by obligations of cooperation, good faith and loyalty to its franchisees as found by this Court in the Provigo case”. The Franchisor’s representatives understood this too: Steve Gabellieri said at trial that the Franchisor has “a responsibility to protect the brand, to grow the business, collaboratively in the market”. To my mind, the obligational context of the duty of good faith applied to this case by the judge is by no means an extension of Provigo but merely an application of established law to a new set of facts.
d) Implied Obligations owed by the Franchisor to the Network of Franchisees
[77] Beyond the obligation to allow individual franchisees to use the Dunkin’ Donuts system, the contracts created, through express language and by necessary implication, a duty owed to the franchisees collectively to take reasonable measures to support and enhance the brand. This included the duty to respond with reasonable measures to help the franchisees as a group to meet the market challenges of the moment and to assist the network of franchisees by enforcing the uniform standards of quality and cleanliness it holds out as critical to the success of the franchise.
[78] Thus when the judge wrote here that the Franchisor has a duty to protect and enhance the brand, he was also speaking to the contractual duty it owes to the whole group. By imposing duties on the franchisees to keep their stores clean, to use approved products to ensure uniform quality, to keep stores open for long hours, and to contribute to the advertising fund, to cite some examples, the Franchisor also implicitly undertook to the group that it would take reasonable measures to ensure to all that these obligations will be respected. The Franchisor had obligations to individual franchisees - technical assistance, for example - but also what has been described as “obligations de nature collective”[24] that were owed, in a manner of speaking, to the whole network. It is appropriate that individual franchisees be in a position to exact performance of these obligations to protect and enhance the brand across the network that are ‘owed collectively’ by the Franchisor under the contracts.[25] Yet part of the problem stems from the terms of the agreements: most of the obligations to ensure that the stores were clean and well run, and that the system was adhered to in order to ensure the uniformity of the Dunkin’ Donuts “experience”, were explicitly imposed on the franchisees, as debtors. As a contracting party, the Franchisor appears in the franchise agreement as bearing “rights”, not duties, including the right to inspect stores, the right to review franchisee financial statements, the right to insist that standards of cleanliness and product quality are respected, and the like.
[79] How are these “rights” transformed into Franchisor obligations?
[80] Needless to say, the “network” of franchisees is not, formally, a contracting party. The network is, in fact, composed of individual contracting parties, each with separate agreements binding them to a single franchisor. Naturally, in a formal sense, the rules on privity or the relative effect of contracts theoretically preclude any one franchisee from suing the franchisor for non-performance of a contract that the franchisor may have with another franchisee. But the franchisor’s duty to maintain the health and prosperity of the network is relevant to every individual contract. As author Generosa Bras Miranda has usefully written, the nature of the contract can bring with it a “devoir général de veiller à la bonne gestion du réseau”[26] of which each franchisee can avail itself. The undertaking to take reasonable measures to protect and enhance the network, owed to the network, can best be thought of as an implicit duty in each contract upon which an individual franchisee can take action in the event of breach. The judge was right to see it as a part of the agreements here upon which each franchisee relies when he or she agrees to become a member of the Dunkin’ Donuts system.
[81] This reliance interest is a central feature of all the agreements. The Franchisor held out to each franchisee, individually, that the brand is something of value as an inducement to join the network. This was done very explicitly in our case, in the preamble to both contracts, by insisting on the value of the reputation of the brand to each of the contracting parties, by emphasizing the esteem with which the public holds the brand, and by underscoring the importance of the uniform experience to the reputation of the brand.[27] The franchisee, naturally, relied on this in deciding to join the network. The franchisee signs the franchise agreement in order to profit from the established renown of the network, and he or she both understands and expects that this established track record will be maintained through a rigorous programme of imposed standards of quality and cleanliness, of training, of assistance and support. The opportunity to join the Dunkin’ Donuts network, with its promised reputation for quality and uniform experience and the sense that the Franchisor would be present over the life of the agreement to ensure that quality, induces them to invest in the franchise. It is what the civil law calls the “cause” of the franchisee agreement: “the cause of the contract is the reason that determines each of the parties to enter into the contract / la cause du contrat est la raison qui détermine chacune des parties à le conclure” (article 1440 C.C.Q.). By denying that it has a duty to protect and enhance the brand, the judge rightly saw the Franchisor as going back on its word in each individual contract by denying the existence of the very cause of the arrangement.
[82] Nowhere is the implicit obligation to the network more evident than in the unstated duty of the Franchisor to see that delinquent franchisees - those who fail to keep their stores clean, or fail to respect the rules of the system in respect to quality of product and store hours - be called to account by the Franchisor. In our case, this was an important finding of the judge: he recognized that there were “bad apples” in amongst the franchisees (although not, as the Franchisor had argued, amongst the respondent Franchisees). He held that the Franchisor had failed to protect the brand by taking appropriate action against these bad apples, and that this failure constituted a fault - the breach of an implied obligation to support the brand under the contracts - that the respondents could invoke in support of their cause of action.
[83] The fact that this unstated obligation reflects the intention of the parties here seems beyond doubt. Franchisees, like franchisors, abhor what economists call “free-riders” across the network.[28] A franchisee who cuts corners in his or her own business in violation of the franchise agreement - invests less in cleaning the store, or in fresh products, or in local advertising, or in keeping the store open at unprofitable hours - may achieve some short term economy but risks damaging the whole of the network. The other franchisees who do adhere to the stringent standards of the “system” imposed by the franchise agreements - like the respondents here - are allowing the underperforming colleague to coast freely on the reputation and goodwill generated by their hard work and investments. Moreover, the Franchisor understands, as do the franchisees who respect the dictates of the system, the negative impact that a free-rider has on the group: the underperforming franchisee can spoil the Dunkin’ Donuts “experience” for a customer and, as a result, deter that customer from patronizing any other Dunkin’ Donuts store thereafter.
[84] What can a franchisee do about a free-rider who, for example, fails to adhere to the contractual standards of product quality or store cleanliness? Little or nothing.
[85] It is up to the Franchisor to police the network by taking reasonable measures to root out the free-riders. It is up to the Franchisor to enforce the authority it has given itself under the franchise agreement. The explicit contractual “right” it has to insist that the franchisee respect the uniform standards of the system brings with it a correlative obligation of means, owed collectively and individually to the complying franchisees, to see that the franchisees adhere to those standards. This is part of its obligation to protect the brand - an obligation “owed to the network” that, juridically, is a duty owed to each of the franchisees as part of the agreement, whether that duty is explicit or not.[29] It is in the nature of a long-term relational contract like the ones in the present case. These powers are especially wide-ranging in the Dunkin’ Donuts’ standard-form contracts. In paragraph 5 of the 1992 agreement, for example, the Franchisor has the right to ensure that each franchisee use materials and ingredients that conform to network standard and that the franchisee keep his or her store clean and in good repair. In paragraph 6, it is accorded the right to inspect premises, examine a franchisee’s books, and even his or her personal income tax returns. At paragraph 10, the Franchisor has special powers where a franchisee seeks to sell or transfer its rights to a third party. Many of these same obligations were also imposed on franchisees in the 2002 agreement. All of these “rights” came with mirror obligations: the Franchisor had implicitly undertaken to all franchisees that it would take reasonable measures to protect and enhance the brand; that it would not sit on its rights at the expense of franchisees who relied on the undertaking made to them when they bought their franchise that the Franchisor was selling them a business opportunity that was worth the investment. It was the failure to meet this obligation that the judge found, in part, to be grounds for establishing fault in paragraphs [54] to [59] of his reasons.
[86] The Franchisor took strong objection to the idea that it had assigned to itself a duty to “enhance” the brand, which it took as tantamount to guaranteeing profits to the Franchisees. The Franchisor is mistaken. First, the term “enhance” was used repeatedly in the express terms of the 1990s standard form. Not only is it found in paragraph 3.C of the 1992 agreement quoted by the judge, but also in paragraph 3.E regarding the Franchisor’s responsibility for advertising (the purpose of which is “to increase sales and enhance and further develop the public reputation and image” of the brand), and in the introduction to paragraph 5 on covenants of the franchisee (that the Franchisor implicitly undertakes to oversee). The duty to take reasonable measures to protect the brand - the judge saw this duty as the source of the Franchisor’s “greatest failing” (para. [57]) - is inseparable, according to the judge’s view of parties’ intent, from the duty to take reasonable measures to enhance its reputation (para. [58]). In suggesting this imposes an obligation to ensure profitability of the franchisees, the Franchisor has offered an unfair reading of the term “enhance” that is found in its own standard form. The Franchisor did not guarantee that the reputation of the brand would be enhanced but undertook to adopt reasonable measures to that end and the judge did not say otherwise. No error has been shown here.
[87] This duty to enhance the brand also reflects the fact that both parties were wrapped up in a long-term relationship requiring of both of them, within their respective spheres, to adopt conduct promoting what two French scholars called “innovation permanente”.[30] This Court alluded to this very idea in Provigo when it held that the Franchisor must take the lead in assisting the franchisees to adapt to a market in constant evolution given its know-how and control over the group.[31] This obviously extends to the presence of new competitors in the marketplace and requires the Franchisor and the franchisees, in their respective spheres, to react with reasonable measures to remain competitive. Standing still in this long-term relationship is not an option and, generally, as in our case, it is the Franchisor, not the franchisees, who is best placed to adjust the “system” as a whole in order to meet new market conditions. Given the nature of the relationship, the Franchisor initiates the response across the network, the franchisee undertakes to comply with the response. Neither party is imagined as taking up a role of passively supporting the brand; those duties - always on a standard of means - require a measure of constant adaptation and innovation, and the Franchisor must hold up its end to sustain “la pertinence du contrat”,[32] as the judge suggested in his reading of the agreements.
[88] In sum, the judge made no revisable error in his identification of the obligational content of the franchise agreements.
IV.A.2 The Intensity of the Franchisor’s Contractual Obligation
[89] The Franchisor says the judge erred in law by imposing on it an obligation of result to enhance the brand, specifically that of guaranteeing profits to the Franchisees, as opposed to an obligation of means to take reasonable steps to protect the Dunkin’ Donuts system. By blaming it for “allowing the fox into the hen-house” - the “fox” being Tim Hortons, the “hen-house” being Dunkin’ Donuts’ market share - the judge is said to have wrongly held the Franchisor to outperform the competition at all costs and indeed to insulate the Franchisees from any change to their income and profitability.[33]
[90] By awarding the franchisees 100% of the profits they claim to have lost, the judge is alleged to have demonstrated his mistaken view that the Franchisor was held to an obligation to guarantee that result. This is a blatant error, says the Franchisor: the Franchisor’s contractual obligation is one of “means/moyens” only. For the Franchisor, this constitutes an error of law that requires that the trial judgment be set aside.
[91] This argument is without merit.
[92] The Franchisor is right to say that the contract did not impose an obligation on it to guarantee the Franchisees’ success or insulate them from competition.[34] There is no disputing the fact that the Franchisor’s obligation was limited to taking reasonable measures to protect and enhance the brand. But the judge rightly recognized this. In paragraph [62] of his reasons, he made plain his sense of the extent of the Franchisor’s duty to protect and enhance the brand: “Although not the insurer of the Franchisees nor the guarantor of their successes, ADRIC is nevertheless responsible to them for the harm caused by its civil faults”. The judge both said, and clearly meant, that the obligation imposed on the Franchisor was one of means, not of result.
[93] The judge then considered the measures that the Franchisor did and did not take in support of its obligations under the contract. It is clear from his comments that he viewed these measures to be insufficient to meet the reasonableness standard or intensity of means of the obligation. The Franchisor did not take reasonable measures, in particular, to protect and enhance the brand in the face of the competition. To return to his colourful expression, the judge understood that the Franchisor was not bound to guarantee that the fox did not enter the hen-house, but merely to take reasonable measures to protect the Dunkin’ Donuts’ system. Had the Franchisor taken proper measures to protect and enhance the brand and, notwithstanding those efforts, Tim Hortons or another competitor had encroached on some of the Franchisees’ market share, the latter would have had no basis for complaint.
[94] If the judge were to have made the mistake that the appellant attributed to him, he would have simply observed that the result was not met and held the Franchisor liable on that basis, without examining any of the measures it took, and leaving only a defence of superior force or force majeure open to the Franchisor. This is what is meant, in law, by “obligation of means” as against an “obligation of result”.[35]
[95] In my respectful view, the Franchisor appears to misunderstand this basic concept. By arguing that the judge’s award of 100% of the Franchisees’ claim demonstrates that the judge held them to an obligation of result, the Franchisor has confused the intensity of the obligation with the quantum of damage caused by non-performance. The judge was entitled to find that the Franchisor’s violation of a contractual obligation of means caused the whole of the damages claimed if the evidence supported that view. It does not necessarily follow that he imposed on it an obligation of result.
[96] In any event, the Franchisor has failed to show a revisable error here. In the final analysis, its disagreement with the judge turns on whether the measures it took were reasonable ones - this disagreement is one of fact, not of law and as noted, absent a demonstration by the Franchisor of a palpable and overriding error, the judge’s findings must stand.
IV.A. 3 The Application of the Business Judgment Rule
[97] The Franchisor argues further that the judge failed to consider the impact of the “business judgment rule” which precludes a court from second-guessing business decisions made in good faith even when those decisions fail to bring about the desired results. This is said to be an error of law.
[98] According to the Franchisor, the trial judge’s conclusions regarding the inadequacy of the strategic growth plan, of the remodel incentive plan, of the transfer of the Quebec market to Couche-Tard are some examples, among others, of his failure to defer to properly-made business decisions undertaken in good faith. The Franchisor says the trial judge ignored the business judgment rule and substituted his own result-oriented views for those of its experienced executives.
[99] This argument is also without merit.
[100] The Franchisor proposes to apply the business judgment rule without regard to its proper meaning in order to avoid ordinary liability for breach of contract to the Franchisees as independent businesses under the franchise agreements.
[101] The parameters of the business judgment rule, described notably by the Supreme Court in Peoples’ Department Store (Trustee of) v. Wise,[36] are both well known and limited in scope in matters of civil liability. The rule is usually applied in matters relating principally to the personal responsibility of directors and officers to shareholders and not as a means of exculpating a corporate contracting party from liability for fault under a contract with third parties. As legal scholars have explained, the rule is designed to allow for directors to take appropriate risks without undue fear of personal liability, but not as a shield against civil liability of their corporations.[37]
[102] In the circumstances, it would be inappropriate to extend the protection afforded to corporate directors to shield the Franchisor from contractual liability under article 1458 C.C.Q. to the Franchisees who, defined in the contracts as independent businesses,[38] are entitled to remedies for breach of contract. The proposed application of the rule is completely out of step with its purpose.[39] Needless to say, a business has a degree of latitude in deciding what are the appropriate measures to be taken in conducting its affairs and, in particular, in the performance of a contractual obligation of means as is the case here. But to say a business enjoys latitude is not to say that its conduct is insulated from review by the courts when the business is alleged to have violated a contract with a third party. The judge was entitled to ask, in his review of the facts, whether the business strategy of the Franchisor met the obligation of means it owed under the franchise agreements. This ground of appeal is rejected.
IV.A.4 Evidence of the Franchisor’s Fault
[103] Fourthly, the judge is alleged to have committed a series of palpable and overriding errors of fact in measuring the efforts made by the Franchisor to assist the Franchisees to meet the challenge presented by competition from Tim Hortons. In particular, the judge is said to have failed to analyze the evidence brought by numerous of the Franchisor’s witnesses who testified to the fact that Dunkin’ Donuts’ strategy was reasonable in the circumstances. The Franchisor argues that the judge’s “sympathy” for the position of the Franchisees meant that he adopted, uncritically, allegations of supposedly wrongful conduct detailed in the Franchisees’ outline of argument without proper consideration of the countervailing proof that the Franchisor had taken reasonable measures to meet its obligations under the franchise agreements.
[104] The Franchisor’s criticism of the judge’s supposed sympathy was presented at the hearing with such vigour that members of the panel hearing the appeal felt compelled to ask counsel for the appellant if it was alleging bias. Counsel quickly retreated from its position and with good reason. Nothing was shown in the record that would provide a plausible basis for an argument that an informed person could entertain a reasonable apprehension of bias on the part of the judge.
[105] In paragraphs [55] and following of his reasons, the judge explained the basis of what he described as a host of contractual failings by the Franchisor, committed between 1995 and 2005, that were substantiated convincingly from the evidence adduced by the Franchisees and from acknowledgments and admissions flowing from the Franchisor’s witnesses and exhibits. In paragraph [59] the judge recalled that this breach reflected not a single act or omission committed before or after the date that some Franchisees signed releases in the early 2000s but that “[i]t was the failure over a period of a decade (1995 to 2005) to protect the brand brought about by a multiplicity of acts and omissions during that period”. In paragraphs [62] to [69], the judge made references to the renovation plan, proposed by the Franchisor in 2000 after “some five years of benign neglect in the face of a determined new player in the Quebec fast food market”. For the judge, this measure amounted to no more than business as usual “in circumstances in which ‘usual’ wasn’t nearly good enough” (para. [67]).
[106] This analysis, for the Franchisor, is flawed because the judge failed to consider all the measures it adopted in determining whether the efforts undertaken to protect the brand had met the reasonableness standard. The judge is said to have relied blindly on the evidence of the Franchisees’ expert Desrosiers, cited uncritically from the Franchisee’s outline of argument as a substitute for his own analysis, and failed to consider the evidence brought by the Franchisor’s witnesses in his reasons. Relying on Ford[40] and Francoeur[41] as cases in which trial courts have made similar mistakes, the Franchisor contends that the judge’s view of the evidence on fault was distorted by his observation of the “collapse” of the brand. After observing the extent of the losses suffered, he erroneously relieved himself of his duty to examine the Franchisor’s evidence and unfairly presumed, on the basis of a distorted perspective and a “result-oriented” method, that unspecified elements of evidence demonstrated fault.
[107] On appeal, the Franchisor essentially asks the Court to review the whole of the evidence, in particular documents and testimony that the judge supposedly ignored or discounted, as a means of correcting the judge’s “distorted” view of the case at trial.
[108] The finding of fault by the judge is one of fact, arrived at after a 71-day trial, including many witnesses, including expert witnesses on both sides, with different accounts of the evidence, along with substantial documentary evidence stretching back to the early 1990s. The Franchisor must show, with precision, a palpable and overriding error before the Court will disturb that finding. Invoking a “distorted perspective” is not in itself a free pass to a new trial unless it is shown that the distortion precluded the judge from understanding the evidence.
[109] The Franchisor has not convinced me that the judge committed an error in his evaluation of the evidence or in his finding of fault that warrants intervention on appeal.
[110] In law, there is no question that the judge was entitled to accept the evidence of the Franchisees’ experts over those of the Franchisor. He quoted at length from Mr. Desrosiers’ conclusions as to the Franchisor’s failings to support the brand and meet its obligations to the respondents between 1990 and 2005 (para. [41]). The judge alluded at several places in the judgment to evidence that the lack of effective action of the Franchisor, in particular during the period prior to the 2000 renovation proposal, constituted a civil fault. These omissions include the insufficient action taken during this period to stave off competition, the failure to sanction other franchisees in the network not meeting Dunkin’ Donuts standards, the insufficient number of consultants and training programs available in the Quebec market, and more. During this period, the judge found that the Franchisor had adopted, at best, a business as usual approach to the network and, in so doing, failed to meet its contractual obligations.
[111] The judge added that the later measures proposed to redress the situation after 2000, including the refurbishment proposal to which the release requirement was attached, were insufficient in the circumstances. He considered aspects of this program, and found it lacking, in particular in that it relied too heavily on the franchisees’ investment to correct matters. In fairness to the Franchisor, this response, coming some seven months after the February 2000 letter of complaint, was not insubstantial. But the judge viewed it as an insufficient response in light of what had come before - failures dating back to 1995 - and it could not make up for the lost ground.
[112] In essence, the reasoning of the judge on fault is based on two principal findings. First, the judge observed the relative inaction of the Franchisor between 1995 and 2000 when faced with the newfound competition, delinquent franchisees, the need for consultants in a position to assist the respondents and the like, and found that the effects continued into the period relevant to the cause of action. Second, the judge found that the Franchisor’s response, from 2000 onwards, came too late and was insufficient. It is important to note that these findings are linked. The response in 2000 might have proved adequate, measured against the standard of the Franchisor’s obligation of means, but for the accumulated difficulties that the Franchisees and the brand were feeling after what the judge described as years of relative neglect leading up to the response. The view he took of the insufficient measures taken between 1995 and 2000 is an essential feature of the judge’s finding of fault for the whole of the period.
[113] There is certainly evidence in the record to support this view. The testimony of the Franchisees’ experience as to the lack of meaningful measures taken following the St. Sauveur meeting is very striking in its precision and detail, as is the fact that no franchisee came forward to defend the position of the appellant. One telling example relates to the Franchisor’s background analysis for the marketing plan for 1999-2000 for the network. This document reveals that the Franchisor had become aware that its network was under threat at that time from the competition; it relates that the Dunkin’ Donuts “concept” was growing old; that it had failed to develop new clients and that its appeal seemed limited to older customers; that Tim Hortons had a more substantial advertising budget; that perception of the quality of Dunkin’ Donuts’ product and service was in decline; and that standards of cleanliness and performance varied considerably from one store to the next.
[114] What is striking too is that this document echoes many of the same complaints that the Franchisees had made themselves four years earlier at the 1996 St. Sauveur meeting. It raised the inference that in the ensuing fours years, the Franchisor had made insufficient efforts to address the problems raised by members of the network years earlier. It is true that the Franchisor put in place a new “Plus” program, including the “Fraîcheur Plus” strategy that would allow franchisees to maintain standards with increased efficiency, but the Franchisees argued that this program, given the depths of their woes, was insufficient (and, in their view, was terminated precipitously and injudiciously by the Franchisor). The judge accepted this view.
[115] When questioned on this period, Franchisor representative Léo Héroux - who had been employed by the appellant from 1979 to 1999 in various roles, including district manager and marketing director - recognized some of these failings: a falling-off in the quality of persons recruited as franchisees from the mid 1990s; signs that some franchisees did not respect standards in the network, in part due to poor communication strategies; a decline in visits by business and operations consultants to the franchises. He noted that there should have been an emphasis placed on “operations” rather than “development” and that, had the proper resources been invested, it would have been possible to meet the challenge presented by Tim Hortons which had become a concern in the early to mid 1990s. This supported the view that, notwithstanding the efforts made, the period between 1995 and 2000 had been one of neglect in respect of the changed circumstance of the newfound competition. From the testimony of Mr. Héroux and others, including appellant witness Jean-François Leduc who acknowledged that the Franchisor had tolerated poorly performing franchisees to the detriment of the network, there was evidence that the Franchisor had been aware of problems prior to 2000 and had not taken the advisable tack to deal with them. This is consonant with the judge’s finding of fault.
[116] When Franchisor representative George Condos testified as to circumstances in 2000 - he had been sent from the United States to Montreal to attend to complaints from franchisees about the state of the network and the competition in 2000 - he noted as well that the network suffered from uneven quality and an uneven reputation given problems of service, product freshness and store cleanliness. When cross-examined, Mr. Condos said he knew that in 2000 action was necessary in order to “rebuild the brand”. Franchisor representative Stephen Gabellieri, who was also dispatched to Quebec by the Franchisor, noted in his testimony that in this period some restaurants in the network were poorly run, dirty and serving inferior products, so the Franchisor was disinclined to invest advertising money in the market.
[117] The evidence was before the judge, therefore, from both sides, that the underperforming franchisees were a problem in the network in 2000 and that this problem reflected a period of relative inaction from 1995 onwards. The Franchisees had made this complaint years earlier. At trial, the Franchisor put the Franchisees and the underperforming franchisees in the same category. The judge took another view. He decided that the presence of underperforming franchisees in the network was to be blamed on the Franchisor’s failure to support the brand by rooting out the ‘bad apples’.
[118] When the judge wrote that the Franchisor’s breach was not the result of a single act or omission, but represented failures over the course of a decade, this included the period of relative inaction from 1995 to 2000. To avert to the point made above, neglect by the Franchisor in its notional duty to the network was among these failures. While it is true that the contracts contained no express requirements, say, for the opening of a corporate store or for a fixed number of consultants to be on hand in the Quebec market, these were part of an ensemble of considerations that, in light of the implicit obligations inherent in the agreements, constituted a breach of the obligation of means incumbent on the Franchisor. They translated into a finding of fault - a failure to take reasonable measures to uphold the value and on-going prosperity of the brand - that each of the Franchisees could invoke based on their reliance on the Franchisor to protect the network. During the period from 1995 to 2000, the Franchisor’s strategy was essentially one of “business as usual”, with minor adjustments. For the judge, this was not enough, and the evidence supports his finding of fault.
[119] Notwithstanding a protracted presentation of its view of the facts on appeal, the Franchisor has failed to show that the judge erred in this regard in a manner that would allow his finding of fact on civil fault to be disturbed by this Court.
[120] Nothing raised by the Franchisor suggests any possible parallel with the cases of Ford and Francoeur where the evidence was distorted by reason of a “prisme déformant”. In Ford,[42] the trial judge’s error in respect of the legal notion of abuse of rights skewed his view of good faith of the defendant. In Francoeur,[43] the trial judge’s misunderstanding of the structure of the transaction at the core of the dispute caused him to see misconduct where it was not present. The Franchisor failed to point to any like mistake made here and its claim that the judge inferred fault based only on his observation of the collapse of the network does not stand up to scrutiny.
[121] It is true that he made few allusions to the evidence brought by the Franchisor, and made no specific reference to a number of its witnesses. But if it is often more helpful to quote the opposing position to explain why one version of the facts is preferred to another, the judge had no obligation to do so. In Ducas,[44] this Court held that the trier of fact is not compelled to review every argument or every piece of evidence in his or her reasons. This is especially true for long and complex trials.[45]
[122] Finally, the Franchisor’s reproach that the judge was wrong to refer to the opposing parties’ outline of argument in his reasons in the place of his own analysis is unfounded. First, the Supreme Court in Cojocaru[46] observed that this kind of practice, while not always appropriate, does not necessarily impugn the impartiality of the trial judge. In complex cases, as this Court observed in Birdair,[47] the use of an outline of argument by the judge is commonplace, and it would be wrong to say the reliance on them undermines the presumption of integrity from which all judges benefit.
IV.A.5 Causation
[123] Fifthly, the judge erred, according to the Franchisor, in his finding that there was a causal link between its wrongful conduct and the damages claimed by the Franchisees. Specifically, the judge failed to consider the impact on causation of the aggressive competition from Tim Hortons and wrongly held the Franchisor to answer for the whole of the loss. Moreover the judge was mistaken not to analyze causation on an individual basis; had he examined the manner in which each of the plaintiffs had responded to the Tim Hortons’ competition, he would have seen that not all of them had taken reasonable steps to adapt their businesses to the new circumstances.
[124] It bears recalling here that the Franchisor’s expert, Mr. Fisher, had taken the position at trial that it was “highly unlikely” that the introduction of Tim Hortons to any market by itself caused the demise of any one franchise. The Franchisor now takes the opposite view, arguing that Tim Hortons was a phenomenon that could not be stopped by its own reasonable measures to support the brand.
[125] The judge did not devote a significant portion of his reasons to an analysis of causation, but it is clear that he saw the lost profits and lost investments suffered by the Franchisees as the direct and immediate consequence of the Franchisor’s breaches of the franchise agreements (para. [73]). In particular, the Franchisees’ losses were caused by its failure to protect and enhance the brand: “Their losses follow hard on the heels of ADRIC’s failures as night follows day” (para. [59]). He explicitly rejected the Franchisor’s argument that the Franchisees, by reason of their own supposed mismanagement of the stores, contributed to their own losses (para. [61] and [62]). He held that the losses were foreseeable at the time the agreements were signed given that the “underlying assumption of all franchise arrangements is that the brand will support a viable commerce” (para. [73]). He considered the role that the Tim Hortons phenomenon had but preferred the view of the evidence, advanced by the Franchisees, that it was the “singular failure of ADRIC to meet the competition head on and in a timely fashion” that caused the losses claimed (para. [71]).
[126] The conclusion on causation is a finding of fact. The Franchisor has shown no palpable and overriding error that would allow the finding of causation to be set aside.
[127] None of the externalities that the Franchisor has raised in argument - the closing of a factory near one franchise, the opening of a Tim Hortons in close proximity to another, for example - served to break the chain of causation in the judge’s view, and this has not been shown to be wrong. These factors, as well as the impact of the competition generally, may well be relevant to the measure of the quantum of damages suffered in one or another establishment, but it has not been shown that judge’s finding on causation was manifestly wrong.
[128] The judge did not, through his causation analysis, place “all the burden of facing Tim Hortons on the shoulders” of the Franchisor. Instead, he found that the Franchisees were not negligent in the day-to-day management of their stores and that this conduct did not cause the loss. No palpable and overriding error has been shown here.
[129] Finally, the Franchisor alleges that the judge’s choice not to analyze causation on a franchise-by-franchise basis was an error. It says that he assumed that they were all similarly situated and failed to consider the possibility that the Franchisor’s conduct may have caused losses in one restaurant and not in others.
[130] I see no error here. The judge decided that none of the Franchisees was a poor operator; that all of the Franchisees had a stake in the protection of the brand and that the failure to protect the brand affected, in a direct and immediate manner, everyone. The judge was entitled, in the circumstances, to hold that the same causation analysis applied across the network to all the Franchisees who were, as he said, “amongst the best and most successful in the Quebec ‘réseau’” (para. [61]). In Boutique Kit International Ltée, this Court decided, in a comparable setting, the approach the judge adopted is an acceptable one:[48]
Dans le contexte particulier où se situe le litige, l'existence de ce réseau étant l'élément de base du litige, la preuve de son existence devient incontestablement pertinente.
À compter de cette première constatation, il apparaît qu'est manifestement pertinente et admissible la preuve de fait tendant à démontrer:
- que le réseau lui-même est composé de franchisés qui y ont adhéré sur la foi de représentations et de promesses qui se sont avérées fallacieuses, dans la mesure où il en est résulté une situation d'ensemble détrimentaire aux appelants;
- que la mauvaise gestion du réseau par les intimés, tant à l'égard des appelants qu'à l'égard des autres franchisés du même réseau, a eu comme résultats une détérioration de leur position concurrentielle, un état d'affrontement entre les franchisés, une diminution de leur crédibilité envers le public consommateur et, en définitive, une perte de rentabilité ou même de viabilité.
Sommes toutes, les intimés ayant choisi de constituer un réseau, y ayant référé spécifiquement dans chacun des contrats de franchise octroyés et ayant créé à l'égard de chaque franchisé des normes communes et des obligations réciproques de l'un envers l'autre, ces intimés ne peuvent maintenant se retrancher derrière l'individualité de chaque contrat pour éviter de répondre aux griefs que l'un ou l'autre franchisé veut faire valoir relativement à leur conduite dans la mesure où elle porte atteinte à l'ensemble du réseau et, partant, à leurs intérêts individuels.
[emphasis added]
[131] These comments, which may usefully be transposed here, serve to confirm that the judge made no error that would justify disturbing his finding of causation.
IV.A.6 The Releases
[132] The Franchisor contends that the judge wrongly set aside the release clauses signed by some of the respondent Franchisees in order to obtain its contribution to remodelling the stores after 2000. The releases were freely agreed to by the Franchisees, it argues, which, as independent businesses, made an ordinary commercial decision in weighing whether the Franchisor’s contribution to the renovation programme was worth waiving any and all claims in exchange. No one disputes that these “quittances générales” were cast in the widest possible language so that the Franchisor might absolve itself from liability for any past violation of the agreements.
[133] After alluding to both parties’ outlines of argument, the judge was harsh with the Franchisor in his decision to hold that the releases given as part of the renovation programme were without effect. The Franchisees who signed were induced to renovate under false pretences, he wrote, and based on representations as to the amount that the Franchisor claimed to be investing to revive the brand that turned out to be equally false. In the circumstances, he concluded, citing articles 1398 to 1407 C.C.Q., that the releases were null:
[68] As a requirement to forgive the sins of the past - some five years of benign neglect in the face of a determined new player in the Quebec fast food market - the Quittances likely served as a powerful disincentive to commit to the programme. As Mr. Fisher might have said, the requirement to sign releases to get funding probably “contributed” to the failure of the programme.
[69] It was overkill, ill advised and, in the context of a time when the Franchisees were struggling just to survive, it was abusive to impose it upon those who chose to adopt the Franchisor’s recommendations, albeit under false pretences and on the faith of representations that turned out to be equally false. Signing a release in such circumstances is a nullity; it was abusive and the necessary consent was missing or vitiated.
[134] The Franchisor says the judge was wrong to do so. Requiring the releases in consideration for the contribution that the Franchisor would make to the renovation of the stores was a commercially acceptable business practice. In addition, the Franchisor submits that the nullity of the releases was never asked for in the various iterations of the Franchisees’ motion to institute proceedings and, as such, the judge’s decision was ultra petita. The judge’s conclusions should be revised, it says, and the releases applied with full force in respect of the Franchisees who signed them.
[135] The Franchisor’s arguments on this point are rejected.
[136] First, while it is true that the motions to institute proceedings do not call for the cancellation of the releases, the judge did not rule ultra petita. The Franchisees clearly asked for them to be annulled in the conclusions to their reply proceeding, filed on May 25, 2011, that contested to the Franchisor’s argument that they amounted to a fin de non recevoir to the claims made by their signatories. The request was also made in oral pleadings the week before and counsel for the Franchisor answered these arguments in his own pleadings. While it would have been preferable that the amendment be consigned to the minutes of the hearing at trial, that omission is not fatal here given that both parties had proper opportunity to plead the matter.[49] The validity of the release clauses was squarely before the judge and neither party could have been the least surprised that he addressed it as he did.
[137] Whatever the currency of this sort of business practice - the Franchisor did not make a strong evidentiary case in support of its argument that such releases were standard fare in the industry - it is plain from the judge’s reasons that he viewed the consent of the Franchisees who signed as something less than free and enlightened by reason of pressure and misrepresentations from the Franchisor. From the time it was proposed in 2000, the Franchisor represented the renovation program could have a major impact on improving the fortunes of the brand. While this was not a guarantee, it was understood by all that a critical mass of franchisees had to agree to renovate across the network in order to produce a reliable effect for the participating stores. The contract for the original plan alluded to a minimum figure of 75 stores participating under the heading “Conditions devant être satisfaites avant de vous soumettre ce programme pour acceptation”. While the evidence was contradictory on this point, the judge found that the Franchisor never recruited that number, and in the end only about 35 stores were renovated (para. [65]).
[138] The judge found that those who did sign the releases relied on the representation that the minimum critical mass of 75 would be or had been obtained so that their investment would have a chance of producing the improvement held out at the start of the program. There is evidence on the record that certain Franchisees - Claude St-Pierre, for example, and Mario Corbeil, who had multiple stores, as well as Sylvain Charbonneau, Jean Rioux and others - were assured by representatives of the Franchisor that the critical mass of 75 stores would be secured or had been secured and that they relied on that in deciding to sign the releases. The judge found that this was not true. He decided that, in the circumstances, the signatures were obtained by misrepresentation which vitiated consent and the releases given on the basis were null.The question as to whether a party provided valid consent to a contract is a finding of fact and the Franchisor has shown no palpable and overriding error that would allow the Court to intervene on this point. In these circumstances, misrepresentations can be grounds for nullity of contract pursuant to article 1401 C.C.Q.[50]
[139] The Franchisor disputes the meaning of the condition on the renovation contract, saying that it gave the Franchisor a unilateral power to withdraw from the plan if 75 stores were not signed on, and that it chose not to exercise this option. The judge plainly disagreed, interpreting the condition as a requirement for the program to proceed and the releases to be binding. There was evidence given by the Franchisees that signed to support the judge’s interpretation of the designated “condition” in the renovation plan agreement and the Franchisor did not show this to be manifestly wrong interpretation of the parties’ intent. This gives further credence to the view that the judge did not err in refusing to enforce the releases but, strictly speaking, it is enough to decide that the Franchisor’s misrepresentations served to vitiate consent.
[140] Given that the releases were annulled, the release of claims is of no effect. But by the same token the contributions made by the Franchisor to the costs of renovations should, where appropriate, be refunded in the calculation of lost investments, below.
IV.A.7 Other Arguments on Liability
[141] The Franchisor argued that the judge’s conclusion that the Franchisor’s faults dated back to 1995, and in particular his decision to blame it for conduct as of the date of St. Sauveur meeting in 1996, was arrived at without due regard to the rules on prescription. Noting that the Franchisees’ action was brought on March 20, 2003, the Franchisor says the judge wrongly took into account conduct and damages seven years old that were outside the prescription period.
[142] The argument is unfounded.
[143] It is trite law to say that where wrongful conduct and the manifestation of damage is repeated, continuous, spread out in time and on-going, a plaintiff can take legal action for breach of an obligation notwithstanding the fact that the first manifestation of damage took place outside the prescription period. This is true as well for the gradual manifestation of damage.[51] The judge found that the Franchisor’s civil wrongs and the damage suffered in the 1990s by the Franchisees are continued into the prescription period and are this both relevant, in the circumstances, to their claim made in 2003.
[144] That said, in the present case, the Franchisees are only entitled to claim damages for losses sustained during the three years prior to the bringing of the action. The conduct that preceded that date was only relevant insofar as it was a prior failure to protect and enhance the brand that continued into the period in respect of which action could be taken. In point of fact, except for a calculation error discussed below, the Franchisees were not awarded damages for losses sustained outside the prescription period, but they merely point to the early manifestations of loss that continued into the permissible time frame.
[145] The Franchisor also argues that the judge took a number of objections under reserve, in particular hearsay objections, and omitted to decide on them later in the proceedings or in his final judgment. These include objections made concerning the production of a study, made in the absence of testimony of its author, commissioned by certain Franchisees from a consulting firm relating to the alleged misconduct by the Franchisor, as well as the testimony of witness Pierre Baril in respect of the content of that report.
[146] While the Franchisor is correct to say that the judge should have ruled on objections in a timely manner, it has failed to show that this omission had an impact on the outcome of the case. This Court has held that in like circumstances, the omission to rule on an objection is not grounds for a successful appeal.[52]
[147] None of the other arguments relating to liability is meritorious.
IV.B. Damages
[148] The Franchisor argues that the judge erred in his evaluation of the amount of lost profits. Moreover he is also said to have erred in awarding any damages at all for lost investments given the failure of the Franchisees to bring reliable evidence as to the extent of their losses in this regard.
[149] Several preliminary remarks are in order.
[150] It should first be recalled that deference is owed on appeal to the evaluation of damages at trial given the advantage the trier of fact has hearing the evidence of losses first hand. In Ostiguy v. Goyer,[53] for example, this Court wrote:
[9] Il est établi qu’une Cour d’appel doit s’abstenir d’intervenir et de modifier le quantum des dommages-intérêts déterminé par le juge d’instance « pour le simple motif qu’elle aurait accordé un montant différent si elle avait siégé en première instance » (Laurentides motels ltd c. Beauport (Ville), [1989] 1 R.C.S. 705, p. 810).
[10] Pour justifier une intervention, la Cour suprême rappelle dans le même arrêt que la Cour doit être convaincue que le juge du procès « a appliqué un principe de droit erroné ou que la somme accordée constitue une indemnisation manifestement incorrecte du préjudice subi ».
[151] Similarly, where the evaluation of damages depends on the appreciation by the trial judge of conflicting expert reports, an appellate court will not intervene in the absence of a palpable and overriding error or an error of law.[54]
[152] The onus of showing such an error falls here to the Franchisor. It is not enough to complain on appeal, as did the Franchisor here, that the proof of loss brought by a successful plaintiff was insufficient at trial if, on the basis of evidence properly adduced, the judge held otherwise. If the trial judge holds - as was the case here - that the Franchisees acquitted their burden by proving the existence of some damage, it falls to the Franchisor on appeal to show that to be demonstrably wrong.
[153] For the purposes of the present case, it may be noted from the outset that there was evidence led by the Franchisees confirming the existence of both lost profits and lost investment. The dispute in first instance turned mostly on the quantum of those two heads of loss.[55] The measure of lost profits was the subject of conflicting expert reports using different methodologies and wildly different estimates of the amounts involved. While the experts for both parties commented on the proof of lost investments, this head of damage does not rest on an expert report. The judge used what the appellant has called a “rule of thumb” - a characterization disputed by the Franchisees - whereby the value of a Dunkin’ Donuts franchise was fixed at 50% of its annual sales. This evaluation was proposed by Pierre Baril, an accountant who worked for a number of Dunkin’ Donuts franchisees, who testified as an ordinary witness that this was the amount used when setting the resale value of franchises at the end of the 1990s.
[154] As a last preliminary note, it is best to highlight immediately an unusual turn of events at trial relating to the proof of damage. The judge had taken the case on reserve when, after deliberating for some seven months, he chose to reconvene the parties. The judge informed them that the matter of liability had been decided in favour of the Franchisees, but that the evidence before him was insufficient to settle questions both of the method to be used for quantifying lost profits and also for how lost investment should be measured, both fiercely contested by the Franchisor’s expert on damages Steve Harrar in his report of April 15, 2011. Citing article 413.1 C.C.P., the judge recalled the events at trial as follows in the judgment a quo:
[91] Accordingly, the Court invited counsel for the parties to meet in chambers on December 15, 2011 at which time the Court advised that it has determined from the evidence that ADRIC is responsible for the Franchisees’ damages flowing from a demonstrated failure to protect the Dunkin Donuts’ brand in the Quebec fast food market but that it has reservations concerning the extent of such damages. Failing a settlement on this issue, the Court further advised it will discharge the délibéré and order the parties and the experts to reconvene to test the approaches recommended by Defendant’s experts and to inform the Court as to the appropriate quantum of the Plaintiffs’ damages.
[155] The judge ordered the re-opening of the hearing “to permit Defendant to complete the Proof necessary to develop the methodologies recommended by the Defendant’s expert on damages at Defendant’s cost”. The Franchisor sought leave to appeal from this part of order; leave was denied.[56]
[156] François Filion, the Franchisees’ expert, had filed a report which sought to quantify the profits the Franchisees would have earned in the absence of fault based on what a “comparable” business earned over the relevant period. Mr. Filion retained Tim Hortons as the comparable measure. Following the re-opening of proof, Mr. Harrar filed a new report in which he advanced the “but-for” method for evaluating damages for lost profits, comparing actual activity to projected activity for each of the Franchisees’ stores, with regard to their individual circumstances, to determine how they would have performed “but-for” the Franchisor’s alleged wrongdoing. Mr. Harrar also offered criticism of the method used to estimate the lost investments - describing it as “rule of thumb” measure that was inadequate, but did not offer a counterproposal as to how this loss should be evaluated. Mr. Filion, for the Franchisees, filed an answer, criticizing the “but-for” method in which he held fast to the comparable method he had originally proposed. He also offered a response to the criticisms of the proof of lost investments.
[157] With these preliminary remarks in mind, I turn to a consideration of Franchisor’s arguments contesting the judge’s findings on lost profits and lost investments.
IV.B.1 Damages for Lost Profits
[158] As noted above, the judge awarded the Franchisees the full amount of their claim for what he considered to be lost profits in a growing market caused by the Franchisor. He rejected the Franchisor’s counterclaim for unpaid royalties and other contributions due from the Franchisees during the relevant period.
[159] As noted, the evaluation of the Franchisees’ lost profits was the subject-matter of protracted argument before the judge who, at the end of the day, was faced with two diametrically opposed expert reports. About one-half of his reasons for judgment is devoted to his decision to award the Franchisees 100% of the lost profits claimed. The judge described why he relied on the method of quantifying lost profits based on “comparable” earnings by Tim Hortons proposed by the Franchisees’ expert Filion. The judge also explained, at length, why he rejected the competing expert report, filed by Franchisor’s expert Harrar, and his conclusions based on the so-called “but-for” method.
[160] After analysis of the expert evidence on both sides, the judge preferred the “comparable” method proposed by experts for the Franchisees for determining the quantum of lost profits for each of the 32 stores owned and operated by the Franchisees between January 1, 2000 and August 31, 2003 (described by him as the three years preceding the institution of the action) and from the latter date through 2005, (to take into account losses sustained during the prosecution of the action). He accepted the Franchisees’ argument that Tim Hortons was a comparable business and, following the suggestion of their expert, fixed the Franchisees’ lost profits based on a factor of 100% of the average growth in sales of 7.7% for the Tim Hortons chain of restaurants in Canada during an identified reference period (paras [75] to [77]). The judge noted that the expert for the Franchisees had proposed three other alternative growth scenarios: 75% of Tim Hortons’ growth, which represented the average growth of sales in the fast-food market in Quebec; 50%, a figure representing the average growth of the whole restaurant industry in Quebec; and 25%, approximating a growth rate equivalent to the rate of inflation. In the end, however, he chose to award damages based on 100% of Tim Hortons’ growth in Canada during the relevant period.
[161] Following the proposal of the Franchisees’ expert, the judge chose 1998 as the reference year for calculating damages from 2000 to 2003, recognizing that while the Franchisor’s faults began earlier, this was the most appropriate date (para. [82]).
[162] The judge explained in detail why he rejected the Mr. Harrar’s criticism of the “comparable” method for calculating the Franchisees’ lost profits. He also noted why he found the competing “but-for” method unsatisfactory in the circumstances, noting in particular that this latter method could only be used reliably for eight of the 32 stores involved (para. [103]). The judge also explained why he felt the Franchisor relied on data from the damage period to predict sales and that it failed to account for several non-recurring factors that unfairly reduced the projected amount of losses (para. [106]).
[163] In the end, the judge awarded the franchisees a total of $7,360,000 claimed for lost profits commencing January 2000 through to 2005.
[164] The judge also refused to reduce the award by an amount reflecting the unpaid royalties due by the Franchisees to the Franchisor for the period during which they complained of lost profits. He explained his refusal to award damages for unpaid amounts due under the franchise agreements on the basis of the doctrine of fundamental breach and the exception of non-performance or exception d’inexécution:
[116] Franchisees struggling to stay afloat as the “réseau” collapses around them due to the contractual faults of their franchisor should be applauded, not pilloried. When contracts are fundamentally breached by one party, the other party cannot be held accountable for a subsequent breach by the prejudiced party.46 Moreover, no demand letters for any of these cross-claims were ever sent to the affected Franchisees.47 They arose, as an afterthought, with the Defences.
46 Applying the maxim "Exceptio non adimpleti contractus".
47 Les Services Financiers et Services d'Emploi Professionnel inc. c. Services Financiers Admifisc inc., 2010 QCCQ. 3575, at paragraph 18.
[165] The Franchisor argues that the comparative profit method preferred by the judge, based on the report of the Franchisees’ expert, was arbitrary and speculative. It says that it was unreasonable in the circumstances to resort to use Tim Hortons as the benchmark given differences in the companies’ business models and the profitable “drive-thru” restaurant service at Tim Hortons that the Franchisees’ did not have.
[166] Moreover, there was no evidence adduced, says the Franchisor, allowing the judge to conclude that the Franchisees would match profits earned by Tim Hortons, a recognized “phenomenon” in the quick-service restaurant industry that enjoyed, across Canada, an exceptional annual growth performance between 1999 and 2005. Instead, it argues, the estimates tabled by the Franchisor’s expert setting the aggregate growth rate for the Franchisees at 40.3% of the average growth rate in the quick-service restaurant industry in Quebec is a more useful tool. In addition, using a “modified but-for test” proposed by Mr. Harrar, the Franchisor submits a significantly lower amount of losses should be attributed to each individual restaurant.
[167] In any event, adds the Franchisor, the projections for lost profits should also be reduced to take into account imponderables, as this Court held in similar circumstances in Provigo. Even with the comparable method, it was an error to use the figure of 7.7% of annual growth given that this ignores the fact that the Franchisees would have faced competition from Tim Hortons even if the Franchisor had done nothing wrong.
[168] Moreover, the Franchisor says that whatever the right quantum of lost profits payable to the Franchisees, that amount should be reduced by reason of the judge’s errors in calculations. First, he wrongly calculated the damages from January 1, 2000, a date outside the prescription period. Second, the judge should have deducted the amounts owed by the Franchisees for unpaid royalties and other expenses under the agreement from the total amount of damages for lost profits. The judge allegedly misapplied the doctrine of fundamental breach, which has no application here, and was bound to recognize that the unpaid royalties and other amounts were due as correlative contractual obligations.
[169] Did the judge err in his evaluation of damages for lost profits?
[170] I am of the respectful view that the amount of damages for lost profits awarded by the judge should be reduced.
[171] First, the Franchisor has convinced me that the judge made two errors of calculation that call for a reduction in the amount.
[172] With due respect for the judge, he made a first error in calculating the relevant dates for determining lost profits. But in fairness to him, the origin of the mistake can be traced back to the expert report filed by the Franchisees, which report estimated lost profits between January 1, 2000 and August 31, 2003.
[173] Given the three-year prescription period applicable to actions for civil liability in contract, the Franchisees could only claim damages sustained for the three years prior to the date of the date of institution of their action on May 20, 2003.
[174] The judge awarded damages for lost profits based on a calculation commencing January 1, 2000. The Franchisees admit in their factum that this is an error, and the amount should reflect lost profits calculated from May 20, 2000 and that the period from January 2000 to May 2000 should be excluded. The aggregate excess amount for which the Franchisor was mistakenly condemned is $248,000. This amount will be deducted from the total amount of the award for lost profits and divided amongst the Franchisees, pro rata, based on the amount of damages for lost profits awarded.
[175] The judge made a second error of calculation when he relieved the Franchisees from paying the royalties and other payments owed by them under the franchise agreements. In paragraph [116] quoted above, he denied the Franchisor’s counterclaim, citing the principle of exceptio non adimpleti contractus. In his view, the “fundamental breach” committed by the franchisor relieved the franchisees from paying the amounts it owed under the contract. With respect, this was a mistake in law.
[176] The judge was of course correct to state that the Franchisor could not claim payment of the royalties as long as it failed or refused to perform its side of obligations in the franchise agreements. But in circumstances such as the present case, the so-called exception for non-performance set forth in article 1591 C.C.Q. only serves as a temporary excuse for non-performance by the Franchisees under the synallagmatic franchise agreements.[57] Once the judge decided to order the Franchisor to perform its contractual obligation by condemning it to pay damages, he imposed what the Civil Code calls “performance by equivalence / exécution par équivalent” (title to art. 1607 et seq.). In order to justify that order, both parties must perform the obligations they owed under the franchise agreements: the Franchisor pays damages as the equivalent of the various obligations it owed and had failed to perform up to the date of the resiliation of the contracts; in turn, the Franchisees, in order to justify that “payment”, must pay the royalties and other contributions they would have paid in the event the contract had been properly performed. In the circumstances, the Franchisor is thus entitled to receive unpaid amounts due under the contract and the judge should have deducted these sums from the damages he ordered the Franchisor to pay.
[177] The judge’s reference to a “fundamental breach” by the Franchisor did not excuse the Franchisees from paying the royalties and other amounts that were due. That said, the judge did not err by an inappropriately referring to the common law doctrine of fundamental breach as the Franchisor argued. It appears to me, instead, to have been a correct reference by the judge to the requirement, under the rules relating to the exception for non-performance, that the debtor must fail to perform his or her obligation “to a substantial degree / substantiellement” before the defence under article 1591 C.C.Q. obtains. Moreover the “fundamental breach” alluded to by the judge was also relevant as a justification for the resiliation of the contract for the future, as articles 1604, para. 2 and 1606, para. 2 C.C.Q. make plain.
[178] In the circumstances, however, the breach, however substantial, did not relieve the Franchisees from respecting their side of the bargain as a condition to requiring forced performance by equivalence from the Franchisor for the period up until resiliation of the agreements. The Franchisees must therefore pay royalties and other amounts they would have paid to the Franchisor if the latter had performed the agreement in the ordinary way. In the result, the quantum of damages owed by the Franchisor should be reduced by a total amount of $899,528, divided amongst them according to what each of them owed under the agreements.[58]
[179] Beyond these two errors, did the judge err in ordering an amount of damages equivalent to 100% of the growth achieved by Tim Hortons, as a “comparable” business in the same segment of the industry, as the Franchisees’ expert Filion had advised?
[180] In my view, despite the differences in the business models between Dunkin’ Donuts and Tim Hortons, the judge made no overriding error in preferring the comparable method for evaluation of lost profits, subject to the comments below. Both methods are considered to be viable means of estimating lost profits and the appropriateness of one over the other in any given case turns on the circumstances. His reasons for setting aside the “but-for” method proposed by the Franchisor’s experts, based in large measure on the criticisms levelled against it by the Franchisees in light of the dearth of reliable evidence to examine the performance of each store, are compelling. While the but-for method, used by this Court in the Provigo case, does have the advantage of particularizing losses to the establishments owned by franchisees, expert Harrar was not able to provide individualized information for most of the restaurants. Moreover, Mr. Harrar had proposed 1999 as reference year when it was plain that the Franchisees started to suffer the consequences of the Franchisor’s mistakes as early as 1996. The judge was not mistaken to note that Mr. Harrar did not take into account certain non recurring factors in his estimates, nor was he wrong to reject the figure of 40.3% of the growth of the Quebec market advanced by Mr. Harrar given the fact that no plausible explanation was given as to why, in arriving at this figure, the high and low years for each franchise were omitted.
[181] The judge explained at length the reasons why he preferred the comparable method, and why Tim Hortons was the appropriate comparable business. The Franchisor has not convinced me that he made an error in this choice, or that the method is speculative or arbitrary. The evidence lends support to the view that, while not identical, Tim Hortons and Dunkin’ Donuts operated similar businesses, both in respect of the products offered, the style of restaurant and the target clientele. It may be noted that in the Franchisor’s own internal materials, it often identified Tim Hortons from among the many quick-service restaurant chains as its principal competitor. As Mr. Filion explained, the difference in the business models has little direct impact on consumer choice given the similarities in product, service and stores.
[182] The businesses are substantially similar, and the average annual growth in sales of 7.7% relied upon by the judge has not been shown to be wrong. The Franchisor’s position that the figure was exceptional is weakened by the fact that it initially predicted growth at a superior rate for Dunkin’ Donuts between 2001 and 2005. The figure is comparable to the rate of growth of Dunkin’ Donuts in the United States (5.9%) and is considerably less than the growth experience by Tim Hortons in Quebec which was 13.5% for the years 2002 and 2003. While Tim Hortons may have had a higher volume of sales but the measure, as Mr. Filion explained in response to Mr. Harrar’s critique, was rate of growth, not volume of sales.
[183] In the circumstances, it was reasonable for the judge to adopt the comparable method, with Tim Hortons as the comparable business, for calculating lost profits.
[184] That said, in choosing the figure of 100% of Tim Hortons’ growth as the factor for determining the Franchisees’ lost profits, the judge did not take into account certain imponderables that potentially affect all businesses. By attributing 100% of Tim Hortons’ growth to each of the respondent Dunkin’ Donuts franchises, the Franchisor says the judge wrongly ignored these unanticipated factors that could have limited the latter’s success and which, in all fairness, must be considered when fixing damages of this kind. Here some discount should also be applied given the lack of “drive-thru” restaurants in the Dunkin’ Donuts chain.
[185] Pointing to the following excerpt from Provigo, the Franchisor says this is a error:
Nous avons exprimé l'avis que si le rapport Parent devait servir de base à l'évaluation du préjudice, ses conclusions devaient néanmoins être nuancées pour tenir compte de l'ensemble des facteurs déjà identifiés et qui en affectent la justesse. Le jugement entrepris a évalué l'un d'eux, les inévitables imprévus et impondérables propres à toute entreprise commerciale, en réduisant généralement de 10% l'indemnité proposée par l'expert et a donc utilisé un mode d'appréciation estimatif. Cette méthode est valide même si, par définition, elle n'offre pas un haut degré de précision scientifique. Elle se justifie par un examen global de l'affaire à partir de faits prouvés et de critères connus, pour dégager une solution équitable et juste dans les circonstances. À cause de ces caractéristiques, elle est difficile d'application. Son utilisation doit par conséquent se faire avec grande prudence et lorsque toutes les autres techniques ou solutions sont exclues. C'était le cas en l'espèce.
[186] Mr. Filion, by his own account, took no external factors into account in his estimate. Even though the Provigo case used the but-for method, I am of the view that it was mistaken not to apply the same rule here to allow for imponderables as Tim Hortons’ figures are transposed to the Franchisees. On this basis, like the Court in Provigo, I propose to reduce the amount by 10%.
[187] The Franchisor argues that the 100% comparable rate is inappropriate for two other reasons. First, it takes no account of lost profits due to the competition from Tim Hortons since, by definition, Tim Hortons does not compete with itself. Certainly, the rate of growth from Tim Hortons takes into account competition from other players, including Dunkin’ Donuts. The judge was adamant in refusing to factor in competition that he saw as “double discounting”. In paragraph [99] he wrote: “The Franchisees sustained losses of profit due largely, in not entirely, to the Tim Hortons’ phenomenon and now, it seems, these diminished profits are to be further attenuated by such competition! ADRIC seems to be suggesting that although it allowed the fox into the hen-house, it should only be responsible for 50% of the chickens that were devoured”.
[188] With respect for the judge’s view, I agree with the Franchisor that the 100% figure fails to allow for the competition that Dunkin’ Donuts would have faced from Tim Hortons even if the Franchisor had not committed a fault. Not taking it into account is a reviewable error. Tim Hortons certainly took advantage of the weakened competition from Dunkin’ Donuts resulting from the Franchisor’s civil wrongs in this segment of the market.[59] While the quick-service restaurant business might well be expanding, consumers' appetite for these products is not infinite. Stated simply, had the Franchisor not committed the faults determined by the judge, Tim Hortons would not have done as well. And had the Franchisor not been at fault, the Franchisees would still have faced competition from Tim Hortons.
[189] The problem was compounded by the fact that Tim Hortons had a competitive advantage over most of the Dunkin’ Donuts franchisees by reason of the prevalence of the “drive-thru” service in the Tim Hortons chain. Experts on both sides agreed that this kind of service can provide a substantial percentage of business in the quick-service restaurant industry. The Franchisor is right that the judge did not analyze this point fully.
[190] In the circumstances, and mindful of the inherently imprecise character of such estimates, I would accord a further 15% reduction to allow for the factor of competition from Tim Horton on the calculation of profits of the Franchisees, including the competitive advantage of the drive-thru service.
[191] At the end of the day, I would apply the comparable method used by the judge, using Tim Hortons as the comparable business, but discount the 100% rate of growth used by the judge to one of 75%.
[192] I note that Mr. Filion proposed the 75% figure as one of his alternative measures for establishing lost profits, based on a scenario representing a growth equal to that of the fast-food industry as a whole in Quebec in the relevant period. This provides further encouragement for settling on the 75% figure here. Alluding to this scenario in his report, Mr. Filion explained as follows at trial:
R. […] Je mentionne, à la page 43, le scénario de soixante-quinze pour cent (75 %), qu'est-ce que ça... qu'est-ce que ça peut être comparable. Ça peut être comparable aux ventes QSR au Québec durant la période qu'on a analysée. Les ventes QSR au Québec sont de cinq point quatre pour cent (5.4 %) puis si on prend soixante-quinze pour cent (75 %) c'est à peu près cinq point huit pour cent (5.8 %).
[193] I would therefore revise the amount of lost profits from $7,360,000 to $4,372,472 calculated as follows: $5,520,000, which is damages based on the 75% comparative approach, using 1998 as the base year, after deducting the overpayment of $248,000, for the period January to April 2000, less an additional amount of $899,528, being the aggregate of the Franchisor’s cross-claim for royalties not recognized by the judge.
IV.B.2 Damages for Lost Investments
[194] By contrast to the evidence adduced concerning lost profits, the claim for Franchisees’ lost investments, to which the judge devoted only a few paragraphs in his reasons, was not based on expert reports. In point of fact, while the claim was alluded to in the original motion to institute proceedings before the Superior Court, the precise amount of the claim for lost investments took shape as an amendment filed on February 14, 2011 in which the Franchisees claimed 50% of the adjusted amount of annual sales in the year preceding the closing for each franchise. As noted, this was based on the testimony of Mr. Baril, an accountant for several Dunkin’ Donuts franchisees. Speaking as an ordinary witness called by the Franchisees, Mr. Baril explained that at the end of the 1990s, 50% of annual sales was used as basis for setting the resale value of a Dunkin’ Donuts franchise. Here is part of what Mr. Baril said:
R. Une franchise Dunkin' Donuts et puis j'ai eu quelques-uns de mes franchisés qui ont vendu leur franchise et puis par les transactions, une franchise se vendait à cinquante pour cent (50 %) du chiffre d'affaires ou vingt-cinq pour cent (25%) du chiffre d'affaires hebdomadaire. Mais en gros, cinquante pour cent (50 %) du chiffre d'affaires annuel. Donc, si une franchise avait des ventes de six cent mille dollars (600 000 $), la valeur de la franchise était de trois cent mille dollars (300 000 $). Dans les années quatre-vingt-dix (90), il y a eu des ventes de franchises et puis d'ailleurs, il y avait des gens qui recherchaient ces franchises-là, il y avait des listes d'attente de gens qui voulaient avoir la franchise Dunkin' Donuts. Malheureusement, aujourd'hui c'est l'inverse, là. Les gens recherchent plutôt des acheteurs.
[195] Neither of the parties’ experts provided an evaluation of the lost investments. Mr. Harrar, for the Franchisor, mounted a critique of what he called a “rule of thumb” approach to business evaluation advanced by Mr. Baril, suggesting it was unreliable except to confirm an evaluation arrived at more scientifically, although he recognized that he did not have first-hand knowledge of the testimony. The Franchisees, who of course had the burden of proof at trial, did not present an expert report. Mr. Filion who, like his counterpart, did not hear Mr. Baril’s testimony, answered Mr. Harrar’s criticism. He described the technique used by Mr. Baril as a “market approach” rather than one based on a “rule of thumb”, and stated that someone with personal experience of market transactions could give a valid estimate of the worth of a business on that basis.
[196] As to this head of damage, the judge observed that following the collapse of the network, the Franchisees lost not only profits but also their investment in the franchise itself. On this point, the judge wrote the following:
[70] All of the Franchisees' stores have closed or been sold for a fraction of their traditional value. Until the turn of the century, Dunkin Donuts' stores could be sold for roughly 50% of annual sales. No such value could be attributed to a Quebec Dunkin Donuts store in the new century. They have thus lost their investments in the Dunkin Donuts System, as well as profits. Some lasted longer than others in a desperate struggle to maintain their livelihoods. The last of the Franchisees to close their doors occurred last year.
[…]
[111] All of the Franchisees have lost their investments in their respective franchises. Their stores are all closed. Had ADRIC maintained its share in the Quebec fast food market, these Franchisees could have sold their stores as going concerns for “roughly 50% of annual sales”. A review of the financial statements of the Franchisees in the years immediately preceding the closing of their stores reveals that in most cases their investments in their franchises exceed what they could expect to receive for the sale of their stores using the formula of “50% of annual sales”. ADRIC should compensate the Franchisees at least to the extent of the loss of any opportunity to sell their stores at traditional values due to the collapse of the Dunkin Donuts "réseau" in Quebec.
[197] He awarded a total of $9,047,143 under the head of lost investments.
[198] The Franchisor is highly critical of the judge’s finding. It says, first, that the question was only advanced by the Franchisees at trial as an afterthought in a manner it considers prejudicial. As to the substance of the award, the Franchisor says the amount settled upon by the Superior Court was grossly exaggerated, as it was based on a highly imprecise “rule of thumb” whereby the value of a restaurant was taken - without regard to other factors - as equal to 50% of an inflated annual sales figure from Tim Hortons in 2005. The witness who advanced this basis for establishing damages was unqualified to do so and nothing in the evidence suggests that the rule of thumb was of any use for the situation of the Franchisees. Having failed to acquit their burden of proof at trial in this regard, the Franchisees are entitled, according to the Franchisor, to no damages whatsoever under the head of lost investments.
[199] Mr. Harrar provided substance to this critique. He said that as a rule of thumb, the technique of estimating value based of 50% of annual sales requires confirmation. It fails to allow for variation in circumstances of vendors including, importantly, the time remaining on their franchise agreements, whether or not they have recently renovated their stores. He said among other things that its usefulness was confined to the U.S. market. The Franchisor, adopting the criticism of their expert, say that the method is so speculative as to be unfair and that this Court should discount the evidence and hold that the Franchisees, as plaintiffs, failed to meet their burden at trial.
[200] The Franchisees answer that Mr. Baril’s evidence was not contradicted; the Franchisor brought no alternate means of estimating lost investments to the trial judge. This is all the harder to understand, given the privileged position enjoyed by the Franchisor under the franchise agreements, in that it was privy to the terms of all franchise resales. In any event, they dispute the characterization of the method as a speculative rule of thumb, and argue - as did their expert - that Mr. Baril was giving evidence from personal experience of transactions he had observed. They prefer to describe the method as a market approach.
[201] The Franchisor is right in at least two respects here. First, it fell to the Franchisees, and not to the defendant, to prove the lost investments at trial. Second, whether the method is described as a rule of thumb or a market approach, it can rightly be criticized for not allowing variation according to the situation of each franchisee.
[202] At the hearing, the panel asked counsel for the appellant how it proposed to remedy what it saw as the judge’s error in granting over $9 million for lost investments. The answer was unequivocal: the judge had used unreliable evidence based on a “flimsy and speculative method of evaluation”. The remedy was to strike this head of damages on appeal and award nothing for lost investments.
[203] The Franchisor is, to be sure, wrong on this point.
[204] While the Franchisees most certainly had the burden of proving their lost investments, the judge was of the view that they had acquitted that task. The burden falls to the Franchisor to show an error that warrants intervention on appeal.
[205] The argument at trial and on appeal turned not on the existence of damage, but on the quantum of the lost investments. Once the lost profits were granted for the period preceding 2005, the Franchisees were left with assets - their businesses - that were diminished in value because of the Franchisor’s fault. Even the Franchisor’s expert Harrar, while contesting the amount of the loss, did not deny its existence. The problem at trial was not whether lost investment existed, but what was its proper quantum.
[206] The judge had a duty to use the evidence adduced to fix the amount of the loss.
[207] This Court has been resolute in distinguishing between the proof of the existence of damage, on the one hand, and proof of the quantum of damage for which the existence has been established, on the other.[60] Where fault is proven and the trier of fact ascertains that there is proof that some damage flows from the debtor’s fault, it is the duty of the presiding judge to evaluate the damage as best as he or she can based on admissible evidence. The comments of Hugessen A.C.J., then of the Superior Court, in Raymor[61] have been understood to be instructive in this regard:
Notwithstanding that Plaintiff’s tender was very substantially lower than the next lowest and successful tenderer, I find that there is some evidentiary basis for this part of the claim, so as to lift it out of the realm of “mere speculation” and permit me to assess damages with “a reasonable degree of certainty”.
Even where the assessment of damages in a contractual matter is extremely difficult, it is the duty of the Court, once it is tolerably clear that there have been some damages suffered, to attempt to estimate them in much the same manner as a jury would be called upon to do.
As stated by the Court of Appeal, in Rothpan v. Drouin ([1959] B.R. 626):
Lorsque le Tribunal constate qu'une partie a subi un préjudice dont l'autre doit réparation. Il n'est pas nécessaire, pour qu'elle en détermine l'étendue, qu'une preuve positive ait été rapportée sur le chiffre de cette perte. Il suffit qu'il se trouve au dossier des éléments lui permettant de l'apprécier.
[…]
I cannot overlook the fact that even this amount is theoretical and depends upon a number of contingencies as to which the proof is not entirely satisfactory. I would therefore reduce it by a further 25% to cover such contingencies and unforeseen or overlooked matters and, rounding out the figure thus obtained, would fix Plaintiffs damages in the amount of $5,000.
[footnotes omitted]
[208] The cases the Franchisor cites on appeal in service of its argument that no damages should be awarded are mostly instances in which a plaintiff, at trial, failed to prove the existence of its damage.[62] That is not the case here. There are some cases in which judges explain that a claim for damages should be dismissed in the absence of reliable expert evidence. In our case, however, unlike others,[63] the judge’s view of the evidence was that certain damages had been shown on the basis of evidence given by an ordinary witness. That finding is not in itself a reviewable error.
[209] In appeals in which this Court is faced with evidence of the existence of a loss that was accepted by a trial judge, as in the present case, it has been decided that the burden of showing the quantum was wrongly fixed falls to the appellant. In Société du Parc des îles v. Renaud,[64] for example, my colleague Morissette, J.A. recognized that a trial judge is entitled to fix damages as best he or she can, even if evidence of quantum is seriously contested:
[26] Ce faisant, le juge arbitrait les dommages et intérêts comme il se devait de le faire dans les circonstances. Ayant conclu à l’existence de divers manquements à leurs obligations de la part des appelantes, manquements qui selon toute probabilité avaient été dommageables pour l’achalandage de l’entreprise exploitée par l’intimée, il lui fallait rechercher dans la preuve la démonstration probable du montant du préjudice financier subi par l’intimée. C’est ce qu’il a fait, conformément au principe énoncé dans l’arrêt Rothpan c. Drouin, [1959] B.R. 626, principe que le juge en chef adjoint Hugessen de la Cour supérieure avait formulé en ces termes dans la décision Raymor Painting Contractors (Canada) Ltd c. Purolator Courier Ltd, [1976] C.S. 468, à la page 472 :
Even where the assessment of damages in a contractual matter is extremely difficult, it is the duty of the court, once it is tolerably clear that there have been some damages suffered, to attempt to estimate them in much the same manner as a jury would be called upon to do.
(Voir aussi Crealise Packaging Inc./Créalise Conditionnement inc. c. A.S.M. Canada Ltd, J.E. 97-1383 (C.S.)).
[210] The assessment of lost profits was indeed “extremely difficult” but, to invoke the idea of Hugessen, A.C.J. taken up by the Court in Société du Parc des îles, it was tolerably clear that the Franchisees had suffered lost investments and, accordingly, it was the duty of the trial judge to settle on an amount.
[211] In so doing, did the judge commit a palpable and overriding error?
[212] Again the burden falls to the Franchisor as appellant.
[213] With two exceptions, I am of the view that the Franchisor has failed in this regard.
[214] First, given my conclusion that the amount of lost profits should be based on 75% rather than 100% of Tim Hortons’ growth, the amount the judge used to determine lost investments must accordingly be reduced. Rather than using Tim Hortons’ 2005 results with a factor of 100%, the calculation should proceed using a factor of 75%. As a result, the method used by the judge in paragraph [111] needs to be adjusted. The amount of lost investments will therefore be reduced by 25%.
[215] Second, the Franchisees who renovated their stores and who received a contribution from the Franchisor under the renovation plan must reimburse the Franchisor for its contribution out of the money they receive as damages. Because the judge annulled the releases, the parties need to be put back into the situation they were in prior to that arrangement. The Franchisees have been awarded the full amount for the lost investment of a renovated store; the judge should have deducted the amount the Franchisor contributed to the cost of renovations for those Franchisees who signed the releases to avoid a double payment for that latter amount.
[216] Beyond these two adjustments, the Franchisor has not convinced me that the judge committed a reviewable error.
[217] I recognize that the method used for fixing the quantum of damages may lack in precision. But it is not enough for an appellant to denounce a method on appeal without explaining exactly how it resulted in a mistake in the court below. One may well imagine an adjustment - upwards or downwards - in the amount of “50% of annual sales” based on variables such as the time remaining in the vendor’s franchise agreement. Some of the variation would be reflected in the sales results used by the judge - one might imagine, for example, a store awaiting renovation generating fewer sales than a freshly renovated one - and thus in the amount awarded for lost investment. That said, the Franchisor is right to say that a complete account of factors, on a store-by-store basis, that might have had an impact on the evaluation of the lost investment was not explicitly included in the reasons for judgment.
[218] I note however that the judge was not unaware of the potential for variation. At paragraph [111], he pushed his analysis further than simply adopting Mr. Baril’s method. “A review of the financial statements of the Franchisees in the years immediately preceding the closing of their stores”, he wrote, “reveals that in most cases their investments in their franchises exceed what they could expect to receive for the sale of their stores using the formula of ‘50% of annual sales’”. These financial materials were before the judge; the Franchisor now complains that he undertook this exercise without the assistance of argument of the parties. But no effort was made by the Franchisor to show exactly where, in his reading of the financial statements, the judge went astray in his conclusion. With respect, it would seem to me that this complaint - given the burden on appeal falling to the Franchisor to show an error at trial that justifies our intervention - is too little, too late, as the judge himself wrote in another context.
[219] The Franchisor also complained, in one brief and unsubstantiated paragraph of its factum, that the net effect of an award for lost profits for the period up to 2005 and an award for lost investment based on the value of the stores in 2005 is to provide the franchisees with double compensation.
[220] I recognize that, in theory at least, circumstances may well exist where lost profits and lost investment would give rise to a “double dip”. Where damages are awarded for lost profits, sustained over a long period in a business, and where the sole capital assets used to generate those profits are subject to a high degree of depreciation, one might imagine the possibility of double compensation. In this appeal, however, the Franchisor made no effort to substantiate how this may have come about here. No numbers whatsoever are presented in support of this criticism of the trial judgment and, once again, the appellant has fallen back on the strategy of complaining that the plaintiffs “failed” to meet their burden of proof at trial when the judge found otherwise. Even at trial, its expert made a confused presentation of this point, asserting, first, on May 3, 2011, that it was acceptable to claim both heads of damages (“it’s not a double dip”) before changing his mind the next day (“it was “double counting all the way through”). The judge heard the evidence, examined the financial statements, and chose to award both heads of damage. Once more, the Franchisor has failed to show a reviewable error with the degree of precision that would entitle an appellate court to disturb the first-hand work of the trial judge on this point.
[221] Finally, I note that some of the Franchisees remained in business after 2005. It seems unfair that they should be indemnified for their lost investment on the basis of 2005 results when they may have earned income thereafter.
[222] The judge was not unaware of this possible anomaly. He noted at paragraph [70] that “[s]ome [franchisees] lasted longer than others in a desperate struggle to maintain their businesses”. It would seem, however, that he viewed those who soldiered on as operating businesses that had lost their worth.[65] But I note that he took care, in his conclusions, to take into account the anomaly as best he could: he ordered, at paragraph [129], that each plaintiff’s interest and the indemnity under article 1619 C.C.Q. be paid from the later date of the institution of the action and the last day of the fiscal period during which lost investments were realized due to store closures.
[223] This is not one of those rare cases in which an appellate court is well advised to send a case back to trial to have the damages evaluated. While the amount in dispute is significant, this is not an instance in which a trial judge decided matters in the absence of proof or where the judge failed to decide a matter in dispute.[66] The proof is imperfect in the eyes of the appellant, but not absent. At the end of the day, my sense that the judge’s evaluation of lost investments should not be disturbed - with the two exceptions mentioned above - turns as much on the burden to show an error on appeal than anything else. It was tolerably clear at trial that the loss had been sustained. The judge had evidence in hand on which he relied and was entitled to rely. That stands until the appellant shows an error. In my respectful view, the Franchisor failed in that task.
[224] To conclude on this point, I propose to reduce the amount of damages for lost profits from an aggregate of $9,047,143 to $6,536,041.25, allowing for the Franchisor’s contribution to renovations of $249,316 to be refunded and calculating the total using 75% of the increase in sales in 2005.
[225] In sum, the adjustments proposed to the amounts awarded for lost profits and lost investments reduce the aggregate amount of damages awarded from $16,407,143 to $10,908,513.25, to be divided amongst the Franchisees as set forth in Schedule A appended to my reasons for judgment. I would confirm the judgment of the Superior Court in all other respects.
***
[226] Article 477 C.C.P. provides that the losing party pay costs. By practice, courts often order parties to pay their own costs where the outcome of a case is divided.
[227] In this instance, I propose that the Court confirm the order of costs against the Franchisor at trial and condemn it, as appellant, to pay 75% of costs on appeal. This is not a reflection for sympathy or antipathy felt to one party or another. In my view, notwithstanding the reduction of damages awarded to the Franchisees on appeal, the outcome of the case is not truly divided as understood in respect of the aforementioned practice. The basic thesis of the Franchisor at trial - that the respondents were themselves at fault - was rejected and not seriously challenged on appeal. The Franchisor’s arguments on liability were all dismissed on appeal; it lost its two principal arguments in respect of damages relating to the inappropriateness of the comparable method advanced by the Franchisees and that proof of lost investments had been made. As to the judge’s errors in calculation that were corrected on appeal, these were mostly conceded or not opposed by the Franchisees. While the Franchisees did not secure all that they wanted on appeal, the outcome of the case is not sufficiently divided to justify making no order as to costs. In consideration of the foregoing, I propose that the Court exercise its discretion under article 477 C.C.P. to leave the award of costs to the respondents at trial undisturbed and to condemn the appellant to pay 75% of costs on appeal in recognition of the reduction in the quantum of damages.
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NICHOLAS KASIRER, J.A. |
|
Schedule A
|
Franchisee
|
Location |
Lost Profits ($)
|
Lost Investments ($) |
TOTAL ($)
|
|||||
|
75% 2000- 2005 |
Prescrip- tion |
Royalties |
Total |
50% of the adjusted amount of sales
|
Renova- tions |
Total |
|||
|
Jacques Doyon & Monic Huard |
Boul. Lacroix (Saint-George-de-Beauce)
|
407,250 |
(18,352) |
(77,317) |
311,581 |
460,525.50 |
- |
460 525,50 |
772 106,50 |
|
Les Entreprises Doyon et Huard Inc.
|
1re Avenue (Saint-George-de-Beauce)
|
167,250 |
(7,440) |
(48,864) |
110,946 |
227,805 |
- |
227,805 |
338,751 |
|
3089-8001 Québec Inc.
|
Boul. Saint-Martin (Laval)
|
123,750 |
(5,456) |
(73,004) |
45,290 |
277,976.25 |
- |
277,976.25 |
323,266.25 |
|
9067-0308 Québec Inc.
|
Boul. Le Corbusier (Laval)
|
62,250 |
(2,728) |
(75,872) |
(16,350) |
210,142.50 |
- |
210,142.50 |
193,792.50 |
|
Les entreprises Lucien Stephens Inc.
|
Boul. Industriel (Val-Bélair) |
118,500 |
(5,456) |
(24,501) |
88,543 |
191,896.50 |
- |
191,896.50 |
280,439.50 |
|
Bertico Inc.
|
535 Boul. Arthur-Sauvé (Saint-Eustache)
|
468,000 |
(21,080) |
(39,401) |
407,519 |
407,456.25 |
- |
407,456.25 |
814,975.25 |
|
Bertico Inc.
|
171 Boul. Arthur-Sauvé (Saint-Eustache)
|
237,750 |
(10,664) |
(32,797) |
194,289 |
220,175.25 |
- |
220,175.25 |
414,464.25 |
|
3024032 Canada Inc.
|
25e Avenue (Saint-Eustache)
|
102,000 |
(4,712) |
(21,427) |
75,861 |
148,008.75 |
- |
148,008.75 |
223,869.75 |
|
3176941 Canada Inc.
|
Rue Principale (Lachute)
|
385,500 |
(17,360) |
(24,265) |
343,875 |
243,124.50 |
- |
243,124.50 |
586,999.50 |
|
3155412 Canada Inc.
|
367 Boul. Arthur-Sauvé (Saint-Eustache)
|
141,750 |
(6,448) |
(10,137) |
125,165 |
164,418 |
- |
164,418 |
289,583 |
|
3481191 Canada Inc.
|
Rue Sainte-Anne (Sainte-Anne-des-Plaines)
|
129,000 |
(5,704) |
(35,659) |
87,637 |
241,159.50 |
- |
241,159.50 |
328,796.50 |
|
Les Entreprises Charloise Inc.
|
Boul. Talbot (Chicoutimi) |
225,000 |
(10,168) |
(18,047) |
196,785 |
- |
(30,000) |
(30,000) |
166,785 |
|
Les Entreprises Charloise Inc.
|
Rue Racine (Chicoutimi) |
18,750 |
(744) |
- |
18,006 |
165,257.25 |
- |
165,257.25 |
183,263.25 |
|
Les Entreprises Pierre Maclure Limitée
|
Route du Président-Kennedy (Lévis) |
208,500 |
(9,424) |
(6,637) |
192,439 |
336,447.75 |
(38,920) |
297,527.75 |
489,966.75 |
|
Les Entreprises Pierre Maclure Limitée
|
Boul. de la Rive-Sud (Lévis) |
156,000 |
(6,944) |
(40,406) |
108,650 |
274,612.50 |
(26,073) |
248,539.50 |
357,189.50 |
|
Les Entreprises Pierre Maclure Limitée
|
Avenue des Églises (Charny) |
83,250 |
(3,720) |
(42,168) |
37,362
|
269,348.25 |
- |
269,348.25 |
306,710.25 |
|
Les Entreprises Pierre Maclure Limitée |
Rue Commer-ciale (Saint-Jean-Chrys.)
|
110,250 |
(4,960) |
(24,733) |
80,557 |
205,208.25 |
- |
205,208.25 |
285,765.25 |
|
Les Entreprises Pierre Maclure Limitée
|
Route 116 (Saint-Nicolas) |
28,500 |
(1,240) |
(25,776) |
1,484 |
150,513.75 |
- |
150,513.75 |
151,997.75 |
|
2622-6282 Québec Inc.
|
3 combined restaurants (Rimouski) |
243,750 |
(10,912) |
(2,767) |
230,071 |
430,924.50 |
- |
430,924.50 |
660,995.50 |
|
2857-8664 Québec Inc.
|
Boul. des Laurentides(Saint-Antoine) |
432,000 |
(19,344) |
(7,732) |
404,924 |
- |
(16,836) |
(16,836) |
388,088 |
|
2857-8664 Québec Inc.
|
Boul. Labelle (Saint-Jérôme) |
418,500 |
(18,848) |
(16,895) |
382,757 |
- |
(26,387) |
(26,387) |
356,370 |
|
3089-3309 Québec Inc.
|
Boul. Hôtel-de-Ville (RDL) |
275,250 |
(12,400) |
(24,947) |
237,903 |
341,140.50 |
(35,200) |
305,940.50 |
543,843.50 |
|
3089-3309 Québec Inc.
|
Boul. Thériault (RDL) |
81,000 |
(3,720) |
(4,272) |
73,008 |
163,921.50 |
- |
163,921.50 |
236,929.50 |
|
3089-3309 Québec Inc.
|
Rue Témiscou-ata (RDL) |
122,250 |
(5,456) |
(13,035) |
103,759 |
175,041 |
(35,200) |
139,841 |
243,600 |
|
3092-5077 Québec Inc.
|
Route de l’Église (SJPJ) |
66,000 |
(2,976) |
(16,448) |
46,576 |
220,832.25 |
- |
220,832.25 |
267,408.25 |
|
9009-6694 Québec Inc.
|
1re Rue (La Pocatière) |
66,000 |
(2,976) |
(15,307) |
47,717 |
167,342.25 |
- |
167,342.25 |
215,059.25 |
|
9064-0947 Québec Inc.
|
Chemin des Érables (Cabano) |
249,750 |
(11,160) |
(16,099) |
222,491 |
237,321 |
(40,700) |
196,621 |
419,112 |
|
9116-5399 Québec Inc.
|
Boul. Cartier (RDL) |
- |
- |
(3,148) |
(3,148) |
94,474.50 |
- |
94,474.50 |
91,326.50 |
|
2968-7654 Québec Inc.
|
Boul. Décarie (Montréal) |
242,250 |
(10,912) |
(96,415) |
134,923 |
455,490 |
- |
455,490 |
590,413 |
|
2968-7654 Québec Inc.
|
Boul. Lacordaire (Montréal) |
150,000 |
(6,696) |
(61,452) |
81,852 |
304,794 |
- |
304 794 |
386,646 |
|
|
|
5,520,000 |
(248,000) |
(899,528) |
4,372,472 |
6,785,357.25 |
(249,316) |
6,536,041.25 |
10,908,513.25 |
[1] [1998] R.J.Q. 47 (C.A.).
[2] Bertico inc. v. Dunkin’ Brands Canada Ltd., 2012 QCCS 2809.
[3] Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at paras. [46] et seq.
[4] P.L. v. Benchetrit, 2010 QCCA 1505 at para. [24].
[5] Author Jean H. Gagnon, a leading authority on franchise law in Quebec, has observed that the majority of franchise agreements set forth numerous explicit obligations on franchisees and few on franchisors: Jean H. Gagnon, La franchise au Québec, looseleaf (Montreal: Wilson & Lafleur, 2003) at 228.5. See also Alexander S. Konigsberg and Anne-Marie Gauthier, “Relations franchiseur - franchisé: nature et étendue des obligations du franchiseur” (1993) 27 R.J.T. 633 at 654-55.
[6] Article 1434 C.C.Q. provides:
|
Le contrat valablement formé oblige ceux qui l'ont conclu non seulement pour ce qu'ils y ont exprimé, mais aussi pour tout ce qui en découle d'après sa nature et suivant les usages, l'équité ou la loi. |
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A contract validly formed binds the parties who have entered into it not only as to what they have expressed in it but also as to what is incident to it according to its nature and in conformity with usage, equity or law. |
[7] The importance of a relationship of collaboration between independent businesses is seen as a defining feature of many franchise agreements. See, e.g., Chantal Sylvestre, “Le contrat de franchise” in D.-C. Lamontagne, ed., Droit spécialisé des contrats, vol. 2: Les contrats relatifs à l’entreprise (Cowansville : Éd. Yvon Blais, 1999) 261 at 271; Paul-André Mathieu, La nature juridique du contrat de franchise (Cowansville: Éd. Yvon Blais, 1989) at 10 and Générosa Bras Miranda, “Le contenu obligationnel du contrat de franchise internationale en droit québécois” (1998) 32 R.J.T. 817 at 834-35.
[8] In “Breach of Good Faith in the Performance of the Franchise Contract” (2004) 83 Can. Bar Rev. 431, author Shannon Kathleen O’Byrne drew notably on the Provigo case to define franchise agreements as the quintessential relational contract: “The relational contract”, she wrote, “is one where the parties have obligations over time and are thereby linked by the norms of reciprocity, flexibility, contractual solidarity, restraint of power and propriety of means” (at 437).
[9] Professor Jean-Guy Belley has explained the relational contract as “celui qui établit les normes d’une collaboration étroite que les parties souhaitent maintenir à long terme”, appropriate for characterizing the commercial relationship of the franchise and like agreements in Quebec law: Jean-Guy Belley, “Théories et pratiques du contrat relationnel: les obligations de collaboration et d’harmonisation normative” in Conférences Meredith Lectures 1998-1999: La pertinence renouvelée du droit des obligations: Back to Basics. The Continued Relevance of the Law of Obligations: retour aux sources (Cowansville: Éd. Yvon Blais/McGill University, 2000) 137 at 139-40.
[10] The duration of the various agreements were not all the same and, in the later contracts, they were often shorter than they had been in the 1990s. Some of the contracts terminated at the end of the franchisee’s lease. But they were all for multiple years, they all contemplated renewal (subject to control by the Franchisor) and they all provided for supervisory powers for the Franchisor that suggest correlative duties to the network of the Franchisees.
[11] In a similar way, Marie-France Bich, writing as a law professor, suggested that article 1434 C.C.Q. brings with it implied obligations that are the “complément nécessaire” of the employment contract by reason of its inherent nature: Marie-France Bich, “Le pouvoir disciplinaire de l’employeur: fondements civils” (1988) 22 R.J.T. 85. For an application by this Court of the idea that some implied obligations, such as the obligation of security, are necessarily incidental to contracts under art. 1434 C.C.Q., see Stations de la vallée Saint-Sauveur inc. v. M.A., 2010 QCCA 1509 at para. [25].
[12] See, e.g., Paul-André-Crépeau, “Le contenu obligationnel d’un contrat” (1965) 43 Can. Bar Rev. 1 at 6 (on art. 1024 C.C.L.C.) and Sébastien Grammond, Anne-Françoise Dubruche and Yann Campagnolo, Quebec Contract Law (Montreal: Wilson & Lafleur/Collection bleue, 2011) at para. 315 (on art. 1434 C.C.Q.).
[13] See Didier Lluelles and Benoît Moore, Droit des obligations, 2nd ed. (Montreal: Éd. Thémis, 2012), para. 1491. Similar language was used in Provigo, supra note 1 at 58 and, recently, by my colleague Claude Gagnon, J.A. in Banque Toronto-Dominion v. Brunelle, 2014 QCCA 1584, at para. [79].
[14] Specifically he referred to Provigo, supra note 1 at 59 and 61.
[15] Supra note 1 at 59.
[16] Supra note 1 at 60.
[17] This is how the “obligation de coopération” is explained as an implied obligation of good faith in Pierre-Gabriel Jobin and Nathalie Vézina, Baudouin et Jobin: Les obligations, 7th ed. (Cowansville: Éd. Yvon Blais, 2013) at para. 162.
[18] The view that the implied obligation of good faith in Provigo is justified both by the presumed intention and equity is adopted by Lluelles and Moore, supra note 13 at paras 1546 and 1553. To adapt for Quebec law a helpful distinction sometimes made in the common law, the obligations based on presumed intention given the “nature of the contract” under article 1434 C.C.Q. are “implied in fact” whereas those that come from “equity” may be said to be “implied by law”: see Stephen Smith, Contract Theory (Oxford: O.U.P/Clarendon Pr., 2004) at 67.
[19] Provigo, supra note 1 at 60.
[20] Belley, supra note 9 at 147, referring explicitly to Provigo, supra note 1.
[21] Professor Marie-Annick Grégoire has written that the duty of “collaboration”, recognized in Provigo, “ne se content[e] plus de prescrire à un contractant d’éviter passivement de nuire à autrui mais qui lui impos[e] un comportement actif de sauvegarde des intérêts du contractant”: Marie-Annick Grégoire, Liberté, responsabilité et utilité: la bonne foi comme instrument de justice (Cowansville : Éd. Yvon Blais/Collection Minerve, 2010) at 181 (emphasis in the original).
[22] Bhasin v. Hrynew, 2014 SCC 71 at [70]. It should be noted that this case, originating in Alberta, concerned the duty to perform contracts in good faith rather than an implied obligation of good faith, but the observation remains relevant here.
[23] This point is made in an Ontario case that refers to Provigo in respect of the duty of good faith and fair dealing: a franchisor can act in its own interest but must consider the interest of the franchisee in so doing: Shelanu Inc. v. Print Three Franchising Corp., 2003 CanLII 52151 (ON CA) at para. [69].
[24] Philippe Le Tourneau and Michel Zola, JurisClasseur Contrats : Fasc. 1050 - Franchisage - Franchisage dans le domaine des services, looseleaf (Paris: Éd. LexisNexis, 2011) at para. 107. The authors write that a franchisor “est tenu d’accomplir diverses tâches de nature collective afin d’assurer la prospérité du réseau”, including obligations to ensure the “dynamisme et la cohésion du réseau” (paras. 120-21).
[25] Writing on French law, authors Cyril Grimaldi et al. speak of “les obligations imposées dans l’intérêt du réseau” on a franchisor, and give examples of, inter alia, of the “protection du réseau” and the “développement du réseau”: Droit de la franchise (Paris: Litec, 2010) at paras. 376-79.
[26] Bras Miranda, supra note 7 at 910. See also Sylvestre, supra, note 7 at 287 (“une obligation implicite du franchiseur de veiller à la protection de l’ensemble de son réseau”).
[27] This is made particularly explicit in paragraph 5 to the 1992 agreement, entitled “Convenants of the FRANCHISEE”, which states that by his or her signature the franchisee understands that “every detail of the DUNKIN’ DONUTS SYSTEM is important to DUNKIN’ DONUTS CANADA, to the FRANCHISEE and to other DUNKIN’ DONUT franchisees in order to develop and maintain high and uniform standards of quality, cleanliness, appearance, service, facilities, products and techniques to increase the demand for DUNKIN’ DONUTS CANADA products and to protect and enhance the reputation and goodwill of DUNKIN’ DONUTS CANADA. […]” [emphasis added].
[28] See Gillian K. Handfield, “Problematic Relations: Franchising and the Law of Incomplete Contracts” (1989-90) 42 Stanford L. Rev. 927 at 950 et seq.
[29] In an article entitled “Le comportement opportuniste du franchiseur: étude du droit civil et du droit international uniforme” (2007) 41 R.J.T 429, author Zoubeir Mrabet characterized this as the franchisor’ “obligation implicite de bien gérer le réseau” (at 486). This same point is made by numerous scholars : see, e.g., Gagnon, supra note 5 at 228.50 who writes of the “obligation de s’assurer que l’ensemble des franchisés respecte les normes et les règles du franchiseur de manière à ne pas préjudicier à la réputation, à l’achalandage et aux affaires des autres franchises”.
[30] Le Tourneau and Zola, supra note 24 at para. 122.
[31] Provigo, supra note 1 at 60. The Court noted further that mere efforts limited to maintaining the status quo are insufficient in that this approach could cost the franchise its place in the market.
[32] Provigo, supra note 1 at 60.
[33] The judge used the expression several times in his reasons, including at para. [110]: “After all, ADRIC’s breach of contract lies principally upon its failure to keep Tim Hortons out of the hen-house (Dunkin’ Donuts’ market share). There is a direct correlation between Tim Hortons’ successes in the Quebec fast food market and Dunkin’ Donuts’ losses”. See also paras [96] and [99].
[34] See paragraph 14.B of the 1992 agreement, for example, in which the parties acknowledge the speculative character of the franchisees investment and that no warranty is made as to the potential success of the venture made this explicit.
[35] See P.-A. Crépeau, L’intensité de l’obligation juridique (Cowansville: Éd. Yvon Blais, 1989) at para. 15 and Hydro-Québec v. Constructions Kiewit cie, 2014 QCCA 947 at paras. [401] and [402].
[36] [2004] 3 S.C.R. 461, especially paras. 64 to 66.
[37] See, e.g., Stéphane Rousseau, “Le rôle des tribunaux et du conseil d’administration dans la gouvernance des sociétés ouvertes: réflexions sur la règle du jugement d’affaires”, (2004) 45 C. de. D. 469, p. 533. See also Paul Martel, La société par actions au Québec - Volume I: Les aspects juridiques, looseleaf (Montreal: Wilson & Lafleur, 2011) at 23-26 and 23-27.
[38] See para. 11.A of the 1992 agreement and para. 21 of the 2002 agreement.
[39] The Court has recently confirmed this view of the business judgment rule in Vidéotron v. Bell ExpressVu, 2015 QCCA 422 at para. [71].
[40] Ford du Canada ltée v. Automobiles Duclos inc., 2007 QCCA 1541.
[41] Francoeur v. 4417186 Canada inc., 2013 QCCA 191.
[42] Supra note 40 at para. [128]
[43] Supra note 41 at para. [65].
[44] Ducas v. Québec (Ministre de la Solidarité sociale), 2005 QCCA 126 at para. [5].
[45] See, e.g., Berthiaume v. Réno-Dépôt inc., [1995] R.J.Q. 2796 at 2807.
[46] Cojacaru v. B.C. Women’s Hospital and Health Center, 2013 SCC 30, esp. paras. [30] and [36].
[47] Birdair inc. v. Danny’s Construction Co. Inc., 2013 QCCA 580, esp. paras. [52] and [59].
[48] Charlebois v. Boutique Kit International Ltée, [1987] R.D.J. 607 at 610 (C.A.).
[49] On this Court’s disinclination to see a like procedural defect as fatal in circumstances where the parties had the chance to make their case, see Droit de la famille - 871, [1990] R.J.Q. 2107 at 2108.
[50] See Superior Energy Management Gas, l.p. v. 9102-8001 Québec inc., 2013 QCCA 682 at para. [12].
[51] See, e.g., Syndicat des employées et employés de métier d’Hydro-Québec, section locale 1500 (SCFP-FTQ) v. Fontaine, 2006 QCCA 1642, esp. para. [56] and Foyer du sport inc. v. Coop fédérée, 2008 QCCA 381, esp. para. [15].
[52] See C.L. v. J.Le., 2010 QCCA 2370 at paras. [152] to [159].
[53] 2012 QCCA 2130.
[54] See, e.g., Lévesque v. Hudon, 2013 QCCA 920 at para. [69].
[55] The Franchisor did make an argument that there could not be an award both of lost profits and lost investments without creating a double indemnity, discussed infra, but did not say - or at least did not demonstrate - that this resulted in no lost investment whatsoever.
[56] 2012 QCCA 372 (Wagner, J.A., as he then was, in chambers).
[57] Professor Jean Carbonnier wrote that the exception d’inexécution in French law is a “diminutif de la résolution […]. L’exception est un moyen purement temporaire. Le contrat n’est que suspendu : le créancier, d’abord repoussé, pourra obtenir satisfaction dès qu’il aura accompli sa propre obligation” : Droit civil : vol II - Les biens, Les obligations (Paris: PUF, 2004) at para. 1110. The ‘creditor’, in our example, is the Franchisor to whom royalties are owed under the contract.
[58] This is the total amount of the cross-claims filed in first instance, confirmed by the Franchisor in its inscription in appeal. In a schedule to its factum, the Franchisor records $989,359, without explaining the difference or amending its inscription in appeal. The amount of $899,528 will be awarded.
[59] This was acknowledged by the Franchisees’ own expert in his report when he recognized that the 100% figure did not allow for “l’influence qu’aurait exercée Dunkin’ Donuts sur le marché en obtenant une plus grande part des ventes”.
[60] Thus, it is appropriate to “distinguer entre l'incertitude du dommage en elle-même et celle découlant de la difficulté qu'il y a à le mesurer exactement en raison de la nature du litige, de la réalité du débat ou de la complexité des faits”: Provigo, supra note 1 at 67 (para. 25). The Court affirmed this recently in Vidéotron, supra note 39 at para. [88].
[61] Raymor Painting Contractors (Canada) Ltd. v. Purolator Courier Ltd., [1976] C.S. 468 at 472, cited with approval in, inter alia, 3030911 Canada inc. v. Softvoyage inc., 2010 QCCA 1375 at para. [57].
[62] See, e.g., Sunrise Tradex Corp. v. Tri-Caddi International Inc., 2011 QCCA 2064 at paras. [50], [64] and [65], where proof of loss was not certain, nor was it found on credible evidence; Kirkland (Ville de) v. Compagnie Immeubles Yale ltée, J.E. 2001-598 (C.A.) at para. [9], where the Court noted the absence of evidence of loss; Abbatoirs Laurentides (1987) inc. v. Olymel inc., J.E. 2003-1262; 2003 CanLII 8729 (QC Sup. Ct.) at paras. [65] to [70] in which proof of loss was also found to be absent.
[63] See, e.g., Regroupement des citoyens contre la pollution v. Alex Couture inc., 2011 QCCS 4262 at paras. [52] et seq. where the trier of fact said the other available evidence of loss was arbitrary.
[64] J.E. 2004-778; 2004 CanLII 25747 (C.A.).
[65] The practice is not unusual. Writing of franchisees for whom the capital value of their business has been lost, author Handfield notes “[a] business with sunk costs […] will continue to operate even though it has never recovered its investment in fixed costs, and will not shut down until the amount it is losing exceeds what it would lose by simply abandoning the investment”: supra note 28 at 952.
[66] See, e.g., Syndicat des métallos, section locale 2843 v. 3539491, 2011 QCCA 264, Papastratis v. McConomy, J.E. 2003-574 (C.A.); Droit de la famille - 091541, 2009 QCCA 1268.
AVIS :
Le lecteur doit s'assurer que les décisions consultées sont finales et sans appel; la consultation du plumitif s'avère une précaution utile.