Décision

Bertico inc. c. Dunkin' Brands Canada Ltd.						2012 QCCS 2809
JT 0971    SUPERIOR COURT
CANADA
PROVINCE OF QUEBEC
DISTRICT OF			MONTREAL
No:		500-17-015511-036;
		500-17-019989-048;  500-17-028727-058
DATE:	JUNE 21st, 2012
______________________________________________________________________
BY:				THE HONOURABLE	DANIEL H. TINGLEY, J.S.C
______________________________________________________________________
BERTICO INC. ET AL                                                                   (Franchisees)
Plaintiffs
v.
DUNKIN’ BRANDS CANADA LTD.                                              (ADRIC) (formerly Allied Domecq Retailing International (Canada) Ltd.)
Defendant
______________________________________________________________________
JUDGMENT
______________________________________________________________________

THE LITIGATION

[1]           Twenty-one (21) Quebec Dunkin Donuts Franchisees, who had operated thirty-two (32) Dunkin Donuts stores in Quebec, seek the formal termination of their leases and franchise agreements plus damages of $16,4 million from their Massachusetts based Franchisor, ADRIC. These damages they say arise from the latter’s repeated and continuous failure between 1995 and 2005 to fulfill its obligations, notably to protect and enhance[1] the Dunkin Donuts brand in Quebec, in virtue of its franchise and ancillary agreements with the Franchisees.

[2]           ADRIC denies any breach of its contractual obligations towards the Franchisees. It asserts that (a) it has complied with all such obligations while the Quebec Franchisees have not, (b) the Franchisees have failed to operate clean, renovated establishments in accordance with its standards, (c) it is not the insurer of the Franchisees nor does it guarantee their success and (d) in view of releases the Franchisees signed, they are barred from claiming any damages from it. ADRIC goes on to conclude for the dismissal of the Franchisees’ action and, by way of cross-demands, it seeks payment of unpaid royalties, ad-fund contributions, interest and other sums aggregating nearly $2,2 million.

 

THE PLAINTIFFS / FRANCHISEES

[3]           Mr. Sylvain Charbonneau operated six (6) Dunkin Donuts stores in the Lachute/St-Eustache areas through five (5) corporations that he controlled, as follows:

1)            two stores at 535 and 171 Arthur-Sauvé Blvd. in St-Eustache held by Bertico Inc. from 1992 to 2011 ;

2)            a store at 180, 25th Ave, local 203 in St-Eustache held by 3024032 Canada Inc. from 1994 to 2003 ;

3)            a store at 367 Arthur-Sauvé Blvd. in St-Eustache held by 3155412 Canada Inc. from 1996 to 2011 ;

4)            a store at 506 Principale St. in Lachute held by 3176941 Canada Inc. from 1995 to 2005;

5)            a store at 38 St-Anne Blvd. in Ste-Anne-des-Plaines held by 3481191 Canada Inc. from 1998 to 2007;

[4]           Mr. Mario Corbeil operated two (2) Dunkin Donuts stores in or near St-Jérôme through 2857-8664 Québec Inc. that he controlled at 471 Des Laurentides Blvd. in St-Antoine and 1050 Labelle Blvd. in St-Jérôme from 1991 to 2011;

[5]           Mr. and Mrs. Joao and Noemia De Lima operated two (2) Dunkin Donuts stores in the Laval area through two (2) corporations that they controlled, as follows:

1)             a store at 1456 St-Martin Blvd. West held by 3089-8001 Québec Inc. from 1993 to 2003;

2)             a store at 1600 Corbusier Blvd. suite 120/121 held by 9067-0308 Québec Inc. from 1998 to 2003;

[6]           Mr. Jacques Doyon and his wife, Mrs. Monic Huard, operated two (2) stores in St-Georges-de-Beauce both in their names and through a corporation that they controlled, as follows:

1)             a store in their own names at 8950 Lacroix Blvd. from 1984 to 2006;

2)             a store at 11511, 1^st Ave. East held by Les Entreprises Doyon et Huard Inc. from 1988 to 2004;

[7]           Mr. Pierre Maclure operated five (5) Dunkin Donuts stores in the Lévis/Charny areas through Les Entreprises Pierre Maclure Limitée that he controlled at 108 President Kennedy Rte, Lévis; 7520 Rive-Sud Blvd., Lévis; 8035 des Églises Ave., Charny; 880 Commerciale St., St-Jean-Chrysostome and 600 Route 116, St-Nicolas from 1979 to 2008;

[8]           Mr. Claude St-Pierre and his wife, Mrs. Lynda Viel, operated six (6) Dunkin Donuts stores in the Bas St-Laurent area through five (5) corporations that they controlled, as follows:

1)             a store at 82 Cartier Blvd. in Rivière-du-Loup held by 9116-5399 Québec Inc. from 2002 to 2006;

2)             three stores at 198 Hôtel-de-ville Blvd.; 248 Temiscouata St., and 298 Thériault Blvd. in Rivière-du-Loup held by 3089-3309 Québec Inc. from 1991 to 2006;

3)             a store at 701 Route de l’Église in St-Jean-Port-Joli held by 3092-5077 Québec Inc. from 1993 to 2003;

4)             a store at Carrefour La Pocatière, 601 1^st St. in La Pocatière held by 9009-6694 Québec Inc. from 1994 to 2004;

5)             a store at 17 Chemin des Érables in Cabano held by 9064-0947 Québec Inc. from 1998 to 2005;

[9]           Mr. Jean Rioux operated three (3) Dunkin Donuts stores in Rimouski through 2622-6282 Québec Inc. that he controlled at 185 and 127 René-Lepage Blvd. and at 124 St-Germain Blvd. from 1988 to 2007;

[10]        Messrs. Raymond Massi and John Costin operated two (2) Dunkin Donuts stores in Montreal through 2968-7654 Québec Inc. that they controlled at 7630 Lacordaire Blvd. and 7555 Décarie Blvd. from 1992 to 2004;

[11]        Mr. René Joly and Mrs. Charlotte Lévesque operated two (2) Dunkin Donuts stores in Chicoutimi through Les Entreprises Charloise Inc. that they controlled at 1577 Talbot Blvd. and 200 Racine Blvd. from 1987 to 2005;

[12]        Ms. Mariette Long operated a Dunkin Donuts store in Val-Bélair through Les Entreprises Lucien Stephens Inc. that she controlled at 1862 Blvd. Industriel from 1997 to 2004;

 

THE DEFENDANT AND ITS FRANCHISE AGREEMENTS

[13]        Dunkin Donuts stores have been operating in Quebec since 1961 utilizing the “Dunkin Donuts System” developed by Dunkin Donuts Incorporated and its subsidiary Dunkin Donuts Canada Ltd. ADRIC is the successor to Dunkin Donuts Canada Ltd. by mergers concluded in 1991 and 2003. ADRIC had represented in the English version of its Franchise Agreements[2] with the Franchisees that:

“DUNKIN DONUTS CANADA and/or its parent Company, DUNKIN DONUTS INCORPORATED, as the result of the expenditure of time, effort and money, has acquired experience and skill in the development, opening and operating of shops and distribution outlets involving the production, merchandising and sale of donuts and other related products utilizing a specially designed building or facility with specially developed equipment, equipment layouts, interior and exterior accessories, identification schemes, products, management programs, standards, distribution and delivery methods, specifications, proprietary marks and information, all of which are referred to in this Agreement as the “DUNKIN DONUTS SYSTEM”.

DUNKIN DONUTS INCORPORATED has developed and used and continues to use and control the usage of, in connection with its business of DUNKIN DONUTS Franchisees (sic), certain proprietary interests, trademarks and trade names, including “DUNKIN DONUTS” which is registered as a trademark in the Canadian Register of Trade Marks (the  “PROPRIETARY MARKS”), to identify for the public the source of goods and services marketed there under and to represent to the public high and uniform standards of quality, cleanliness, appearance and service. DUNKIN DONUTS CANADA is the Registered User in Canada of the PROPRIETARY MARKS owned by DUNKIN DONUTS INCORPORATED, and in accordance therewith may, with the prior consent of DUNKIN DONUTS INCORPORATED, license or grant a franchise to any third party, including the FRANCHISEE. Moreover, DUNKIN DONUTS CANADA has been appointed as the Canadian Agent for DUNKIN DONUTS INCORPORATED, for the purposes of licensing the said Proprietary Mark registrations and granting franchises in Canada of establishing and supervising the standards and specifications of the DUNKIN DONUTS SYSTEM and of inspecting the wares sold under the said PROPRIETARY MARKS, the whole in accordance with the terms and conditions set forth herein.”

[14]        The Franchise Agreements all provide for the grant of a franchise “to operate a donut shop utilizing the “DUNKIN DONUTS SYSTEM” in accordance with such agreements at specified locations and for specified terms of up to twenty (20) years but never longer than the expiration of the Franchisees’ leases. The franchise includes the right to use:

“[…] the trademark “DUNKIN DONUTS”, along with other PROPRIETARY MARKS owned by DUNKIN DONUTS INCORPORATED and utilized by DUNKIN DONUTS CANADA, in connection with other DUNKIN DONUTS SHOPS, and the right to use the DUNKIN DONUTS SYSTEM including all confidential and valuable information which now exists or may be acquired hereafter and set forth in DUNKIN DONUTS operating manuals or otherwise disclosed to DUNKIN DONUTS CANADA’S Franchisees.”

[15]        ADRIC agrees in these Franchise Agreements:

“2.C. To make available the specifications and/or requirements for the equipment to be utilized in the DUNKIN DONUTS SHOP;

2.D. To make available to the FRANCHISEE, and the FRANCHISEE’S designated representative, prior to the opening of the DUNKIN DONUTS SHOP, a training program with respect to the operation of the DUNKIN DONUTS SYSTEM conducted at the DUNKIN DONUTS UNIVERSITY Corporate Training Center (DDU);

2.E. To provide operating procedures to assist the FRANCHISEE in complying with DUNKIN DONUTS CANADA’S standard methods of record keeping, controls, staffing and training requirements and production methods and in developing approved sources of supply;

2.F. To make available to the FRANCHISEE assistance based on the experience and judgment of DUNKIN DONUTS CANADA, in the preopening, opening and initial operation of the DUNKIN DONUTS SHOP and in conforming to the requirements of the DUNKIN DONUTS SYSTEM; and

[…]

3.A. To maintain a continuing advisory relationship with the FRANCHISEE, including consultation in the areas of marketing, merchandising and general business operations;

3.B. To provide operating manuals to the FRANCHISEE, which contain the standards, specifications, procedures and techniques of the DUNKIN DONUTS SYSTEM, and to revise, from time to time, the content of the manuals to incorporate new developments regarding standards, specifications, procedures and techniques;

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;

3.D. To review for approval all proposed advertising and promotional materials relating to the FRANCHISEE’S DUNKIN DONUTS operations, prepared by the FRANCHISEE for use in local advertising; and

3.E. To administer The DUNKIN DONUTS Franchise Owners Advertising and Sales Promotion Fund (the “Fund”) and to direct the development of all advertising and promotional programs. One-fifth of the FRANCHISEE’S 5% advertising contribution (1% of the GROSS SALES of the shop) will be utilized, at the discretion of DUNKIN DONUTS CANADA, to provide for the administrative expenses of the Fund and for programs designed to increase sales and enhance and further develop the public reputation and image of DUNKIN DONUTS CANADA and the DUNKIN DONUTS SYSTEM. The balance, including any interest earned by the Fund, will be used for advertising and related expenses. Contributions to the Fund in excess of 5% of GROSS SALES shall be used in accordance with the programs to which they relate. The content of all advertising, as well as the media in which the advertising is to be placed and the advertising area shall be at the discretion of DUNKIN DONUTS CANADA. Upon request, DUNKIN DONUTS CANADA will provide the FRANCHISEE a statement of receipts and disbursements of the Fund, prepared by an independent chartered accountant (or U.S. certified public accountant) for each fiscal year of the Fund.”

[16]        The remaining clauses in these Franchise Agreements, comprising some 25 pages, speak to the obligations and covenants of the Franchisees, including amongst others, the weekly payment of Franchise fees (4,9% of gross sales) and Advertising contributions to the Fund (a minimum of 5% of gross sales), the procurement and payment of insurance against specified risks from pre-approved insurers, the purchase of pre-approved food products, supplies, equipment and materials required for the operation of their stores, the maintenance and management of such stores, their staffing and training, the keeping of books and accounts, the submission of weekly statements of gross sales, monthly profit and loss statements and annual and bi-annual financial statements certified by a pre-approved accountant, the pre-approved renovation and remodeling of their stores within 10 years (requiring funds of at least $200,000), restrictions on competitive activities of Franchisees during and after termination (two years) of the Agreements and the conditions for the transfers of an interest in the Agreements.

[17]        Paragraph [9] of the Agreements deals with events of default, cure periods and the consequences (including termination) if a default is not cured. Included, as events of default are bankruptcy or insolvency, the failure to pay when due any amounts under the Agreements or to comply with any of the Franchisee’s obligations under the Agreements or any ancillary agreements such as leases or equipment acquisitions.

[18]        ADRIC revised its franchise agreements in 2002, reducing the term from up to twenty (20) years to up to ten (10) years and requiring major renovations every five (5) years rather than the 10 years under the 1990 forms. About the only place in the 34 page 2002 form of franchise Agreement where ADRIC recognizes the importance to both franchisor and franchisee of improving or enhancing the Dunkin Donuts’ brands is found in the last “considérant” of the “Préambule” on page one in these terms:

“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;“

Not only is it important, it is of the essence of any franchise arrangement. The rest of this form speaks to the obligations of the Franchisees.

[19]        In late 2000, as part of its 2001 marketing plan, ADRIC introduced to the Quebec market a remodel incentive programme which would serve as an amendment to existing franchise agreements and was intended to be implemented within 18 months of the date of the amending agreement. The incentive programme was voluntary and was offered to those Franchisees:

“(a) who meet our current requirements and are approved for remodeling in the province of Quebec, and (b) who are in compliance with all of their agreements with us.”

[20]        The programme, intended to encourage Franchisees of at least 75 stores to commit to renovations of their stores before the time prescribed in their franchise agreements, contemplated payments being made by ADRIC which could aggregate $46,200 towards the overall cost to renovate (at least $200,000) over the first year following such renovations. ADRIC also committed to contribute (a) “50% of franchise fees generated by actual incremental sales” to the AD fund for three (3) years and (b) $3,000 “for any remodeled store where Tim Hortons develops a new store nearby “within 24 months.”

[21]        The remodel incentive programme was introduced by ADRIC, amongst other initiatives, to combat an aggressive competitor, Tim Hortons, who had in the five preceding years captured a significant proportion of the fast food market in Quebec.

[22]        Franchisees who agreed to renovate their stores prematurely were obliged, as a condition precedent to receiving incentive payments, to sign a “Quittance générale” expressed in these terms:

“ […] pour bonnes et valables considérations, qu’ils [the Franchisees] reconnaissent par les présentes avoir reçu […] donnent […] quittance complète et finale à […] DUNKIN’ DONUTS, de toutes réclamations, demandes, causes d’actions, procédures, dettes, sommes d’argent, comptes, ententes, contrats, conventions, promesses, dommages, jugements, ou toutes autres obligations, tant liquides ou exigibles que contingentes, connues ou non, de quelque nature que ce soit, à toutes fins que de droit, que les SOUSSIGNÉS ou leurs prédécesseurs, leurs légataires, exécuteurs, administrateurs, successeurs ou cessionnaires, s’il en est, avaient, ont ou pourraient avoir pour quelque raison ou cause que ce soit depuis la création de l’univers jusqu’à ce jour.

Sans limiter la généralité de ce qui précède, mais pour fin d’exemple seulement, la présente quittance s’applique à toutes et chacune des réclamations ou causes d’actions, violations d’obligations, réclamations ou causes d’actions basées sur des fausses représentations ou la fraude, violations d’obligations de fiduciaire ou toute autre réclamation ou cause d’action de quelque nature que ce soit.

[…].”

[23]        As noted,[3] ADRIC invokes this “Quittance générale” as a complete bar to the right of the Franchisees to bring any suit or action against it for whatever reason from the dawn of creation to the day it was signed. While only a few of the Franchisees ever signed a Quittance, this may nevertheless in part explain why the Franchisees have limited their claims for damages to those incurred since January 1^st, 2000. Prescription appears to have been the principal reason.

[24]        Some three years later, by which time Tim Hortons had supplanted Dunkin Donuts as the industry leader in the Quebec fast food market, ADRIC transferred and assigned its rights in its Franchise Agreements with the Franchisees to Couche-Tard[4], as a Master Franchisee, in these terms:

“2.  GRANT:

2.1 Master Franchisee’s Rights. ADRIC grants to Master Franchisee the exclusive, non-transferable right, and Master Franchisee undertakes the obligation, pursuant to the terms and conditions of this Agreement, (1) to franchise to Franchisees at least that number of new Franchised Shops within the Territory as is specified in the development schedule referred to in Section 4.1, and attached hereto as Exhibit D (“Development Schedule”); (2) to license Franchisees to sell and market Dunkin’ Donuts Products to customers only at their designated Shop premises within the Territory; and (3) to use and license Franchisees to use the Marks in connection therewith.

2.2 Existing Shops. Master Franchisee acknowledges having received, as of the Effective Date, an assignment of the Existing Franchise Agreements from either ADRIC or DDCAN, with respect to the Existing Shops, Master Franchisee shall henceforth perform all obligations of franchisor under the Existing Franchise Agreements.

2.3 Shops. Each Shop, other than Existing Shops in their current premises, shall be located only at a specific location, which meets the requirements of the Franchising Systems Plan. All new, renovated or relocated Shops shall be developed in accordance with the Development Schedule and the Franchising Systems Plan.”

[25]        This transfer and assignment was made for an initial term of 10 years and was not exclusive. This is explained in paragraphs 4.4 and 4.5 of the Dunkin Donuts Master Franchise and Territorial Development Agreement (Master Franchise Agreement) executed on August 27, 2003 which stipulate that:

“4.  DEVELOPMENT OBLIGATIONS:

[…]

4.4 Conditional Exclusivity. During the initial Development Schedule and any extensions thereof, ADRIC shall not operate, or grant third party a franchise to operate, any new Shops in the Territory; provided that Master Franchisee: (a) timely opens and franchises the required number of Shops in accordance with the Development Schedule; and (b) has not defaulted under the provisions of this Agreement or any other agreement between the parties. The conditional exclusivity provided above may be extended by written agreement between ADRIC and Master Franchisee in connection with their negotiation of subsequent development schedules.

4.5 Remedies. If the Development Schedule or the Shop mix requirements are not met, ADRIC shall have the continuing right to: (a) develop and license others to develop Dunkin’ Donuts Shops within the Territory, and/or (b) terminate the exclusive development and other rights granted Master Franchisee under this Agreement, and/or (c) temporarily suspend any part of or all development and other rights granted Master Franchisee under this Agreement, and/or (d) terminate this Agreement and all rights granted hereunder. ADRIC shall give written notice of the right(s) under this Section 4.3 that it intends to invoke, which shall be effective upon the expiration of the immediately ensuing Contract Year (effectively providing Master Franchisee with a twelve (12) month cure period), unless during such twelve (12) month period Master Franchisee cures such failure. In the event of termination of Master Franchisee’s exclusive rights, the rights of Master Franchisee pursuant to this Agreement shall thereafter continue on a non-exclusive basis subject to all of the other terms of this Agreement. The exercise of any remedy permitted by this Section 4.4 shall be without prejudice to any other right or remedy of ADRIC under this Agreement with respect to any other default by Master Franchisee.”

[26]        Couche-Tard defaulted under the Master Franchise Agreement as early as August 2004. Four (4) years later, in a Termination Agreement executed on August 20, 2008, Couche-Tard surrendered and terminated all its rights and obligations under the Master Franchise Agreement subject to payments in excess of one million. By this time, there were only 41 Dunkin Donuts stores still operating in Quebec. Today there are less than 25 such stores.

[27]        In an Addendum to the Termination Agreement executed on June 15, 2010, Couche-Tard represented and warranted that “all the remaining Couche-Tard Dunkin Donuts Shops are unprofitable and that they have not been able to sell these Shops.” Relying upon this representation, ADRIC consented to their premature closings against payment of penalties to compensate for lost income.

[28]        Counsel for ADRIC objected to the production of the Master Franchise Agreement and the Termination Agreement on grounds of relevancy. The Court initially took these objections under reserve and later dismissed them for the reasons given at trial on January 18, 2011.[5] These documents speak eloquently to the demise of the Dunkin Donuts brand in Quebec despite the efforts of Couche-Tard between 2003 and 2008. The damage had long since occurred. Allowing Tim Hortons to capture the lions’ share of the Quebec Fast Food donuts and coffee market between 1995 and 2003 was a huge and costly mistake. It was far from inevitable as ADRIC later proved in respect of its New England market.

THE DUNKIN DONUTS EXPERIENCE IN QUEBEC

[29]        The Dunkin Donuts Brand has a long history in Quebec, a presence extending over half a century. In the mid nineties it was still the leader in the Quebec fast food coffee and donut market, both by total sales and number of stores (210 in 1998). Yet in less than a decade, more than 200 Dunkin Donuts stores in Quebec using the “Dunkin Donuts System” have closed their doors.

[30]        ADRIC attributes this stunning fall from grace to the “Tim Hortons’ phenomenon” and underperforming, even poor, franchisees, submitting in argument that:

“8. Throughout many of these years, the Quebec market thrived. There was virtually no competition and the Quebec Dunkin’ Donuts franchisees were […] very successful. Then came the “Tim Hortons’ phenomenon”. As Tim Hortons grew increasingly in the Quebec market, towards the end of the nineties and in the early two thousands, competition intensified and Quebec franchisees were starting to feel the brunt of this heightened competition;

 9. Tim Hortons was coming out with brand new stores, great execution, and was increasing its number of locations. At the same time, an increasing number of Dunkin’ Donuts stores were experiencing decreasing sales, becoming timeworn, execution was uneven and many franchisees were not working as hard as they could to deliver a first rate Dunkin’ Donuts experience;

10. In the year 2000, Dunkin’ Donuts reacted to the situation and devised a strategic plan to meet the challenges facing the franchisees in the Quebec market.”

[31]        The Franchisees characterize the decade, roughly 1995 to 2005, in a very different light:

“1. … Le présent dossier illustre le déclin vertigineux et l’échec marqué d’un franchiseur négligeant et de mauvaise foi, ayant abandonné ses meilleurs franchises au Québec.

 2. Dans son échec, face à l’essor d’un concurrent mieux organisé et structuré, “Tim Hortons”, Dunkin’ Brands entraîne avec elle les Demandeurs (ou les “Franchisés”), lesquels comptent parmi les meilleurs franchisés de son réseau québécois. En effet, la plupart des Demandeurs a été autorisé à exploiter plus d’un établissement et a connu des années prospères. Ils comptent parmi les opérateurs les plus participatifs et respectueux des normes de qualité et d’excellence du Franchiseur. D’ailleurs, nombre d’entre eux ont été récipiendaires de marques d’appréciation, de plaques commémoratives ou de prix distinctifs en provenance du Franchiseur. Ils ont, en moyenne opéré entre 10 et 30 ans un ou plusieurs établissements “Dunkin’ Donuts”. La preuve révèle qu’au cours de ces années, ils n’ont rien changé de substantiel quant à leurs méthodes à titre d’opérateurs et quant à leurs qualités à titre de franchisés.

 3. En 1996, lors d’une réunion “extraordinaire“ sans précédent, les franchisés du réseau alertent le Franchiseur et identifient une cinquantaine de points qui doivent être adressés pour freiner le recul de la marque “Dunkin’ Donuts“ et pour renouer avec la prospérité.

 4. Enfin, les Franchisés qui obtiennent le conseil d’experts-comptables indépendants en arrivent tous à la même conclusion : le plan de rénovation n’est pas économiquement viable, compte tenu de l’état d’endettement des franchisés. À tout événement, ce plan intervient trop tard. “

[32]        The Franchisees formally alerted ADRIC to what later became the “Tim Hortons’ phenomenon” in 1996. Little was done that was effective to combat this “phenomenon”. By early 2000, the Quebec Franchisees were very concerned about “a gradual crumbling” of the Dunkin Donuts image in Quebec. They wrote to ADRIC on February 15, 2000, demanding “a recovery plan” and a “plan of action” within 30 days to address the Franchisee’s several concerns spelled out in their 5page letter such as the high level of management turnover, reduction of services offered, deterioration of image, lack of technical and management support and the requirement that ADRIC reinvest in its banner to maintain “its leadership position in the market.”

[33]        In late 2000 ADRIC proposed the remodel incentive programme mentioned above in paragraphs [19] to [23] inclusive. Amongst other things, the remodel programme required a huge investment on the part of those Franchisees who committed to it, notwithstanding the negative views of the accountants retained by the Franchisees to advise them as to the feasibility of the programme.

[34]        The gloomy predictions and forecasts of the Franchisees’ experts concerning the likely consequences of adherence to the programme proved to be much more accurate than some of the representations of ADRIC; for example, a 15% improvement in gross sales for those Franchisees who committed to the programme, an improvement never realized by any of them. For various reasons discussed below[6] this programme never got off the ground.

[35]        Thus, in May 2001 the Quebec Franchisees put ADRIC in default to provide them with “a satisfactory and detailed plan and schedule of action” to address their concerns mentioned in their February 2000 letter and repeated in their May 22, 2001 “mise en demeure.”

[36]        Conditions for the Dunkin Donuts franchise did not improve. Worse, store closures far exceeded new store openings such that by 2003 the number of Dunkin’ Donuts shops operating in Quebec had shrunk from a high of 212 stores to 115 stores. As noted above, the slide continued until by last year, only 25 stores remained in operation in Quebec. Today, some 13 stores are still operating.

[37]        In the period 1995 to 2005, virtually all the Franchisees experienced stagnant sales, despite inflation over this decade aggregating some 21% and a growing fast food market. By contrast, during this same period, Tim Hortons’ stores experienced on average annual sales increases of 7,5%, or over 70% for the decade.[7]

[38]        Clearly, Tim Hortons had captured the lions’ share of growth in the coffee/donut fast food market and at the very least materially contributed to the precipitous collapse of the “Dunkin Donuts System” in Quebec during this period. Tim Hortons’ stores had multiplied five times from 60 stores in 1995 to 308 by 2005. Dunkin Donuts’ market share in Quebec had plummeted from 12,5% in 1995 to 4,6% in 2003.

[39]        Much evidence was adduced by the Franchisees to explain the demise in less than a decade of the “Dunkin Donuts System” in Quebec. This evidence is summarized in considerable detail in the Franchisees’ “Plan d’Argumentation” at pages 6 to 223 inclusive. It is a story of how twenty-one of the best Dunkin Donuts Franchisees in Quebec lost their franchise businesses, for some their livelihoods, in a very short period of time due to factors largely out of their control.

[40]        It is a sad saga as well of how a once successful franchise operation, a leader in its field - the donut/coffee fast food market in Quebec - fell precipitously from grace in less than a decade; literally, a case study of how industry leaders can become followers in free market economies.

 

THE EXPERTS

[41]        Mr. François Desrosiers, MBA, retained by the Franchisees, prepared a 27 page Report in 2008 cataloguing the “manquements”(breaches) of ADRIC towards its Franchisees between 1990 and 2005. Mr. Desrosiers testified at length in support of his Report which concludes with these opinions, all of which are amply supported by the evidence adduced at trial:

1)  …les dirigeants d’Allied Domecq Retail International avai(en)t une appréciation discutable du marché québécois et une vision incohérente au niveau des intentions, des décisions et des actions entreprises par Allied Domecq Retail International à l’endroit de ses franchises.

2)  Après avoir connu des années fastes, le leader qu’était Dunkin Donuts est devenu le follower que l’on connaît. Le succès conjoncturel qu’a connu Dunkin Donuts au Québec au cours des années 1980 était principalement la conséquence d’un manque de concurrence structurée. L’arrivée tardive de Tim Hortons a été largement sous-estimée par les gestionnaires de Dunkin Donuts et ces derniers ont persisté dans la reproduction aveugle d’anciens facteurs de succès qui se sont traduits par des facteurs d’échecs au détriment de la marque et des franchisés.

3)   Le plan de relance de la marque et du réseau québécois des établissements Dunkin Donuts par Alimentation Couche-Tard pourrait être un jour concluant mais cela ne soustrait en rien les responsabilités du franchiseur Allied Domecq Retail International envers ses franchisés entre 1990 et 2005.

[42]        As if to prove the point, no sooner had the Franchisees brought their action against ADRIC than this latter transferred its rights in the Quebec market to Couche-Tard, as a “Master Franchisee”, as noted above in paragraphs [24] to [27] inclusive and in item 3) of the preceding paragraph.

[43]        After reviewing the Master Franchise Agreement of 2003 and in the light of what happened thereafter, the Court opined that such transfer had all the appearances of a very clever exit strategy from the Quebec fast food market for which counsel to ADRIC could be justly proud. The pity is that the damage had already been done and even the well funded Quebec based Couche-Tard could not restore what had been allowed to founder under ADRIC’s direction.

[44]        Mr. Douglas Fisher, BAS, MSc, FCMC, CFE, FCSI,[8] was mandated by ADRIC to respond to Mr. Desrosiers’ Report. Following an industry review, feasibility analyses of the Franchisees’ stores, comments on various complaints of Franchisees - menu changes, fresh vs. frozen eggs, Coke to Pepsi, post mix to cans, 18% vs. 10% cream, Drive-thru, larger portions, store renovations and advertising - Mr. Fisher concluded that:

1)  It is clear that Dunkin’ Donuts has a winning formula in that it has over 8,800 restaurants worldwide and many have proven successful in the Province of Quebec. It is also clear that there is a very strong coffee and donut market in Quebec.

2)  It is highly unlikely that the introduction of Tim Hortons to any one particular market has by itself caused the demise of any one particular Dunkin’ Donuts operation. It is more likely that the demise of the franchisees in this litigation was due to any one of a number of factors ranging from poor operations quality to poor service strategy, from service of inferior product to offering old and timeworn facilities. Only a few plaintiff franchisees took the franchisor’s advice and incentives to remodel their stores, although this by itself, without increased service quality, cleanliness and the other factors discussed earlier, does not guarantee success.

3)  It seems to me that while the Plaintiffs have been demanding that the franchisor be more like Tim Hortons, they thwarted everything that the franchisor proposed to be more competitive with Tim Hortons and the other competition entering the Quebec marketplace. The franchisees took their time renovating, many did not renovate at all, there was no synergy of franchisees in the market other than complaining about the operations that they were responsible for on a day-to-day basis.

4)  It is my opinion that Dunkin Donuts made substantial efforts to raise the quality and mix of their offerings to reach out and meet the needs of the Quebec consumer. Dunkin’ Donuts attempted a changeover in products, conducted product testing and showed a desire to improve the store design, presence and convenience in order to be more appealing to their Quebec customers.

5)  The […] franchisees who are party to this litigation, did not:

1.    Give Dunkin’ Donuts the chance to implement their expertise;

2.    Remodel in accordance to the franchisor’s request and as required in their agreement;

3.    Implement almost all recommended changes in product and operations;

4.    Focus on day-to-day operations and local promotion but rather on national advertising; and

5.    React positively to the franchisor’s recommendations and suggestions.

In my opinion, these inactions of the franchisees contributed to their demise.

[45]        The balance of Mr. Fisher’s Report is a detailed critique of Mr. Desrosiers’ Report, concluding that in his opinion:

1)  […] the competition of Tim Hortons was not a significantly contributing factor to the plaintiffs’ unfortunate failure in the Quebec market. Also, I am of the view that blaming the franchisor, Allied Domecq, for not having succeeded as well as Tim Hortons in the Quebec market is to completely overlook:

1.    the major differences between these two franchise concepts; and

2.    the paramount role of the franchisee in the success of a restaurant.

2)  The continued growth and success of a mature franchise concept depends first and foremost on the involvement and hard work of the franchisees. I do not see, from a franchise industry standards’ point of view, any shortcomings or negligence on the part of Allied Domecq in its decisions and actions undertaken to support its Dunkin’ Donuts franchise and brand in Quebec. I am of the view that Allied Domecq did not abandon the Quebec marketplace, but was and has continued to make efforts to get franchisees to conform to current looks, service and style, Allied Domecq has invested in the ad fund to cover deficits, has recruited quality staff and seemingly has worked hard to promote the brand. In the context of a weak economy, a saturated market and a fierce competition for new and attractive location/premises, the success of a restaurant depends principally on flawless management, good quality and fresh product, excellent and personalized service in a clean and appealing environment.

[46]        Mr. Fisher has had to rely on the accuracy of the allegations contained in the defences for many of his opinions. However, the allegations in particular of poor or underperforming operators were never substantiated. To the extent Mr. Fisher blames “poor service strategy” or “service of inferior product” he necessarily blames ADRIC, the strategist behind the System and the party that must pre-approve all products. He characterizes the Quebec fast food market as a “saturated market”. It wasn’t; it was still a growing market in the late 1990’s.

[47]        In addition, Mr. Fisher criticizes the refusal of most of the Franchisees to submit to a premature and voluntary remodelling of their stores, notwithstanding the gloomy predictions of their experts at the time the remodel programme was presented in late 2000. He is careful however to point out that such remodelling “by itself” does not guarantee success.

[48]        Finally, the conclusions drawn by Mr. Fisher in paragraph (5) recited above in paragraph [44] are, save as regards the fifth item, largely unsupported by the facts adduced at trial. However, it is quite true that the Franchisees were for the most part very reluctant to spend up to $200,000 to remodel their stores before they were contractually obliged to do so, given their own experts opinions.

 

THE LAW

[49]        The Franchisees’ claims are grounded in contract, or more correctly breaches of ADRIC’s obligations under their Franchise Agreements. So too are the cross-claims asserted by ADRIC against the Franchisees.

[50]        The Franchise Agreement creates obligations to which the parties are bound. They are bound as well to obligations that are incident to the contract “according to its nature and in conformity with usage, equity or law.”[9]

[51]        Franchise Agreements, by their very nature[10] are almost always characterized as contracts of adhesion, that is, a contract wherein the “essential stipulations were imposed by one of the parties” and these stipulations “were not negotiable”.[11] This is certainly the case with the Franchise Agreements. They were prepared in their entirety by or for ADRIC and by all accounts their terms were not negotiable.

[52]        Consequences flow from contracts that are described as adhesion contracts. For example, an “abusive clause” in a contract of adhesion “is null, or the obligation arising out of it may be reduced.”[12] The Franchisees submit that the “Quittance générale” some of them signed constitutes just such a clause. The affected Franchisees ask that the clauses in it barring any suit or action be annulled.[13]

[53]        As with all contracts, the breach of an obligation contained in them (explicit) or incident to them according to their nature (implicit), gives rise to a civil fault.[14] Franchisors are bound by an obligation of good faith and of loyalty towards their franchisees such that they are duty bound to work in concert with them and:

“de lui fournir les outils nécessaires, sinon pour empêcher qu’un préjudice économique ne lui soit causé, du moins pour en minimiser l’impact. Entre, d’une part, l’inaction totale et le maintien d’un statu quo qui risquaient de lui coûter sa place de marché et, d’autre part, l’exercice de son droit de libre concurrence vis-à-vis des tiers, il existe une marge. […] Elle devait, de concert avec eux, mettre sur pied une réplique commerciale adéquate qui permettait à ces derniers de minimiser leurs pertes et de se repositionner dans un marché en évolution.”[15]

 

DISCUSSION

A.  The Contractual Faults

[54]        Far and away the most important explicit obligation of ADRIC under its Franchise Agreements is the one found at paragraph 3C of the 1990 Agreement and the last “considérant” on page 1 of the 2002 Agreement wherein it promises to protect and enhance both its reputation and the “demand for the products of the Dunkin Donuts System”; in sum, the brand. It did neither between 1995 and 2005. The brand has withered in Quebec by all relevant measures, however successful it may continue to be in the United States or elsewhere in the world according to Mr. Fisher.

[55]        The Franchisees have raised a host of other explicit and implicit failings they ascribe to ADRIC during the years 1995 to 2005 - failure to adequately consult, support and assist, absence of a corporate store or stores to test new products and train new staff, inordinately high turnover of ADRIC’s executives, too few business and operations consultants to adequately service the Quebec Franchisees, failure to remove in a timely manner underperforming franchisees from the Quebec “réseau”, 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”.

[56]        These alleged failings - civil faults - have all for the most part been substantiated convincingly from the evidence adduced by the Franchisees and from acknowledgements and admissions flowing from several of Defendant’s witnesses and exhibits.

[57]        But the greatest failing of all was ADRIC’s failure to protect its brand in the Quebec market. No doubt the host of failings chronicled by the Franchisees contributed to the collapse of the Dunkin Donuts’ brand in Quebec. A successful brand is crucial to the maintenance of healthy franchises. However, when the brand falls out of bed, collapses, so too do those who rely upon it. And this is precisely what has happened in this case.

[58]        ADRIC had assigned to itself the principal obligation of protecting and enhancing its brand. It failed to do so, thereby breaching the most important obligation it had assumed in its contracts. It must accept the consequences of such a failure. As noted above, Franchisees cannot succeed where the System has failed. After sustaining several years of stagnant sales, narrowing profit margins and then losses, the Franchisees have all had to close their stores. Their losses follow hard upon the heels of ADRIC’s failures as night follows day.

[59]        This particular breach was not the result of a single act or omission committed before or after some of the Franchisees signed the Quittance mentioned above in paragraphs [22] and [23]. It was a failure over a period of a decade (1995 to 2005) to protect the brand brought about by a multiplicity of acts and omissions occurring during the period. Brand protection is an ongoing, continuing and “successive” obligation.

B.  The Defences[16]

[60]        ADRIC suggests in its defences that the Franchisees have only themselves to blame for their demise; they were poor franchisees. ADRIC’s expert, Mr. Fisher, is somewhat more guarded. He opined, based on the assumption that the allegations in the defences were true - and for the most part they were not true - that the Franchisees only “contributed to their demise”.

[61]        Were the Franchisees poor operators? Not by a long shot. They were amongst the best and most successful in the Quebec “réseau”. Their owners were amongst the most active committee members. Several of them chaired these committees at one time or another. Many of the owners operated several stores. They were for the most part the leaders amongst the Quebec Franchisees. ADRIC failed miserably during the first sixty-six days of trial to paint the Franchisees as poor operators. This was a defence utterly devoid of substance.

[62]        Blaming the Franchisees for their unhappy circumstances and for the failure of the Dunkin Donuts System in the Quebec marketplace has not been substantiated. Those Franchisees who operated their stores otherwise than according to ADRIC’s standards are not parties to this action. ADRIC allowed these underperforming stores to remain open to the evident prejudice of the “réseau”, setting poor examples by their continuing presence. Rather, it is ADRIC that has failed to comply with several of its obligations under the Franchise Agreements. Although not the insurer of the Franchisees nor a guarantor of their success, ADRIC is nevertheless responsible to them for the harm it has caused by its civil faults.

[63]        What then of the “Quittances” some of the Franchisees signed in order to receive ADRIC’s contributions - up to $46,000 coupled with bank guarantees - to the cost of each remodel to which they committed? This issue is discussed at some length in the Plaintiffs’ “Plan d’argumentation” at pages 165 to 180 (paragraphs 622 to 684) and in the Defendant’s Brief of Arguments at pages 109 to 112 (paragraphs 453 to 461).

[64]        The owners of the stores that were renovated under the remodel programme and who signed a Quittance all submit that they were induced to renovate under false pretences and based upon representations that turned out to be equally false. Given that the Quittances were treated as amendments to the franchise agreements, those Franchisees who signed them want them annulled as being abusive.[17]

[65]        A condition precedent imposed by ADRIC to proceeding with the programme was that at least 75 stores in good standing[18] had to commit to it. This never happened. Less than half those numbers of stores were renovated under the remodel programme. The so-called “synergy of numbers” was never realized. Worse, stores were closing and no new stores were coming on stream. To the extent that the remodel programme was intended to stop store closures, encourage new stores and improve the profits of existing stores, it was a failure. Mr. Desrosiers was right. ADRIC had seriously underestimated the Tim Hortons’ phenomenon.

[66]        ADRIC represented that sales of remodelled stores would increase by 15% in the first year and for several years thereafter. As noted,[19] this assurance was never realized by any of those who participated in the programme.

[67]        Concurrently with the implementation of the remodel programme, ADRIC had announced it was investing some $40,000,000 to revive the brand in Quebec. Half this amount was to come from the pockets of the Franchisees who were to remodel their stores. In the result, no credible evidence was advanced to even suggest that anything like $20 million of ADRIC’s funds was injected at or around the turn of the century to protect, support and enhance the brand. Such funds continued to come from the Franchisees largely through their annual contributions to the Advertising fund, an ever-diminishing amount as stores continued to close.[20] It was business as usual in circumstances where “usual” wasn’t nearly good enough.

[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[21].

C.  The Franchisees’ Damages

1. General observations

[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.

[71]        The Franchisees had been threatening for years to seek compensation from ADRIC for their business losses - that is, losses of contribution margin[22] - brought about largely by the Tim Hortons’ phenomenon; a phenomenon facilitated by the singular failure of ADRIC to meet the competition head on and in a timely fashion. It was too little way too late.

[72]        The remodel programme, structured as it was and as described above, proved to be a dismal failure and led inexorably to the revenue losses the Franchisees sustained in the period subsequent to its wobbly implementation. It is these revenue losses that the Franchisees also claim from ADRIC. The major architect and beneficiary of these losses was Tim Hortons and its franchisees. They gained market share to the detriment of ADRIC and its Franchisees.

[73]        Lost profits flowing from lost sales in a growing market caused by a franchisor that had failed to protect its brand and the loss of investments made to participate in such market fall readily into the category of damages that is an “immediate and direct consequence of the debtor’s default”.[23] Moreover, they were foreseeable at the time the Franchise Agreements were signed by the parties. An underlying assumption of all franchise arrangements is that the brand will support a viable commerce.

[74]        ADRIC’s experts, Messrs Fisher and Harrar, do not suggest otherwise. Rather, Mr. Fisher erroneously laid the blame for the Franchisees’ misfortunes on them. Mr. Harrar attacks the approaches taken by Navigant to estimate lost sales and lost investments, relying in part upon the erroneous opinions of Mr. Fisher, particularly those where Mr. Fisher relied upon the truth of allegations in the defences that were never substantiated at trial.

2. The Navigant Report

[75]        The Franchisees retained Navigant Consulting to quantify the revenue losses the 21 Franchisees sustained by reason of ADRIC’s breaches of the Franchise Agreements, or more particularly, to quantity the losses of “contribution margins” each of the 32 stores sustained from January 1, 2000 to August 31, 2003, the 3 years preceding the institution of this action and from this latter date through 2005.

[76]        The approach Navigant takes to quantify this category of damages is to estimate for each of the Franchisees the contribution margin which would have been lost by them with reference to the corresponding increases in sales of Tim Hortons, the principal beneficiary of Dunkin Donuts’ decline. This is reflected in ten separate reports, one for each of the owners of the 21 Franchisees, and one general report summarizing the total damages under this category.

[77]        The Navigant Report relies on the following conclusions of the Desrosiers’ Report to which the Court subscribes for its approach to and quantification of this head of damages.

« Ainsi, Monsieur Desrosiers présente que :

Ø  la croissance annuelle des ventes du marché de la restauration au Québec a affiché une moyenne de l’ordre de 5,45% de 1991 à 2004 (Rapport Desrosiers, page 8);

·         l’analyse du graphique au bas de la page 8 de son rapport permet de constater que pour la période de 1997 à 2003, l’accroissement des ventes en pourcentage a toujours été comparable ou sinon plus élevé au Québec qu’au Canada, mis à part l’année 1998;

·         le nombre d’établissements Tim Hortons au Québec est passé de 60 à 308 de 1995 à 2005 (graphique de la page 9);

·         le graphique de la page 10 de son rapport compare la tendance du nombre d’établissements ouverts de 1995 à 2002 pour Dunkin Donuts à celle pour Tim Hortons. Selon ce graphique, la tendance a été tout à fait différente pour Dunkin Donuts par rapport à Tim Hortons. Ainsi, le nombre d’établissements de Dunkin Donuts a baissé de 1995[24] à 2002, alors que celui de Tim Hortons a augmenté;

·         dans le même ordre d’idées, les parts de marchés estimées détenues en 1995 et en 2003 ont aussi subi des tendances inverses si l’on compare Dunkin Donuts à Tim Hortons. Celles de Dunkin Donuts ont diminué de 1995 à 2003, alors que celles de Tim Hortons ont augmenté (tableau de la page 11);

·         selon le graphique de la page 16, les ventes annuelles moyennes d’un Tim Hortons au Canada ont sans cesse augmenté de 1995 à 2005, soit de 82% de 1995 à 2003, alors que la hausse des ventes de la restauration au Québec aurait été de 51%.

Selon ce même graphique, en 1995, un Tim Hortons générait en moyenne 812 000$, alors qu’en 2005, il rapportait 1 673 000$.

Ces différents constats de Monsieur Desrosiers nous serviront de guide pour quantifier les dommages qu’auraient subis les Franchisés. »

[78]        Mr. François Filion, CA, CA-EJC, EEE,[25] of Navigant testified at length as regards the methodology his team adopted to quantify the Franchisees’ damages under this head, the objective being to put them in the financial position they would have experienced had ADRIC retained its leadership role in the Quebec fast food market.

[79]        The formula is simple, its application complex; compute the sales the Franchisees should have had if ADRIC had contained Tim Hortons - as it later did in the New England states according to reliable hearsay - and deduct their actual sales to arrive at lost sales.

[80]        The first part of this accounting exercise is the tricky part; identifying and quantifying those costs that relate to the lost sales such as the cost of goods sold, employee salaries, royalties, advertising fund contributions and percentage rent.[26]

[81]        To help them in this endeavour, Navigant resorted to a recognized tool adopted by ADRIC to help the Franchisees calculate the increase in sales they should have experienced if they had renovated prematurely; the same essential exercise. This was a brilliant adaptation of a tool already to hand, albeit in reverse.

[82]        The next problem addressed by Navigant was to establish a starting point or reference period for its damage calculations covering the period 2000 to 2003. It fixed on 1998 as a reference year, recognizing correctly that ADRIC’s failures began as early as 1995; characterized by the Court as the beginning of the period of benign neglect in the face of the Tim Hortons’ onslaught.

[83]        In case the Court were to conclude that the Franchisees would not have experienced the Tim Hortons growth in sales in the years in question, Navigant developed three other growth scenarios; 75% of the Tim Hortons’ experience approximating the average growth of sales in the fast food market in Canada, 50% approximating the Quebec experience and 25% approximating the increase due solely to inflation.

[84]        From all of this, Navigant concludes its general report with a summary of damages in respect of lost profits for each of the Franchisees from 2000 to 2003 under the four scenarios.[27] The scenario that the Court will adopt[28] concludes that the Franchisees sustained lost profits during the years 2000 to 2003 of $4,5 million at the expense Tim Horton’s successes.

[85]        Since 2008, when Navigant’s Report was completed, the Franchisees have amended their action to add annual lost profits through 2005 and to add a claim for lost investment to those Franchisees who had closed their doors as of May 2011. These latter two claims aggregate more than $11,8 million: $2,8 million of lost profits for the period 2003 to 2005 and $9 million for lost investments.[29] The lost investment claim has been determined based on a “Rule of thumb” valuation applicable to Dunkin Donuts stores equal to 50% of annual projected sales in the year preceding their closing. Today, all of the Franchisees’ stores have closed.

3. The Nexia Friedman 2010 Report

[86]        ADRIC retained Nexia Friedman, a worldwide network of independent accounting firms, to “critique the damage calculations” presented by Navigant. They concluded in their Critique Report of December 21, 2010 that:

“1) In our opinion, the various estimated lost marginal contribution calculations presented by [Navigant (NC)] are unsupported and, at best, are speculative.

In addition, we are of the opinion that the information reviewed by NC, as presented in their reports, does not allow any conclusion regarding the plaintiffs’ alleged losses.

 2) In our opinion, the initial investments and major renovations and the calculations prepared and presented by NC do not reflect the net value of all of the assets and liabilities, or equity of the plaintiffs’ in their respective businesses and as such the calculations are not in accordance with Generally Accepted Valuation Principles, including the Asset-Based Approach and the Estimated Replacement Cost Method to valuing any business operation. From a valuation perspective, to rely solely on the historical cost of the stores’ fixed assets to determine the market value of any lost investments is not appropriate.”

[87]        They explain their opinion concerning the “alleged loss of value” of the Franchisees’ stores by adding that:

“Since the foundation for awarding economic damages is to place the injured party in the position that it would have occupied but for the alleged wrongdoing, then it is the out-of-pocket investment or the value of the net equity of the shareholders that should be considered and not their gross investment in fixed assets just before the alleged start of the damage period, namely 1996 or 1997 according to the plaintiffs. NC did not make any attempt to determine independently the actual loss of investments, if any, but merely reproduced historical data sustained by each of the plaintiffs.”

[88]        Mr. Steve Harrar, CFE, CBV, CMA, CA,[30] one of the signatories of the Nexia Friedman 56page report, testified in its support.

[89]        On April 15, 2011, Nexia Friedman sent to ADRIC’s counsel its Critique Report #2 commenting on “the new general approach taken by the [Franchisees] in arriving at the total claimed damages in the 2011 claim.” They repeated at pages 13 and 14 of this second report that:

“In our opinion, as described at length in the [Nexia Friedman] Report, the Plaintiffs’ use of the sales performance of Tim Hortons’ Canadian stores is highly speculative and unfounded. The Plaintiffs did not provide any justification or explanation as to why they retained 100% of the Tim Hortons’ Canadian stores annual growth rates and 1998 as a basis for their calculation of the store values, or why other methods of calculating the alleged damages were not considered. The Plaintiffs’ calculations reflect the highest scenario considered by NC, while NCs’ Reports clearly indicate other possible damage calculation scenarios.

and expanded on their previous opinion concerning lost store values, characterising them as “flawed” in that they overstate “the level of the alleged damages sustained as follows”:

·         The Plaintiffs assume that the franchises, which for the most part were approaching the end of their contractual term, would continue to exist indefinitely. The valuation methodology used (adjusted annual sales times a discount of 50%) assumes the continuation of a business into infinity. To assume that all the relevant franchise contracts will be extended indefinitely is highly speculative.

·         No external or internal factors such as, the competition, state of store cleanliness and repair, economic conditions, were considered to justify the use of Tim Hortons’ sales growth rates from 1998 onward.

·         At the end of each franchise term, the franchisee would be required to pay a new franchise fee and invest in major renovations. The Plaintiffs’ value calculations do not take this fact into account.

·         The Plaintiffs’ value calculations do not take into account the total debts which should be deducted when arriving at the value to the franchise owners.

·         The residual value realized upon the actual disposition of the stores’ assets were not deducted from the claimed amounts.

In our opinion, the use of a Rule of Thumb (50% of sales) as a primary method to calculate the value of the stores is not in accordance with valuation standards as it provides results that do not reflect or consider the profitability of each store. Valuation standards require that primary methods based on income and assets, as described in Annex A, be used first and that the related conclusions could be corroborated using Rules of Thumb calculations.

Based on the February 2011 claim, the Plaintiffs allege having lost approximately $333,000 per store. Their investments in their stores amount to approximately $43,000 in 1997, $66,000 in 2000 and $24,000 in 2003, if one took into account pre-damage or post-damage dates. To be conservative, for purposes of this analysis, we considered all of the Plaintiffs’ investments that the owners apparently controlled, including shareholders’ equity, loans from shareholders/directors/co-entrepreneurs and redeemable preferred shares. We note from this information that the Plaintiffs’ low investments in their stores amounted to 13% pre-damages and varied between 20% and 7% of the claimed amount post alleged damages.

By not considering all the above, the methodology used by the Plaintiffs grossly overstates the value of the stores and the claimed damages.”

4. Missing Evidence

[90]        There may be merit in the critiques Nexia Friedman have advanced concerning the methodology adopted by Navigant both as regards losses of revenue and value and the preferred approaches to take to determine “out of pocket investment or the value of the net equity of the shareholders” of the Franchisees. However, the Court harbours serious reservations concerning these “preferred approaches”. For example, is lost value really equivalent to lost investment or to the net equity of the Franchisees’ shareholders? If so, what then should the quantum of damages be? Defendant led precious little evidence to permit such a determination.

[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.[31]

[92]        The Court gave the parties until January 25, 2012 to settle the litigation. No settlement intervened and, after a debate on the issue of re-opening the hearing to allow ADRIC to produce additional proof (financial statements of the Franchisees for years prior to 1995) to support its experts’ opinion as to the appropriate methodology to determine the Franchisees’ damages, on January 31^st, 2012 the Court made the following orders:

DISCHARGES the Délibéré;

ORDERS the re-opening of the hearing to permit Defendant to complete the Proof necessary to develop the methodologies recommended by Defendant’s expert on damages at Defendant’s cost;

RATIFIES the following Échéancier of the parties:

On or before February 7, 2012:

For the production of Financial statements for the period of 1990 to 1995;

 

On or before March 12, 2012:

For the production of an Expertise by Defendant;

 

On or before April 2^nd, 2012:

For the production of an Expertise by Plaintiffs;

 

ORDERS the parties to conform to this Échéancier ;

FIXES the hearing to debate this issue for April 11^th and 12^th, 2012 in a room to be determined;

ORDERS Defendant to pay the reasonable fees and disbursements of Plaintiffs’ expert and the costs of producing all relevant Exhibits into the Court record within 15 days of receipt of invoices therefor;

ORDERS provisional execution of this cost order notwithstanding appeal.

[93]        ADRIC sought leave to appeal the costs order which was heard by Mr. Justice Wagner on February 24, 2012. He denied leave notwithstanding that the principles flowing from the decision in St-Arnaud[32] may have been disregarded (ie, an apparent absence of proof of impecuniousness) largely on the basis that any prejudice from such an order can be remedied by a final judgment. He added that it was just possible the trial judge might know something about the financial health of the Franchisees that he did not know, observing as well that in our case the issue of liability has been decided.[33]

5. The Nexia Friedman 2012 Submission

[94]        Nexia Friedman produced its report on March 15, 2012 using the financial statements of the Franchisees from the opening of their stores to 2003, where available, plus “information pertaining to sales by establishment that were sent to us in February 2012 by Plaintiffs' expert, Mr. Filion.”

[95]        Armed with these additional financial statements and information, Nexia then set about applying the Franchisees’ “actual activity” prior to ADRIC’s “wrongdoing” to predict what the sales and profits should have been were it not for (but for) the “wrongdoing” during the “damage period”. This is the approach Nexia asserts should have been used by Navigant to determine the Franchisees’ losses, rather than equating Tim Hortons’ gains to their losses, either in whole (100%) or in part (75%).

[96]        Constrained largely by its mandate, Nexia narrowly defined the “damage period” as being from May 1, 2000 to August 31, 2003 when ADRIC assigned to Couche-Tard all its obligations under existing Franchise Agreements.[34] The Court has determined that the Franchisees were adversely affected by the Tim Hortons’ phenomenon at least as early as 1996, exacerbated as Tim Hortons continued to gain market share at the expense of Dunkin Donuts. The “damage period” extends from 1996 when the Franchisees warned ADRIC of a fox looking to enter the hen-house until the last store closed its doors in 2011. ADRIC failed in the decade following the St-Sauveur meeting to reverse or even stem the Tim Hortons’ tide. Neither the remodel incentive programme nor the introduction of a master franchisee more in tune with local markets could resuscitate the Dunkin Donuts System in Quebec.

[97]        Having defined the “damage period” as akin to the “claim period” (2000 to 2003), Nexia then calculated the Franchisees’ historical sales and historical EBITDA[35] trends, using data wherever possible from 1990 to 1999, the year before the first year of the defined claim period, concluding that the Franchisees’ average annual growth for sales during this period was less than half the rate of inflation and the average decreasing trend for EBITDA was-2,01% per year, indicating that:

” … many plaintiffs were experiencing a negative EBITDA trend long before the claim period, indicating that the declining sales and profitability may be due to factors other than the alleged wrong-doing by the defendant.”

[98]        These observations should hardly come as any surprise once it is recognized that almost half the years included in Nexia’s calculations were in fact included in the “damage period” determined by the Court. They confirm that the Franchisees were struggling during the Tim Hortons’ ascendancy which began, arguably, as early as 1992.[36]

[99]        Nexia calculated that the Franchisees losses during the “claim period” totalled $1,1 million “before taking into account any discount … for the impact of competition as a causal effect of losses”. Quite simply, this is double discounting. The Franchisees sustained losses of profit due largely, if 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. This is rank nonsense.[37]

[100]     Nexia is nevertheless correct to observe that the Franchisees’ “average sales trend before the claim period was below the Quebec inflation rate for the restaurant industry” and that they “had started to show negative profitability growth rates prior to 1999 …”. In the Court’s opinion, these trends flow directly from the failure of ADRIC to protect (never mind enhance) its system and its brand in the Quebec market during a prolonged period extending from 1996, or earlier, to 2011.

6. The Navigant Response

[101]     Navigant criticizes the way that Nexia used the “but for” approach to conclude that “telle qu’utilisée par Nexia” this approach “est inadéquate et ne peut être adoptée dans le présent litige” for the following ten reasons:

“ a) Erreurs d’application de la part de Nexia

                      i.        alors que lors de l’audition du 31 janvier dernier, il fut mentionné que la période de référence à être utilisée était 1996, Nexia a utilisé la période de référence 1999 afin d’effectuer ses analyses;

                     ii.        alors que l’approche « but for » requiert l’analyse du contexte économique et de l‘industrie, Nexia n’a pas analysé les indicateurs qui y prévalaient pendant la période qui nous préoccupe, soit entre 1990 et 2005;

                    iii.        Nexia, pour chacun des établissements, effectue une moyenne de la croissance des ventes entre l’année 1990 (ou la date d’ouverture de l’établissement, si l’établissement a été ouvert subséquemment) et l’année 1999;

                    iv.        Nexia arête le calcul des dommages au 31 août 2003, soit au moment de la signature d’une entente avec Alimentation Couche-Tard. Par contre, les franchises ont continué à subir une décroissance de leurs ventes ou n’ont pas généré un niveau acceptable de celles-ci. Ainsi, la très grande majorité des établissements ont été contraints à fermer leurs portes par la suite;

                     v.        bien qu’elle ait utilisé la période de référence 1999, Nexia a eu recours pour certains établissements, à l’approche « comparable », faute d’un historique de données;

                    vi.        pour certains établissements, afin de définir la tendance des ventes, Nexia utilise des données historiques sur une période variant entre deux et quatre ans, alors que lors de son témoignage en mai 2011, le représentant de Nexia avait mentionné que l’analyse devait s’effectuer sur une période minimum de cinq années.

Or, en considérant cette période minimum de cinq années, ce n’est plus 32 établissements qui peuvent faire l’objet d’une analyse selon l’approche « but for », mais bien 21 établissements, si la période de référence 1999 est utilisée ou huit établissements si la période de référence 1996 est retenue;

                   vii.        alors que l’approche « but for » requiert l’identification de facteurs non récurrents qui devraient être exclus ou modulés afin de déterminer le taux de croissance représentatif, Nexia ne les identifie pas et les considère indirectement dans ses calculs;

b) L’approche « but for » ne peut être applicable dans plusieurs cas

                  viii.        tel que mentionné, pour certains établissements, dû à l’absence de données historiques sur une période adéquate, Nexia utilise l’approche « comparable », bien qu’elle utilise la période de référence 1999;

                    ix.        en considérant la période de référence 1996, ce n’est plus que huit établissements sur les 32 établissements qui présentent un historique de données suffisants, à première vue, afin d’effectuer une analyse telle que le requiert l’approche « but for »;

                     x.        de ces huit établissements :

·         deux établissements ont un historique de données suffisant et supporté avant 1996 afin d’utiliser l’approche « but for ». En utilisant cette approche, nous obtenons des dommages d’un montant semblable à ceux calculés avec l’approche « comparable »;

·         pour trois autres établissements, le nombre d’années nécessaires afin de supporter l’approche « but for » n’est pas adéquat, puisque nous devons exclure certaines années du à des facteurs non récurrents. Par contre, la croissance des ventes durant une période moindre que cinq ans, soit trois ans, indique une meilleure performance que celle du marché et celle de Tim Hortons Canada pour la même période, faisant en sorte que les dommages calculés selon l’approche « comparable » sont raisonnables et probants;

·         pour les trois derniers établissements, il est difficile, voire impossible, d’analyser les tendances historiques, puisque la documentation n’est pas disponible et/ou des éléments non récurrents doivent être pris en compte, ce qui diminue le nombre d’années sur lesquelles une analyse selon l’approche « but for » pourrait être effectuée, faisant en sorte que cette approche ne peut être utilisée.”

[102]     Several of the foregoing reasons are congruent with the findings of the Court discussed above[38], particularly the inclusion by Nexia in the so-called pre-damage period of sales and ABITDA trends incurred by the Franchisees during the “damage period” as determined by the Court.[39]

[103]     Notwithstanding that Navigant believes the “comparable” approach is the better method to determine the Franchisees’ loss of profits in this case, Mr. Filion nevertheless demonstrated that for those eight stores (8) where the but for approach could be used reliably - that is, using at least five years of data preceding the “damage period” - the results of the two approaches are very similar.[40] This exercise provides powerful support for the use and application of the comparable approach in this case to determine the loss of profits sustained by the Franchisees during the claim periods at the 100% level.

[104]     The Court agrees with Mr. Filion that it is wrong to include data from the “damage period” to predict projected sales in such period were it not for the wrongdoing. As noted above, it skews the numbers and adds insult to injury when a “competition discount” is deducted from the mix.

[105]     Both experts agree that non-recurring factors must be considered when using the but for approach. Mr. Filion points out, however, that Nexia made no adjustments whatever for such factors in any of its calculations.

[106]     The Court is not at all comfortable with the Nexia calculations. They are seriously tainted in that they include data from 1996 to 1999 as the “before” or so-called pre-damage period and they fail to account for several non-recurring factors brought to the Court’s attention.[41]

[107]     Navigant’s calculations using the but for approach treat the damage period as beginning in 1996 based on an exchange between the Court and Counsel for ADRIC on January 31^st, 2012[42] concerning the appropriate reference period to calculate the performance of stores prior to the damage period.

7. Navigant’s Defence of the “Comparable” approach

[108]     The Navigant Report concludes with a reasoned defence of the “Comparable” approach it used to summarize the damages sustained by the Franchisees.[43] The entire chapter on this issue deserves to be reproduced at length. It removes the reservations the Court entertained when it permitted ADRIC “to develop the methodologies recommended by [its] expert on damages”.[44] Mr. Filion has done his homework, extremely well:

 

14.0 L'UTILISATION DE L'APPROCHE «COMPARABLE »

La présente section énumère différents facteurs supportant le fait que

l'approche « comparable » est l'approche la plus appropriée pour ce

litige.

 

14.1 Comparabilité de Tim Hortons à Dunkin' Donuts

 

 

 

Fréquemment en évaluation d'entreprises et en quantification de

dommages, il est ardu de trouver le meilleur « comparable » à

l'entreprise sous étude puisque les entreprises comparables oeuvrent

dans des marchés différents, n'offrent pas nécessairement un produit

identique, les données ne sont pas disponibles, etc.

 

Dans le présent litige, nous considérons Tim Hortons comme le

meilleur comparable à Dunkin' Donuts puisque :

 

• Dunkin' Donuts et Tim Hortons oeuvrent dans le même

segment de marché et visent la même clientèle;

• Au Québec, Tim Hortons s'est accaparé le marché qui était

couvert par Dunkin' Donuts;

• Tim Hortons s'est installée dans les mêmes villes que celles de

Dunkin' Donuts.

 

Or, rappelons qu'à même plusieurs documents internes rédigés par

Dunkin' Donuts durant les années 1999, 2000 et 2001, Dunkin'

Donuts se compare, de façon répétée, à Tim Hortons quant à

différents sujets, tels que :

 

• la perception à titre de « leader » (C-418, page 25);

• la fraîcheur des beignes, la vitesse du service, le goût du café,

etc. (C-418, 27);

• « Budget de Tim augmente, celui de Dunkin' baisse » (C-335 —

onglet #3, page 32);

 

Le tableau ci-dessous est une reproduction du tableau présenté par

nous (C-424, page 34) lors du procès de 2011 et qui illustrait les

endroits dans les documents rédigés par Dunkin' Donuts où les

comparaisons directes avec Tim Hortons étaient effectuées.

 

 

14.2 Le taux de croissance utilisé

Afin d’estimer les ventes perdues, nous avons utilisé le taux de

croissance moyen par établissement qu’a connu Tim Hortons au

Canada entre 1999 et 2005 (en moyenne 7,7%). Nous sommes d’avis

que ces taux sont représentatifs puisque :

 

• ce sont des taux réels qui ont été influencés par la conjoncture

économique et la compétition qui prévalaient sur le marché

durant la période de dommages. Aucun ajustement ne doit

être effectué afin de tenir compte de l'économie et de

l'industrie, puisque ce sont des taux du moment présent;

• Selon le document intitulé « Strategic growth plan » 7, Dunkin'

Donuts avait projeté pour ses établissements, au début des

années 2000, un taux moyen de croissance annuelle des ventes

de 12,7 % pour les années 2001 à 2005. Ce taux moyen est bien

supérieur à celui utilisé de 7,7 %;

• selon le prospectus de Dunkin' Brands Group inc. en date du

13 juillet 2011, la croissance moyenne des ventes des

établissements Dunkin' Donuts aux États-Unis entre les

années 2001 et 2005 fut de 5,9 % et à toutes fins comparable à

celle de Tim Hortons au Canada affichant 6,2 %. Ainsi

Dunkin' Donuts, dans son réseau, a accompli une

performance équivalente à celle que nous utilisons pour les

années 2001 à 2005;

• selon le rapport Fisher (C-438, onglet 16), la croissance des

ventes d'un établissement Tim Hortons au Québec entre 2002

et 2003 est de 13,5 `)/0. Rappelons que ce document devrait

présenter les données sur la période de 2002 à 2009, mais qu'il

a été coupé. Suite à une demande des procureurs des

demanderesses, monsieur Fisher n'a pas déposé le document

complet;

• les indicateurs économiques durant les périodes 1991-1995,

1996-1999 et 2000-2005 entre le Québec et le Canada ont suivi

les mêmes tendances;

• tel qu'indiqué au Tableau 6 du présent rapport, la croissance

moyenne annuelle des ventes de la restauration au Québec de

4,6 % a été plus forte que celle enregistrée Canada, soit 3,7 `)/0,

durant la période 2000 à 2005;

 

14.3 L’utilisation de l’approche « but for » de Nexia

Tel que démontré tout au long de ce rapport, l’approche « but for »,

telle que proposée par Nexia, présente beaucoup trop de lacunes

pour être considérée et conséquemment, elle ne peut être applicable

dans les circonstances. Nous référons le lecteur à la Section 2.0 -

Sommaire exécutif du présent rapport qui résume les faiblesses de

l’approche suggérée par Nexia.

 

Or, rappelons qu'en considérant tous les paramètres de l'approche

« but for » non considérés par Nexia, dont entre autres :

 

• la période de référence 1996 au lieu de 1999;

Privilégié et confidentiel

Le 5

• « Perte des familles au profit de Tim's » (C-335 — onglet #3, page

32).

• le ratio de performance de la croissance des ventes de

l'établissement en fonction de celle du marché;

• le nombre requis d'années d'historique de données suffisant

et soutenu,

nous obtenons des dommages semblables à ceux estimés avec

l'approche « comparable » pour deux établissements.

De plus, pour trois autres établissements ayant un historique de

données avant 1996, mais pour lesquels il manque un nombre

d'années suffisant, la croissance des ventes est supérieure à celle

du marché. Sur cette base, il est loisible de croire que la

performance de ces établissements aurait été meilleure que celle

du marché pour les périodes subséquentes.

En conclusion, pour tous les autres établissements, puisqu'il

n'existe pas d'historique de données suffisant et supporté, nous

sommes d'avis que c'est l'approche « comparable » qui doit être

retenue, tout comme pour les cinq établissements discutés ci-

dessus.

[109]     The additional expertises authorized by the Court serve to confirm that in this case the comparable approach is by far the preferable approach to adopt and apply to all the Franchisees, unlike the “but for” approach that can only be reliably applied to eight of 32 stores.

[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.

8. Lost Investments

[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”.[45] 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.

9. Recapitulation of the Franchisees’ Damages

[112]     The Franchisees’ claims for lost profits in the years 2000 to 2005 and for lost investments aggregate $16,407,143. divisible amongst each of the Franchisees according to the following Table:

 

	Franchisé	Adresse	100% 2000-2005	50% des ventes projetées	TOTAL :
1	Jacques Doyon & Monic Huard	8950, boul. Lacroix, Saint-George-de-Beauce	543 000	614 034	1 157 034
2	Les Entreprises Doyon et Huard Inc.	11511, 1re Avenue, Saint-George-de-Beauce	223 000	303 740	526 740
3	3089-8001 Québec Inc. (Noemia de Lima)	1456, boul. Saint-Martin, Laval	165 000	370 635	535 635
4	9067-0308 Quebec Inc. (Noemia de Lima)	1600, boul. Le Corbusier, Laval	83 000	280 190	363 190
5	Les entreprises Lucien Stephens Inc.	1062, boul. Industriel, Val-Bélair	158 000	255 862	413 862
6	Bertico Inc. (Sylvain Charbonneau)	535, boul. Arthur-Sauvé, Saint-Eustache	624 000	543 275	1 167 275
7	Bertico Inc. (Sylvain Charbonneau)	171, boul. Arthur-Sauvé, Saint-Eustache	317 000	293 567	610 567
8	3024032 Canada Inc. (Sylvain Charbonneau)	180, 25e Avenue, Saint-Eustache	136 000	197 345	333 345
9	3176941 Canada Inc. (Sylvain Charbonneau)	506, rue Principale, Lachute	514 000	324 166	838 166
10	3155412 Canada Inc. (Sylvain Charbonneau)	367, boul. Arthur-Sauvé, Saint-Eustache	189 000	219 224	408 224
11	3481191 Canada Inc. (Sylvain Charbonneau)	38, rue Sainte-Anne, Sainte-Anne-des-Plaines	172 000	321 546	493 546
12	Les Entreprises Charloise Inc. (René Joly)	1577, boul. Talbot, Chicoutimi	300 000	—-	300 000
13	Les Entreprises Charloise Inc. (René Joly)	200, rue Racine, Chicoutimi	25 000	220 343	245 343
14	Les Entreprises Pierre Maclure Limitée	108, route du Président-Kennedy, Lévis	278 000	448 597	726 597
15	Les Entreprises Pierre Maclure Limitée	7520, boul. de la Rive-Sud, Lévis	208 000	366 150	574 150
16	Les Entreprises Pierre Maclure Limitée	8035, avenue des Églises, Charny	111 000	359 131	470 131
17	Les Entreprises Pierre Maclure Limitée	880, rue Commerciale, Saint-Jean-Chrysostome	147 000	273 611	420 611
18	Les Entreprises Pierre Maclure Limitée	600, route 116, Saint-Nicolas	38 000	200 685	238 685
19	2622-6282 Québec Inc. (Jean Rioux)	Rimouski - 3 établissements combines	325 000	574 566	899 566
20	2857-8664 Québec Inc. (Mario Corbeil)	471, boul. des Laurentides, Saint-Antoine	576 000	—-	576 000
21	2857-8664 Québec Inc. (Mario Corbeil)	1050, boul. Labelle, Saint-Jérôme	558 000	—-	558 000
22	3089-3309 Québec Inc. (Claude St-Pierre)	198, boul. Hôtel-de-Ville, RDL	367 000	454 854	821 854
23	3089-3309 Québec Inc. (Claude St-Pierre)	298, boul. Thériault, RDL	108 000	218 562	326 562
24	3089-3309 Québec Inc. (Claude St-Pierre)	248, rue Témiscouata, RDL	163 000	233 388	396 388
25	3092-5077 Québec Inc. (Claude St-Pierre)	701, route de l’Église, SJPJ	88 000	294 443	382 443
26	9009-6694 Québec Inc. (Claude St-Pierre)	601, 1re Rue, La Pocatière	88 000	223 123	311 123
27	9064-0947 Québec Inc. (Claude St-Pierre)	17, chemin des Érables, Cabano	333 000	316 428	649 428
28	9116-5399 Québec Inc. (Claude St-Pierre)	82, boul. Cartier, RDL	0	125 966	125 966
29	2968-7654 Québec Inc. (Raymond Massi)	7955, boul. Décarie, Montréal	323 000	607 320	930 320
30	2968-7654 Québec Inc. (Raymond Massi)	7630, boul. Lacordaire, Montréal	200 000	406 392	606 392
		Total	7 360 000	9 047 143	16 407 143

 

[113]     The parties will observe that the Court has found that the Franchisees' damages are, to the dollar, what their experts have determined them to be. As noted above, the Court considers that Mr. Filion and his Navigant team have assessed their clients' damages based on assumptions and findings of facts that are entirely consistent with those determined by the Court.

[114]     This is not a case where the Court has to estimate future damages. The Franchisees have suffered the losses they claim. They have lost their business; their livelihoods.

D. The Cross-Claims

[115]     ADRIC’s Cross-claims against those Franchisees who failed to pay “arrears of royalties, ad-fund contributions, interest and other sums owing pursuant to the franchise agreements” or damages for “defamatory and prejudicial remarks”, “abuse of proceedings” arise from events that in almost all cases follow the institution of the Franchisees’ claims.

[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.

[117]     The Cross-claims grounded in defamation, abuse of proceedings or for legal fees have not been substantiated during 67 days of hearings. Far from it. Whatever abuse there may have been in these proceedings, it lies much closer to the reckless and unproven allegations in the Defences as regards poor or underperforming Franchisees.

[118]     In sum, the Cross-claims cannot survive the damage caused to small business operators whose only breach came while trying desperately to survive in a market their franchisor abandoned in 2003.

E. Punitive Damages

[119]     Both parties claim punitive damages! Such claims come from two dramatically opposed notions of who was responsible for the demise of the Dunkin Donuts brand in Quebec. The Franchisees have prevailed.

[120]     However, winning a case does not of itself justify a claim for punitive damages against the losing party. The losing party generally pays the costs of the winning party according to a tariff.[48] That is the penalty for losing in the vast majority of cases.

[121]     Counsel for the parties have acted throughout in a thoroughly professional and courteous manner. Their efforts have made the work of the Court easier than it might have been. Their written arguments alone bear witness to their dedication to the interests of their clients.

[122]     With respect, this is not a case where punitive damages ought to be assessed. The Court surmises that in a case such as this one, there may be a request for special fees in accordance with Article 15 of the Tariff.

[123]     FOR THESES REASONS, THE COURT:

[124]     MAINTAINS Plaintiffs' re-reamended action of May 4^th, 2012.

[125]     DISMISSES the Defences and Cross-Claims of Defendant.

[126]     ANNULS the Quittances signed by certain Plaintiffs produced as C-64, C-80, C-109, C-111, C-128, C-143, C-145, C-158 and C-295.

[127]     RESILIATES all the contracts (leases and franchise agreements) between the parties.

[128]     ORDERS Defendant to pay Plaintiffs the global sum of $16,407,143 - divisible amongst Plaintiffs as follows:

 

	Franchisé	Adresse	100% 2000-2005	50% des ventes projetées	TOTAL :
1	Jacques Doyon & Monic Huard	8950, boul. Lacroix, Saint-George-de-Beauce	543 000	614 034	1 157 034
2	Les Entreprises Doyon et Huard Inc.	11511, 1re Avenue, Saint-George-de-Beauce	223 000	303 740	526 740
3	3089-8001 Québec Inc. (Noemia de Lima)	1456, boul. Saint-Martin, Laval	165 000	370 635	535 635
4	9067-0308 Quebec Inc. (Noemia de Lima)	1600, boul. Le Corbusier, Laval	83 000	280 190	363 190
5	Les entreprises Lucien Stephens Inc.	1062, boul. Industriel, Val-Bélair	158 000	255 862	413 862
6	Bertico Inc. (Sylvain Charbonneau)	535, boul. Arthur-Sauvé, Saint-Eustache	624 000	543 275	1 167 275
7	Bertico Inc. (Sylvain Charbonneau)	171, boul. Arthur-Sauvé, Saint-Eustache	317 000	293 567	610 567
8	3024032 Canada Inc. (Sylvain Charbonneau)	180, 25e Avenue, Saint-Eustache	136 000	197 345	333 345
9	3176941 Canada Inc. (Sylvain Charbonneau)	506, rue Principale, Lachute	514 000	324 166	838 166
10	3155412 Canada Inc. (Sylvain Charbonneau)	367, boul. Arthur-Sauvé, Saint-Eustache	189 000	219 224	408 224
11	3481191 Canada Inc. (Sylvain Charbonneau)	38, rue Sainte-Anne, Sainte-Anne-des-Plaines	172 000	321 546	493 546
12	Les Entreprises Charloise Inc. (René Joly)	1577, boul. Talbot, Chicoutimi	300 000	—-	300 000
13	Les Entreprises Charloise Inc. (René Joly)	200, rue Racine, Chicoutimi	25 000	220 343	245 343
14	Les Entreprises Pierre Maclure Limitée	108, route du Président-Kennedy, Lévis	278 000	448 597	726 597
15	Les Entreprises Pierre Maclure Limitée	7520, boul. de la Rive-Sud, Lévis	208 000	366 150	574 150
16	Les Entreprises Pierre Maclure Limitée	8035, avenue des Églises, Charny	111 000	359 131	470 131
17	Les Entreprises Pierre Maclure Limitée	880, rue Commerciale, Saint-Jean-Chrysostome	147 000	273 611	420 611
18	Les Entreprises Pierre Maclure Limitée	600, route 116, Saint-Nicolas	38 000	200 685	238 685
19	2622-6282 Québec Inc. (Jean Rioux)	Rimouski - 3 établissements combines	325 000	574 566	899 566
20	2857-8664 Québec Inc. (Mario Corbeil)	471, boul. des Laurentides, Saint-Antoine	576 000	—-	576 000
21	2857-8664 Québec Inc. (Mario Corbeil)	1050, boul. Labelle, Saint-Jérôme	558 000	—-	558 000
22	3089-3309 Québec Inc. (Claude St-Pierre)	198, boul. Hôtel-de-Ville, RDL	367 000	454 854	821 854
23	3089-3309 Québec Inc. (Claude St-Pierre)	298, boul. Thériault, RDL	108 000	218 562	326 562
24	3089-3309 Québec Inc. (Claude St-Pierre)	248, rue Témiscouata, RDL	163 000	233 388	396 388
25	3092-5077 Québec Inc. (Claude St-Pierre)	701, route de l’Église, SJPJ	88 000	294 443	382 443
26	9009-6694 Québec Inc. (Claude St-Pierre)	601, 1re Rue, La Pocatière	88 000	223 123	311 123
27	9064-0947 Québec Inc. (Claude St-Pierre)	17, chemin des Érables, Cabano	333 000	316 428	649 428
28	9116-5399 Québec Inc. (Claude St-Pierre)	82, boul. Cartier, RDL	0	125 966	125 966
29	2968-7654 Québec Inc. (Raymond Massi)	7955, boul. Décarie, Montréal	323 000	607 320	930 320
30	2968-7654 Québec Inc. (Raymond Massi)	7630, boul. Lacordaire, Montréal	200 000	406 392	606 392
		Total	7 360 000	9 047 143	16 407 143

 

[129]     ORDERS Defendant to pay Plaintiffs 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 as disclosed at pages 78 and 79 of Plaintiffs' re-reamended action.

[130]     THE WHOLE with costs including the fees and disbursements of Plaintiffs' experts.

		__________________________________ DANIEL H. TINGLEY, J.S.C
Me Frederic Gilbert (Fasken Martineau)
Me Guy De Blois (Langlois Kronström Desjardins)
for Plaintiffs
Me Stephane Teasdale
Me Margaret Weltrowska
(Fraser Milner Casgrain)
for Defendant
Dates of hearing:	67 days between October 18th 2010 to May 25th  2011 and 4 days from April 11, to 18th  2012