2015 QCCA 624, 2015 QCCA 624

Dunkin' Brands Canada Ltd. c. Bertico inc. 2015 QCCA 624 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL No: 500-09-022875-124 (500-17-015511-036) (500-17-019989-048) (500-17-028727-058) DATE: April 15, 2015 CORAM: THE HONOURABLE NICHOLAS KASIRER, J.A. CLAUDE C. GAGNON, J.A. MARTIN VAUCLAIR, J.A. DUNKIN' BRANDS CANADA LTD. (formerly Allied Domecq Retailing International (Canada) Ltd.) APPELLANT – defendant v.

BERTICO INC. 3024032 CANADA INC. 3155412 CANADA INC. 3176941 CANADA INC. 3481191 CANADA INC. 2857-8664 QUEBEC INC. 3089-8001 QUEBEC INC. 9067-0308 QUEBEC INC. JACQUES DOYON ET MONIC HUARD LES ENTREPRISES DOYON ET HUARD INC. LES ENTREPRISES CHARLOISE INC. LES ENTREPRISES LUCIEN STEPHENS INC. 3089-8639 QUEBEC INC. LES ENTREPRISES PIERRE MACLURE LIMITEE LES PATISSERIES AL.MA.SO. INC. 9116-5399 QUEBEC INC. 3089-3309 QUEBEC INC. 3092-5077 QUEBEC INC. 9009-6694 QUEBEC INC. 9064-0947 QUEBEC INC. 2622-6282 QUEBEC INC. 2968-7654 QUEBEC INC.

CLAUDE ST-PIERRE et LYNDA VIEL SYLVAIN CHARBONNEAU NOEMIA DE LIMA et JOAO DE LIMA RENE JOLY et CHARLOTTE LEVESQUE MARIETTE LONG RAYMOND MASSI PIERRE MACLURE JEAN RIOUX MARIO CORBEIL JOHN A. COSTIN BERNARD STERN JACQUES POMERLEAU RESPONDENTS – plaintiffs JUDGMENT [ 1 ] Dunkin’ Brands Canada Ltd. has appealed a judgment of the Superior Court, District of Montreal (the Honourable Mr. Justice Daniel Tingley presiding), rendered June 21, 2012, which maintained the respondent-plaintiffs’ action for breach of franchise

agreements, dismissed the appellant-defendant’s defences and cross-claims, annulled the releases signed by certain respondent-plaintiffs, resiliated all the contracts (leases and franchise agreements) between the parties, and ordered the appellant-defendant to pay the respondent-plaintiffs’ a total of $16,407,143 in damages, divided between the plaintiffs as indicated in paragraph [128] of the judgment, with interest and the additional indemnity provided by law from the later of the date of the institution of the action and the last day of each fiscal period during which lost profits were sustained or lost investments were realized due to store closes, with costs, including the fees and disbursements of Plaintiffs' experts. [ 2 ] For the reasons of Kasirer, J.A., with which Gagnon and Vauclair, JJ.A. agree, THE COURT : [ 3 ] ALLOWS the appeal for the sole purpose of striking paragraphs [125] and [128] from the judgment, and replacing them with the following paragraphs: [125] MAINTAINS the defences and cross-claims to the sole extent of granting an amount of $899,528 as cross-claims to be deducted from damages for lost profits in respect of unpaid amounts due by certain Plaintiffs to the Defendant under the franchise agreements; and an amount of $249,316 as a cross claims to be deducted from damages for lost investments in respect of Defendant’s contribution to renovations paid to certain Plaintiffs; [128] ORDERS Defendant to pay Plaintiffs the aggregate sum of $10,908,513.25, to be divided amongst them as follows: 1 .

Jacques Doyon and Monic Huard, for the establishment located at 8950, boul. Lacroix, Saint-George-de-Beauce: $772 106,50 2 . Les Entreprises Doyon et Huard Inc., for the establishment located at 11 511, 1re Avenue Est, Saint-George-de-Beauce: $338,751 3 . 3089-8001 Québec Inc. (Noemia de Lima and Joao de Lima), for the establishment located at 1456, boul. Saint-Martin, Laval: $323,266.25 4 . 9067-0308 Québec Inc. (Noemia de Lima and Joao de Lima), for the establishment located at 1600, boul. Le Corbusier, Laval: $193,792.50 5 .

Les entreprises Lucien Stephens Inc. (Mariette Long), for the establishment located at 1062, boul. Industriel, Val-Bélair: $280,439.50 6 . Bertico Inc. (Sylvain Charbonneau), for the establishment located at 535, boul. Arthur-Sauvé, Saint-Eustache: $814,975.25 7 . Bertico Inc. (Sylvain Charbonneau), for the establishment located at 171, boul.

Arthur-Sauvé, Saint-Eustache: $414,464.25 8 . 3024032 Canada Inc. (Sylvain Charbonneau), for the establishment located at 180, 25e Avenue, Saint-Eustache: $223,869.75 9 . 3176941 Canada Inc. (Sylvain Charbonneau), for the establishment located at 506, rue Principale, Lachute: $586,999.50 10 . 3155412 Canada Inc. (Sylvain Charbonneau), for the establishment located at 367, boul. Arthur-Sauvé, Saint-Eustache: $289,583 11 . 3481191 Canada Inc. (Sylvain Charbonneau), for the establishment located at 38, rue Sainte-Anne, Sainte-Anne-des-Plaines: $328,796.50 12 .

Les Entreprises Charloise Inc. (René Joly and Charlotte Lévesque), for the establishment located at 1577, boul. Talbot, Chicoutimi: $ 166,785 13 . Les Entreprises Charloise Inc. (René Joly and Charlotte Lévesque), for the establishment located at 200, rue Racine, Chicoutimi: $183,263.25

14 . Les Entreprises Pierre Maclure Limitée (Pierre Maclure), for the establishment located at 108, route du Président-Kennedy, Lévis: $489,966.75 15 . Les Entreprises Pierre Maclure Limitée (Pierre Maclure), for the establishment located at 7520, boul. de la Rive-Sud, Lévis: $357,189.50 16 . Les Entreprises Pierre Maclure Limitée (Pierre Maclure), for the establishment located at 8035, avenue des Églises, Charny: $306,710.25 17 . Les Entreprises Pierre Maclure Limitée (Pierre Maclure), for the establishment located at 880, rue Commerciale, Saint-Jean- Chrysostome: $285,765.25 18 .

Les Entreprises Pierre Maclure Limitée (Pierre Maclure), for the establishment located at 600, route 116, Saint-Nicolas: $151,997.75$ 19 . 2622-6282 Québec Inc. (Jean Rioux), for 3 combined restaurants in Rimouski: $660,995.50 20 . 2857-8664 Québec Inc. (Mario Corbeil), for the establishment located at 471, boul. des Laurentides, Saint-Antoine: $388,088 21 . 2857-8664 Québec Inc. (Mario Corbeil), for the establishment located at 1050, boul. Labelle, Saint-Jérôme: $356,370 22 . 3089-3309 Québec Inc. (Claude St-Pierre and Lynda Viel), for the establishment located at 198, boul.

Hôtel-de-Ville, Rivière-du- Loup: $543,843.50 23 . 3089-3309 Québec Inc. (Claude St-Pierre and Lynda Viel), for the establishment located at 298, boul.

Thériault, Rivière-du-Loup: $236,929.50 24 . 3089-3309 Québec Inc. (Claude St-Pierre and Lynda Viel), for the establishment located at 248, rue Témiscouata, Rivière-du- Loup: $243,600 25 . 3092-5077 Québec Inc. (Claude St-Pierre and Lynda Viel), for the establishment located at 701, route de l’Église, Saint-Jean-Port- Joli: $267,408.25 26 . 9009-6694 Québec Inc. (Claude St-Pierre and Lynda Viel), for the establishment located at 601, 1re Rue, La Pocatière: $215,059.25 27 . 9064-0947 Québec Inc. (Claude St-Pierre and Lynda Viel), for the establishment located at 17, chemin des Érables, Cabano: $419,112 28 . 9116-5399 Québec Inc. (Claude St-Pierre and Lynda Viel), for the establishment located at 82, boul.

Cartier, Rivière-du-Loup: $91,326.50 29 . 2968-7654 Québec Inc. (Raymond Massi and John A. Costin), for the establishment located at 7955, boul. Décarie, Montréal: $ 590,413

30 . 2968-7654 Québec Inc. ( Raymond Massi and John A. Costin) , for the establishment located at 7630, boul. Lacordaire, Montréal: $386, 646 [ 4 ] CONFIRMS the conclusions of the judgment a quo in other respects; [ 5 ] With 75% of costs on appeal against the appellant. NICHOLAS KASIRER, J.A. CLAUDE C. GAGNON, J.A. MARTIN VAUCLAIR, J.A. Mtre Margaret Weltrowska Mtre Stéphane Teasdale Mtre Luc Giroux Mtre Catherine Dagenais Dentons Canada LLP For the appellant Mtre Frédéric Gilbert Fasken Martineau DuMoulin LLP Mtre Guy de Blois Langlois Kronström Desjardins LLP For the respondents Dates of hearing: February 12 and 13, 2014 REASONS OF KASIRER, J.A. [ 6 ] In the

preamble to its 60-page factum on appeal, Dunkin’ Brands Canada Ltd. (the Franchisor) sets a dramatic tone for its argument before this Court. The judgment of the Superior Court ordering it to pay $16.4 million in damages for breach of contract to a group of its Dunkin’ Donuts franchisees (the Franchisees) is styled as “unprecedented in the annals of franchise law, not only in Quebec and Canada but also in the United States”. The Franchisor says the court mistakenly imposed on it “a new unintended obligation to protect and enhance the brand, outperform the competition and maintain indefinitely market share”.

After having “almost completely ignored” the evidence it adduced over a lengthy trial, the Franchisor says the judge wrongly characterized its contractual obligations as having an intensity of “result”, which “effectively guarantees the financial success of all Dunkin’ Donut franchisees”. [ 7 ] The Franchisor is harsh in its characterization of the judge’s work: his assessment of liability is “result-oriented”; he showed “extraordinary sympathy” towards the Franchisees; the judge erred by referring uncritically to an incomplete document of argument prepared by them to establish fault; he made a myriad of “gross errors of law” and “blatant” mistakes of fact.

Overall, his conclusions are said to have “resulted in a gross miscarriage of justice” for the Franchisor, which, as victim of this supposed affront, describes itself as a “globally renowned quick-service restaurant (QSR) brand that franchises over 10,000 restaurants in 32 countries worldwide”. [ 8 ] In describing the case as one that is “unprecedented” in the annals of franchise law, the Franchisor has, in my respectful view, wrongly characterized aspects of franchise arrangements widely understood by courts and legal scholars in this province as uncontroversial, in particular in respect of duties that may be inferred from the nature of agreements such as the ones in the case at bar.

The collapse of the Dunkin’ Donuts chain may well have no match as a financial misfortune in the annals of the quick-service restaurant business in Quebec – that is not an issue for this Court to decide – but nothing in the judge’s account of the Franchisor’s obligations was “unprecedented” or even demonstrably wrong-headed; in point of fact, he was expressly careful to follow precedent, namely the doctrine of implied obligations under

article 1434 C.C.Q. and the duty of good faith set forth in Provigo Distribution inc. v. Supermarché A.R.G. inc. , [1] decided by this Court eighteen years ago and generally recognized as the leading authority in Quebec law since that time. [ 9 ] For the reasons that follow, I see no error of law in his analysis of the obligational content of the relevant franchise agreements, and the Franchisor has shown no palpable and overriding error of fact in the judge’s findings of fault or in respect of the causal link

between the Franchisor’s breaches of contract and losses suffered by the Franchisees. While I find myself in respectful disagreement with the trial judge on some aspects of his evaluation of damages to be awarded, the outcome is very far from anything approximating a miscarriage of justice, even allowing for the occasional rhetorical overstatement that is to be expected as part of appellate pleadings. I Context [ 10 ] The Dunkin’ Donuts quick-service restaurant chain has been present in the Quebec marketplace since 1961.

Until the mid- 1990s, the franchise was a leader in the fast-food industry in the province with upwards of 200 stores. [ 11 ] The Franchisees operated 32 restaurants in the Dunkin’ Donuts chain for differing periods in the 1990s and 2000s. They brought proceedings for breach of contract against their franchisor, Allied Domecq Retailing International Ltd. (referred to as “ADRIC” by the judge), of which the appellant is successor in title.

The Franchisees alleged, in the main, that the Franchisor failed to protect and promote the Dunkin’ Donuts brand in Quebec as it was bound to do by contract at a time when the franchise was faced with especially intense competition from another fast-food chain offering a similar product.

They alleged at trial that this constituted a contractual fault that caused them lost profits and lost investments as part of what they describe as the collapse of the Dunkin’ Donuts coffee-and-doughnut brand in the province. [ 12 ] The Franchisees mark the beginning of the decline of the fortunes of the Dunkin’ Donuts chain the 1990s when Tim Hortons, which also concentrated on the quick-service coffee and doughnut market, began to assert its presence in Quebec. [ 13 ] In 1996, the Franchisor convened a three-day meeting at a hotel in St.

Sauveur in response to concerns voiced by a number of franchisees that the success of Tim Hortons represented a threat to the viability of their businesses. They complained that the Franchisor was insufficiently attentive to their needs, citing in particular the lack of support and collaboration offered to contend with this newfound source of competition.

Moreover, they alleged that the Franchisor had repeatedly failed to enforce properly the standards associated with the Dunkin’ Donuts “system” across the “réseau”, or network, of franchisee restaurants in the province, in particular through its inappropriate tolerance of underperforming franchisees who devalued the public perception of the brand. [ 14 ] The parties disagree as to the extent to which the Franchisor took proper measures to correct the situation following the St. Sauveur meeting. [ 15 ] According to many of the franchisees, the situation worsened between 1996 and 2000.

On February 15, 2000, a group of them wrote a detailed letter to Jeff Brookhouser, Vice-President of Development and Operations of the Franchisor, to ask that a new plan of action be put in place to remedy the situation. The letter reiterated the complaints made at the 1996 meeting in St. Sauveur and cited what some franchisees considered to be breaches of the obligations incumbent on the Franchisor under the individual agreements signed by each of them, including “the investment of the required money, time and resources that are necessary to protect and increase the trademark’s image and value”.

According to the letter, these failures had resulted in “the gradual crumbling of its image in the Province of Quebec”. [ 16 ] In response to the complaints, the Franchisor dispatched two representatives from its Boston office to propose a plan to address problems the Dunkin’ Donuts brand faced in the Quebec market.

They met with representatives of the group of dissatisfied franchisees and set out their views as to the possible solutions to improve performance of the brand, including a program of renovations of the restaurants. [ 17 ] Certain franchisees followed up with fresh letters sent to the Franchisor in March and April of 2000 in which they stressed the importance of identifying short-term solutions rather than merely proposing long-term plans for renovations. [ 18 ] At a meeting at a hotel in Vaudreuil on September 21, 2000, the Franchisor presented franchisees with a document entitled “Marché du Québec, Plan de croissance quinquennal, Années 2001-2005” with three principal proposals: (

i) a plan for the renovation of existing restaurants and the opening of new restaurants; (ii) a marketing plan; and (iii) a new plan for operations. [ 19 ] The key feature of the plan was the proposal for renovations that encouraged all franchisees to remodel their restaurants as soon as possible rather than waiting for the date at which renovation was required pursuant to the franchise agreements.

The plan, which, among its specified conditions, alluded to the fact that “une adhésion d’au moins 75 magasins est requise”, included incentives to undertake this work estimated at approximately $200,000 for each restaurant. The Franchisor promised to contribute an amount up to $46,200 to the costs, subject to conditions.

In exchange, participating franchisees were required to sign a general release (“quittance générale”), according to which the franchisee released the Franchisor from any and all claims, cast in very broad terms (“pour quelque raison ou cause que ce soit depuis la création de l’univers jusqu’à ce jour”). [ 20 ] The renovation plan proved unsuccessful. It failed to attract the minimum number of participants and those who signed on claimed that the plan did not stave off the competition from Tim Hortons that continued to intensify. [ 21 ] On May 11, 2001, a group of franchisees wrote directly to Jack D.

Shafer, jr., the Chief Executive Officer of the Dunkin’ Donuts group of companies in the United States, in what they described as a “last cry of desperation” with respect to the Franchisor’s “numerous contractual failures and its blatant lack of real interest in saving the Dunkin’ Donuts banner in the province of Quebec”. Many of the complaints stated in the letter of February 15, 2000 were restated.

The franchisees claimed that their businesses were struggling to survive in the marketplace; that the Franchisor was not taking the necessary measures to ensure that standards of quality and cleanliness were being respected by all franchisees; that there was a lack of support, both commercially and operationally, including a lack of competent personnel supplied by the Franchisor to train and assist franchisees in the running of their businesses; that there was an unusually high turnover of management personnel that hindered proper business development of the brand; and that there was no proper communication plan in place to assist in raising the profile of the brand.

The letter detailed as well the failings of the proposed renovation plan, described as poorly conceived and too costly. While they recognized the potential usefulness of renovations over the long-term, the signatories of the letter demanded that the overall plan be revised by May 22, 2001 to provide franchisees with assistance

allowing them to survive in the short-term. [ 22 ] Mr. Shafer answered on May 23, 2001 to say that the Franchisor stood by the plan as announced in September 2000. [ 23 ] Numerous franchisees remained unhappy with the Franchisor’s response as the market conditions continued, in their view, to worsen. On February 7, 2003, some of their number sent a formal notice of default to the Franchisor calling on it to fulfil its contractual obligations under the franchise agreements and to compensate them for damages suffered by reason of the breaches of contract as of that date.

The list of civil faults alleged in the letter of default included intimidation, tolerance of underperforming franchisees, unfair economic pressure to sign the releases, poor management practices, failure to provide proper support to the franchisees, failure to protect and enhance the value of the brand in Quebec, an absence of a proper marketing plan, bad faith in the performance of the franchise agreements and violation of the general obligation of loyalty owed to the franchisees.

A detailed account of the losses attributed to the Franchisor’s wrongful conduct as of January 31, 2003 was sent, which, they said, stood at $7,488,820. [ 24 ] The notice of default elicited no satisfactory response and, accordingly, the respondent Franchisees filed an action in damages against the Franchisor on May 20, 2003. In their motion to institute proceedings, each of the named Franchisees in the group asked for damages for breach of contract and demanded the resiliation of the franchise agreements and leases then in force.

They also asked the Superior Court to operate compensation for any amount they might owe to the Franchisor. [ 25 ] In the months that followed, the Dunkin’ Donuts chain across the province continued its decline. On August 28, 2003, an initial ten-year agreement was signed between the Franchisor and Alimentation Couche-Tard inc., the owner of a chain of convenience stores, whereby Couche-Tard would become the master-franchisee for the brand in Quebec. The business entailed the projected opening of 100 new restaurants. Stated simply, the plan failed and the arrangement was terminated prematurely in 2008.

In 2010, Couche-Tard announced that it would close all Dunkin’ Donut restaurants under its direct responsibility within the next year because they were not profitable and had no apparent resale value. [ 26 ] The motion to institute proceedings was amended and, late in the proceedings, the Franchisees added a claim of $9 million for lost investments to the amount previously asked for relating to lost profits under the agreements. At the time of the judgment of the Superior Court in 2012, only a handful of Dunkin’ Donut franchises remained in operation in the province.

II The Judgment of the Superior Court [ 27 ] The trial was something of a marathon: there were 71 days of hearings, punctuated by a reopening of the case after it had initially been taken under advisement; some 478 exhibits were filed; and upwards of 30 witnesses, including four expert witnesses, were heard by the judge.

The whole comprises nearly 100 volumes of transcripts, proceedings and other materials in the joint record on appeal. [ 28 ] The judge maintained the action by the Franchisees for breach of contract in the full amount of their claim. [2] [ 29 ] At the start of his 42-page decision, the judge described the general parameters of the action, noting that the Franchisees sought formal termination of their lease and franchise agreements, as well as an aggregate award of $16.4 million in damages.

He detailed the plaintiffs’ allegations that the Franchisor had failed to meet its contractual obligations to take proper measures in support of the brand that were explicitly provided for in the franchise agreements or that flowed implicitly from the general nature of the franchise arrangement. He also set forth the principal defences raised by the Franchisor in denying liability: (

a) it had fulfilled its contractual obligations; (

b) the Franchisees had themselves failed to operate their establishments in accordance with the standards of cleanliness and efficiency required by the Dunkin’ Donuts system; (

c) the Franchisor was not the insurer of the Franchisees nor did it guarantee their success; and (

d) that, in any event, numerous Franchisees had released the Franchisor from liability after 2001 when they signed the “quittances générales”.

The judge noted that the Franchisor sought payment of $2.2 million by way of cross-demand for unpaid royalties, advertisement contributions and other sums. [ 30 ] The judge summarized the competing experts’ positions on the Franchisor’s conduct, noting that François Desrosiers, retained by the Franchisees, recounted a series of faults committed by the Franchisor starting in the mid-1990s that, he said, meant that the franchise could not contend with the competition offered by Tim Hortons. The judge wrote that Mr. Desrosiers’ conclusions were “amply supported by the evidence adduced at trial” (para. [41]).

The report and testimony of the Franchisor’s expert, Douglas Fisher, was also detailed at length by the judge. In the main, Mr. Fisher blamed the Franchisees’ losses on their own mistakes: poor operations, poor service, unclean stores and unresponsiveness to the substantial efforts and solutions proposed by the Franchisor to counter competition from Tim Hortons. The judge rejected Mr. Fisher’s conclusions, observing that they were “largely unsupported by the facts adduced at trial” (para. [48]). [ 31 ] The judge quoted extensively from the standard-form franchise agreements concluded in the 1990s and 2000s.

He then presented the applicable law and, specifically, his view that the agreements included explicit obligations as well as obligations that may be inferred from their nature. He relied as well on the duty of good faith owed by franchisors as recorded by this Court in Provigo (para. [53]). [ 32 ] Applying the law to the facts, the judge decided that the most important explicit obligation agreed to by the Franchisor was its promise “to protect and enhance both its reputation and the ‘demand for the products of the Dunkin’ Donuts System’; in sum, the brand” (para. [54]).

In his view, the Franchisor had done neither.

He ascribed “a host of other explicit and implicit failings” to the Franchisor during the period from 1995 to 2005: failure to consult, support and assist the Franchisees; absence of a corporate store to train new staff and test new products; inordinately high turnover of its executives; too few consultants for the network of franchisees; failure to remove underperforming franchisees from the network; and the implementation and subsequent withdrawal of frozen products, “to name but a few – all chronicled in considerable detail at pages 278 to 341 inclusive of Plaintiffs’ “‘Plan d’argumentation’” (para. [55]).

He concluded that these faults had “for the most part been substantiated convincingly from the evidence adduced by the Franchisees and from the acknowledgments and admissions flowing from several of Defendant’s witnesses and exhibits” (para. [56]). [ 33 ] The judge rejected, in very strong terms, the Franchisor’s defence that the Franchisees’ poor business practices were

responsible for their own losses, finding instead that it was the breach of the Franchisor’s obligations that caused the losses sustained. Furthermore, the judge held that the releases signed by the Franchisees as an inducement to renovate their premises after 2001 were signed under false pretences as to the amount the Franchisor would itself invest in the renovations, and on misrepresentations as to the increase in sales that the renovations were to produce.

He decided that the releases were null, that they were abusive and that the necessary consent from the Franchisees was missing or vitiated (para. [69]). [ 34 ] Having found the Franchisor liable, the judge devoted paragraphs [70] to [122] to a consideration of the Franchisees’ claim in damages for lost profits and lost investments and to the counterclaim for unpaid royalties and other amounts by the Franchisor.

He awarded the Franchisees $7,360,000 for lost profits and $9,047,143 for lost investments, dividing the total among the various franchisees according to his calculation of their individual losses (para. [112]). [ 35 ] The judge dismissed the Franchisor’s counterclaim for unpaid royalties and the like as well as damages for defamation and abuse of process. The judge explained his refusal to award damages for unpaid amounts under the agreements on the basis of the doctrine of fundamental breach and the exception of non-performance.

He dismissed the claims for defamation and abusive proceedings as unfounded on the evidence. [ 36 ] In sum, the Superior Court maintained the Franchisees’ actions, dismissed the cross-claims, annulled the releases, resiliated the leases and the franchise agreements, and awarded an aggregate sum of $16,407,143, with interest at the legal rate and the indemnity of

article 1619 C.C.Q. from the later of the date of institution of the action and the last day of each fiscal period during which lost profits were sustained or lost investments were realized due to store closures. III

Summary of Arguments on Appeal [ 37 ] The Franchisor says the judge erred in finding it liable for breach of contract. It argues that the judge misread the franchise agreements, imposing obligations that it had never assumed, and held it to a standard that would force it to guarantee profits to the Franchisees. In any event, whatever view one takes of its conduct, it claims the alleged breaches did not cause the losses claimed.

In the alternative, the Franchisor argues that the judge erred in his evaluation of damages: he overstated the amount of lost profits by a substantial margin and he awarded an amount for lost investment that was not properly asked for and for which the proof was sorely deficient.

The Franchisor also seeks amounts due to it under the agreements as counterclaim. [ 38 ] The Franchisees answer by saying the judge made no mistake in either his measure of the explicit or implicit contractual obligations agreed to by the Franchisor or in his finding that the latter’s conduct failed to satisfy its obligation of means to protect and enhance the brand under the agreements. The finding of fault by the judge turned on questions of fact that the Franchisor simply seeks to retry on appeal.

They defend the judgment by noting that the judge was not bound to answer in detail each and every one of the Franchisor’s arguments relating to specific measures taken to support and enhance the brand, nor was he required to explain why the evidence of each of the various witnesses for the defence was not retained. As to the causal link, they argue that the damages claimed were the direct and immediate consequence of the Franchisor’s failure to take reasonable steps to protect and enhance the brand. Moreover, the judge made no error in applying a general analysis of causation to the whole group of plaintiffs.

As to damages, the Franchisees contend that the judge had to decide between conflicting accounts of the evidence and that no palpable and overriding error has been shown that would allow the Court to disturb the various amounts awarded at trial.

IV Analysis IV.A Liability [ 39 ] In contesting the judge’s finding of civil liability, the Franchisor divides its arguments into seven main points: first , the judge’s alleged error in law in identifying the obligational content of the franchise agreements; second , he was mistaken, in law, in discerning the intensity of the contractual obligation imposed on the Franchisor; third , the judge’s finding of fault was mistaken, in law and in fact, by reason of his failure to apply the business judgment rule that precludes courts from second-guessing commercial decisions of management; fourth , the judge erred in fact and in law in his appreciation of the evidence of the appellant’s contractual fault, specifically by reason of his failure to consider the reasonable measures taken by the Franchisor to avoid losses by the Franchisees; fifth , the judge should have enforced the general releases from liability signed by some Franchisees to the advantage of the Franchisor; sixth , the judge was allegedly mistaken in finding a causal link between the Franchisor’s conduct and the individual losses suffered by the Franchisees; and, seventh , the judge mistakenly ignored its arguments on prescription and certain of its objections to the evidence. [ 40 ] I propose to consider each of these arguments in turn.

As a preliminary note, however, it should be observed that the Franchisor’s strategy on appeal is radically unlike the one it took up at trial, at least in its principal line of argument. One of the central propositions the Franchisor developed before the trial judge was that, by reason of their poor performance in running their businesses, the Franchisees were the artisans of their own misfortune.

It was alleged that they had failed to respect the business model imposed by the franchise agreements, and that they had not adhered to the norms for restaurant cleanliness and other operating standards required by the Dunkin’ Donuts “system”. This conduct was said to constitute a fault under the agreements that explained why the Franchisees lost money individually and why the Dunkin’ Donuts brand collapsed as a franchise chain in Quebec.

Much of the proof adduced at trial by the Franchisor – including its principal expert report relating to liability filed by George Fisher – sought to establish this fault on the part of the Franchisees that, argued the Franchisor, relieved it from liability.

The gravamen of this argument was that the Franchisees’ losses were not caused by the Franchisor, or even by Tim Hortons, but resulted from their own business failures. [ 41 ] After observing that the Franchisor’s defence that the Franchisees were poor operators was “utterly devoid of substance” (para. [61]), the judge wrote that the underperforming franchisees were not party to the action.

In fact, noted the judge at para. [62], the Franchisor “allowed these underperforming stores to remain open to the evident prejudice of the “réseau”, setting poor examples by their continuing presence”. [ 42 ] On appeal, this line of defence and the evidence that supported it – to which the judge devoted significant attention at trial and in his reasons for judgment – was largely abandoned in favour of the arguments set out above.

IV.A.1 The Obligational Content of the Franchise Agreements [ 43 ] The Franchisor submits the judge erred in law by misinterpreting the franchise agreements, in particular by wrongly concluding that the Franchisor had assumed a contractual obligation “to protect and enhance” the Dunkin’ Donuts brand. The express terms of the agreements, it argues, unambiguously preclude that reading. In particular, the judge is said to have wrongly held the Franchisor to an obligation of guaranteeing the profitability of the brand.

Moreover, his use of implied obligations and the obligation of good faith to supplement the clear terms of the contracts was unwarranted and unjustified in the circumstances. [ 44 ] On appeal, the Franchisor contends that what the judge saw as the Franchisor’s principal obligation “to protect and enhance its brand” was a duty that it never assigned to itself, and that the judge’s references to paragraph 3.C of the 1992 franchise agreement and one of the recitals amongst the “whereas/considérant” clauses in the 2002 agreement did not create and cannot support that obligation.

These contractual provisions, upon which the “entire reasoning” of the judge is said to have been based, referred instead to mere “efforts” to be undertaken in service of the parties’ shared aspiration for success in business. The judge mistakenly transformed this common objective – what the Franchisor calls “a hoped-for result” – into a binding, contractual obligation that he wrongly imposed, exclusively, on the Franchisor.

This flaw, it argues, amounts to “a distortion of the very nature and essence of the franchise agreements in issue and of franchising generally”. [ 45 ] In short, the Franchisor disputes the judge’s

interpretation of the agreements. [ 46 ] Insofar as the exercise requires the judge to discern the intention of the parties to a contract, this argument is generally understood to raise a question of fact or, at most, a mixed question of fact and law, in respect of which the Court owes deference to the trial judge. [3] The burden on appeal falls then to the Franchisor to show, with the exacting degree of precision required by the decided cases, that the judge committed a palpable and overriding error in reading the contracts. [4] [ 47 ] Did the judge err by imposing an obligation on the Franchisor that it had not assumed under the franchise agreements? [ 48 ] In my view, the Franchisor has failed to show an error committed by the judge in his

interpretation of the contract. In arguing that the judge’s “entire reasoning” was based on paragraph 3.C of the 1992 contract and the recital of the standard form of 2002, the Franchisor has misread the judgment to suit its argument. The obligation of means to protect and enhance the brand imposed on the Franchisor is not incompatible with the explicit terms of the contracts. But, just as importantly, the judge’s

interpretation of the duties owed to the Franchisees rests on the whole of the agreements, including the implicit obligations based on the nature of the franchise arrangement and, in particular, the implied obligation of good faith incumbent on both parties. I see no palpable and overriding error in his conclusion that the Franchisor promised to take reasonable measures to protect and enhance the brand. But I hasten to say that even if one was to consider the inference of obligations based on the nature of the contract under

article 1434 C.C.Q. or the obligation of good faith as raising a question of law, I am of the view that no error of law has been shown either.

a) Express Terms of the Agreements [ 49 ] Given the Franchisor’s insistence that the judge misread clauses of the franchise agreements, a review of the express contractual terms is in order. [ 50 ] The judge considered the two franchise agreements in force at the relevant times in his effort to identify the Franchisor’s obligations, in particular one standard form prepared by the Franchisor in the 1990s and the other in the early 2000s.

These two standard forms were not identical, but neither provided a robust account of the full extent of the duties incumbent on the Franchisor. [ 51 ] By way of example, the agreement signed by Franchisee Bertico inc. and the Franchisor in 1992, which is 25 pages in length, contains approximately one page of explicit obligations imposed on the Franchisor, along with a general allusion to its duties in the several introductory recitals at the start of the standard form. By contrast, Bertico’s explicit obligations make up the bulk of the 1992 agreement.

When the business setting changed, in particular after the period of complaints made at the St. Sauveur meeting and thereafter, the Franchisor proposed a new standard form franchise agreement that was even more laconic in its account of its obligations. Beyond the representations made in the recitals and the granting of the right to use proprietary marks associated with the brand, the contract that the same respondent signed in 2002 contains no apparent explicit obligations for the Franchisor. [ 52 ] The parties disagree as to the

interpretation the judge gave to paragraph 3.C of the 1992 franchise agreement and the last recital of the 2002 agreement. Paragraph 3.C and the recital read as follows: 3. Dunkin’ Donuts Canada agrees [...] 3.C.

To continue its efforts to maintain high and uniform standards of quality, cleanliness, appearance and service at all DUNKIN’ DONUTS SHOPS, thus protecting and enhancing the reputation of DUNKIN’ DONUTS CANADA, DUNKIN’ DONUTS OF AMERICA, INC. and the demand for the products of the DUNKIN’ DONUTS SYSTEM and, to that end, to make reasonable efforts to disseminate its standards and specifications to potential suppliers of the FRANCHISEE upon the written request of the FRANCHISEE; 2002 Recital: ET CONSIDÉRANT QUE le franchisé comprend et reconnaît l’importance, pour chaque système, des normes et spécifications élevées en matière de qualité, de propreté, d’apparence et de service, ainsi que la nécessité d’exploiter l’établissement conformément à celles-ci afin d’accroître l’achalandage créé par l’élaboration et l’amélioration de chaque système; […]”. [ 53 ] The Franchisor says that the trial judge wrongly read paragraph 3.C and the recital to include an obligation for the Franchisor to “outperform the competition” to which it never agreed.

[ 54 ] The Franchisor is mistaken. The judge said nothing about a contractual duty to outperform the competition or to guarantee a market share to the Franchisees. Moreover, reading the judgment as a whole, it is plain that the judge did not only rely on these two provisions to substantiate his finding that the Franchisor agreed to undertake reasonable efforts to protect and enhance the brand.

But in any event, I would add that the text of paragraph 3.C, alluding to “efforts” that the Franchisor must undertake that would have the effect of “protecting and enhancing the reputation” of the brand as well as “the demand for the products”, is consonant with the judge’s finding of the parties’ intention in the 1992 agreement. His

interpretation of the recital in the 2002 agreement was also a reasonable one. [ 55 ] Moreover, the direction in paragraph 3.C that the Franchisor continue its efforts to maintain high and uniform standards of quality “thus protecting and enhancing the reputation of DUNKIN’ DONUTS CANADA […​] and the demand for the products” was not the only text of the 1992 agreement on which the judge’s finding rested.

He quoted from paragraphs 2 and 3 in which the Franchisor committed to take different steps to assist the franchisees at the start of the franchise operation and over the life of the contract (in the case of the example the judge used, the term was 15 years, 4 months).

It agreed to make available a training program (2.D), to provide operating procedures (2.E), to make available assistance in the pre-opening, opening and initial operation of the shop (2.F), to maintain a “continuing advisory relationship, including consultation in the areas of marketing, merchandizing and general business operations,” with the franchisee (3.A); to provide operating manuals, with on-going revisions, setting out standards, specifications, procedures and techniques for the franchisee to follow (3.B); to review and approve proposed advertising prepared by the franchisee through the life of the agreement (3.D); and to administer the franchise owners’ advertising fund composed of contributions from all franchisees and to provide for programs “designed to increase sales and enhance and further develop the public reputation and image of DUNKIN’ DONUTS CANADA” (3.E).

In connection with the long-term, collaborative relationship that the parties established, these provisions support the judge’s view that the Franchisor would protect and enhance the value of the brand, beyond the time of the franchise start-up, through the assistance it provided to individuals and by ensuring that franchisees across the network maintain and improve standards of cleanliness and quality. While these express undertakings, as he said, were an incomplete account of the Franchisor’s duties to its franchisees, it was not unreasonable for the judge to cite them in support of the

interpretation of the standard-form agreement used in the 1990s. [ 56 ] What about the 2002 standard form in which the relatively few express duties assigned to the Franchisor in the previous standard form were not carried forward? The judge made mention, at paragraph [18], of the revisions made to the agreement in 2002 and the last recital in the

preamble thereto which, he wrote, was “[a]bout the only place in the 34 page 2002 form of [the] franchise Agreement where ADRIC recognizes the importance to both the franchisor and the franchisee of improving or enhancing the Dunkin’ Donuts brands […]”.

He characterized this undertaking as “of the essence of any franchise agreement”, noting that the rest of the contractual form only spoke to the obligations of the franchisees. [ 57 ] Was the judge wrong to see an obligation to protect and enhance the brand in the 2002 agreement like the one that came before? [ 58 ] The judge’s finding that the recital of the 2002 contract amounts to a recognition, by the Franchisor, that both parties committed themselves to supporting the brand is a reasonable

interpretation of that clause. But more importantly, by excising other express allusions to the Franchisor’s obligations, the parties did not intend to establish an arrangement wherein the franchisees had all the obligations and the Franchisor had none beyond making the system available to its franchisees with a modest degree of technical assistance.

b) Implied Obligations Incidental to the Nature of the Franchise Agreements [ 59 ] It was by no means unusual for the Franchisor to understate its duties in standard-form franchise agreements, and generally it has not prevented courts from recognizing implicit obligations on a franchisor to complete the contract. [5] Here, the judge cited

article 1434 C.C.Q. to explain that the obligations owed by the Franchisor were not only those explicitly stated in the agreements but also implicit obligations that flowed from the nature of the franchise arrangement (para. [50]). [6] He made no mistake in holding that the Franchisor’s obligations rested not just on the texts of the agreements, but also on duties that it had implicitly assumed in respect of the whole network of franchisees.

Indeed, it is only when one recognizes the incomplete account of the parties’ rights and obligations given by the explicit terms of the contracts that the true nature of the arrangement – an innominate contract of franchise based on a relationship of long-term collaboration between independent businesses [7] – becomes apparent. [ 60 ] By arguing that it had virtually no obligation to support the brand much beyond a narrow duty of technical assistance, the appellant paints an inaccurate picture of the nature of its agreements with the Franchisees.

At the hearing on appeal, the Franchisor paid only lip service to its implicit duties, resisting questions from members of the bench who sought to understand their substantive content that fitted with a multi-year franchise agreement in which the Franchisor had given itself an active role in overseeing the network of all franchisees.

Respectfully stated, in minimizing its implicit obligations to the network of franchisees, the Franchisor has given a disingenuous account of the nature of this long-term collaborative arrangement. [ 61 ] What then is the “nature” of these particular franchise agreements that justifies the inferences made by the judge under

article 1434 C.C.Q.? [ 62 ] The contracts established a relationship of cooperation and collaboration between the Franchisor and its franchisees, reflecting both common and divergent interests, over a long period of time. Unlike in other arrangements where a franchisor might merely provides a licence and some modest start-up advice, the Dunkin’ Donuts franchisees were by no means left to their own devices after their launch in this quick-service restaurant business. Protecting the brand was no doubt too important to the Franchisor not to take an active hand in the arrangement over the course of its term.

Sustaining the “system” as a flourishing restaurant chain required, as the terms of the agreement made plain, an on-going interaction between the Franchisor and each of its franchisees. The Franchisor took on a role in choosing appropriate franchisees and approving new acquirers of existing franchises, of advising franchisees at the start of the venture, of offering assistance to them along the way to be sure that each franchisee respected the system upon which the reputation of the brand rested. The franchisee relied on the Franchisor assuming this role to justify his or her investment.

Not only would each franchisee receive assistance and benefit from the collaboration of the Franchisor but the franchisees were entitled to count on the Franchisor to see that the system would be supervised and that the weaker links in the chain of franchisees be corrected or excised. This would continue over the life of the agreement. In this sense, the agreement was a “relational” [8] one which, as is often the case in such long-term arrangements, did not spell out all of its terms. [9]

[ 63 ] These implicit obligations formed part of a long-term collaborative relationship, between the Franchisor and each individual franchisee, within an established network in which service and quality of experience were imagined as nearly identical from restaurant to restaurant. The judge might well have explained more fully what was the nature of these particular agreements that justified the inference of substantial obligations that were not spelled out in the contracts.

That said, I take as important his recognition that the character of this specific franchise arrangement was an “on-going” one in respect of a “system” that the parties agreed to sustain as critical to the success of the brand. As a result, the judge found that the obligations the Franchisor has in respect of the brand were necessarily “continuing” and “’successive’” (para. [59]). The collaborative nature of these quick-service restaurant franchising agreements that extended upwards of 20 years is central to explaining why

article 1434 C.C.Q. served to import the obligations it did. [10] [ 64 ] Given the role the Franchisor assigned to itself in overseeing the on-going operation of the network and the uniform system of standards, it is fair to characterize the obligation of means to protect and enhance the brand as a “complément nécessaire” [11] of the contracts due to their nature. It was thus appropriate, in my view, for the judge to infer that the Franchisor had implicitly agreed to undertake reasonable measures to help the franchisees, over the life of the arrangement, to support the brand.

This included a duty to assist them in staving off competition in order to promote the on-going prosperity of the network as an inherent feature of the relational franchise contract. [ 65 ] Moreover, this necessary complement to the express terms rests on the presumed intention of the parties to these particular agreements. The judge inferred the Franchisor’s obligations flowing from the nature of the agreements not from a body of suppletive or public order rules, but from his sense of the unstated intention of the parties, consonant with articles 1425 and 1426 C.C.Q.

As scholars who have studied the theory of implied obligations have demonstrated, this is a principal justification for obligations inferred from the nature of the agreement under

article 1434 C.C.Q. [12] In other words, in characterizing the essential obligation of the Franchisor as a duty to protect and enhance the brand, the judge did not assign a new and unintended obligation on the Franchisor, but he drew on the explicit terms, supplemented by implicit obligations flowing from the nature of the agreement that, in both cases, reflected the intention of the parties.

The “élargissement du cercle contractuel” in this case, to use a helpful expression, is based on the judge’s finding of fact as to parties’ intent. [13] I hasten to note that the Franchisor pointed to no express term that would have ousted the implied obligations that came with the nature of this long-term agreement.

c) Implied Obligation of Good Faith [ 66 ] In addition, the judge quoted extensively from the Provigo [14] judgment to explain that the Franchisor owed an obligation of good faith towards the Franchisees, including a duty, in cooperation with them, to respond and adjust to new market conditions (para. [53]) This duty of good faith – an implied obligation in these agreements as the judge rightly held – serves to reinforce his view that even where it is not stipulated as such, the Franchisor had the obligation under the 1992 and 2002 agreements to take reasonable measures to support the brand. [ 67 ] The Franchisor recognized in argument that it owed an obligation of good faith, but read it down to such an extent that the duty recognized in Provigo in 1997 could not ground its contractual liability.

At the hearing, counsel argued that the obligation of good faith should be limited to precluding a franchisor from competing unfairly with its franchisees, in keeping with the setting for the dispute in Provigo . [ 68 ] The Franchisor is mistaken on this point. [ 69 ] The judge was correct to rely on Provigo as support for an implicit obligation of good faith which, in connection with the present franchising arrangement, buttressed the obligation to protect and enhance the brand based on the parties presumed intent.

The judge rightly decided that the duty outlined in Provigo is not confined to the circumstances of franchisors who compete unfairly with their franchisees. [ 70 ] This Court noted in Provigo that the franchisor owed an obligation of good faith and loyalty to its franchisees that brought with it a duty to provide technical and commercial assistance and what it called “collaboration” during the life of the agreement. It is may be recalled that the Court made this finding not on the basis of the duty to perform contracts in good faith set forth in

article 1375 C.C.Q. but rather on the distinct theory of implied obligations, citing specifically the “nature” of the franchise agreement and “equity” in

article 1434 C.C.Q. [15] This implied obligation of good faith requires a franchisor, by reason of superior know-how and expertise upon which the franchisees rely, to support individual franchisees and the whole of the network through its on-going assistance and cooperation: [16] [Le franchiseur] doit cependant aussi, en raison de l'obligation de bonne foi et de loyauté qu'il assume à l'égard de son franchisé, faire bénéficier celui-ci de son assistance technique, de sa collaboration donc de ses nouveaux outils ou, au moins, trouver d'autres moyens de maintenir la pertinence du contrat qui le lie pour que les considérations motivant l'affiliation ne soient pas rendues caduques ou inopérantes. […] Le franchiseur doit, en effet, maintenir l'ensemble du réseau à un haut niveau de performance ce qui suppose, dans certains secteurs, une grande souplesse d'adaptation aux nécessités du marché. [ 71 ] In circumstances where the parties must work together to achieve the object of the franchise arrangement over a long period of time, Provigo thus recognizes that both the nature of the agreement and equity allow a “duty to cooperate” to be inferred as a contractual obligation for the Franchisor. [17] In the present case, the nature of the agreement, on the one hand, and equity, on the other, provide two distinct normative justifications for this implied obligation of good faith under

article 1434 C.C.Q. [18] Where the nature of the agreement justifies the inference, the implied obligation is best viewed as a reflection of the presumed intention of the parties. Parties to a long-term franchise agreement like the ones in the case at bar can typically be presumed to have intended reasonable standards of cooperation based on the relational nature of the arrangement. Equity does not depend on presumed intention, but is more closely connected to the law’s concerns for fairness in contract.

Here, equity mandates the Franchisor’s due regard for the Franchisees’ interests – taking into account what the Court called in Provigo the franchisor’s superior know-how and expertise [19] – without which long-term common objectives of both parties could not be met. The implied duty of good faith under

article 1434 acts to reinforce and confirm the

duties of assistance and cooperation for the Franchisor associated with the nature of the contract.

In sum, good faith brings with it, as an implied obligation based on both equity and the long-term nature of these franchise agreements, an “intensification de la coopération qui reste la caractéristique fondamentale de tout contrat relationnel”. [20] [ 72 ] Beyond the duty not to take actions that would wrongfully cause them harm, the Franchisor assumed, on the basis of this implied duty of good faith in the 1992 and 2002 agreements, a duty to assist and cooperate with the Franchisees by taking certain active measures in support of the brand. [21] This meant that the Franchisees were entitled to rely on the Franchisor, as a matter of contractual fairness and as a reflection of their own presumed intentions, to take reasonable measures to protect them from the market challenge presented by Tim Hortons.

The judge correctly identified these two sources of implied obligations in our case. Where a violation of these implied obligations incident to the nature of the contract and in conforming to equity was established, he was entitled to conclude that there was a contractual fault as this Court held in Provigo . [ 73 ] It is of course important not to exaggerate the content of the implied obligation of good faith and its attendant “duty to collaborate” here. Despite some shared objectives, franchisors and franchisees also have divergent interests but are no less wrapped up in a relationship of collaboration.

Stated simply, in our case the franchisees sold coffee and doughnuts; the Franchisor sold franchises and reserved for itself a right to take royalties based on the performance of the franchisees who it both assisted and supervised along the way to make sure the system worked. The Franchisor increased its return, through royalties, when gross sales increased; the Franchisee increased its profits where he or she made efficient use of its time and resources.

In these circumstances, a franchisor does not want any franchisee to cut corners to increase profits at the expense of gross sales; a franchisee may see things differently. He or she may not want to sell more doughnuts at unprofitable hours, for example, or prefer not to renew inventory that is still suitable for use.

The pursuit of these divergent interests is possible, but only within the parameters of the terms of the contract and the implied obligation of good faith. [ 74 ] In this light, it is fair to see the parties – despite the aspirational language of “partnership” sometimes used in connection with the arrangement – as having some different goals. They are entitled, within the bounds of the execution of the contract in good faith (article 1375 C.C.Q.) and the content of the obligation of good faith that is implicit in their agreement (article 1434 C.C.Q.), to pursue those divergent interests.

As the Supreme Court has held in a comparable context, the obligation of good faith does not displace the “legitimate pursuit of economic self-interest” that is at the core of freedom of contract. [22] On its facts, for example, Provigo even allowed for some competition between franchisor and franchisee and, in my view, the duty of good faith applied here does not require of this Franchisor a degree of collaboration or contractual ‘solidarity’ with its franchisees that mandates altruistic business practices or self- sacrifice. [23] [ 75 ] But in the present case, the judge did not impose on the Franchisor, through the duty of good faith, an unfair standard of disinterested behaviour or require it to confer a liberality on the franchisees – it was in the Franchisor’s interest, broadly speaking, to assist its franchisees, to supervise the network and to collaborate with them by proposing reasonable measures to combat a competitor who, in the longer term, threatens the value of the brand for both parties.

When established, the failure to do so is a contractual fault that gives rise to damages not as an arbitrary measure of redistribution of wealth but as an ordinary contractual remedy based on corrective justice. In any event, it is enough in the present case to observe that the judge made no error in identifying an implicit obligation, for the Franchisor to take reasonable measures to promote and enhance the brand, and that this conclusion found justification both in the nature of the agreement and in equity.

Whether the doctrine of the implied obligation of good faith might have a more robust or more expansive content, including the question as to whether “good faith” and “loyalty” are qualitatively different sources of contractual duty, is a matter best left to another day. [ 76 ] None of this is controversial and the judge made no mistake in his account of this aspect of the applicable law.

While it endeavoured to read down the import of its obligation of good faith and rely only on the minimalist duties set out by the express terms of the agreements, the Franchisor did recognize (to quote from its own factum), that both parties are “bound by obligations of cooperation, good faith and loyalty to its franchisees as found by this Court in the Provigo case”. The Franchisor’s representatives understood this too: Steve Gabellieri said at trial that the Franchisor has “a responsibility to protect the brand, to grow the business, collaboratively in the market”.

To my mind, the obligational context of the duty of good faith applied to this case by the judge is by no means an extension of Provigo but merely an application of established law to a new set of facts.

d) Implied Obligations owed by the Franchisor to the Network of Franchisees [ 77 ] Beyond the obligation to allow individual franchisees to use the Dunkin’ Donuts system, the contracts created, through express language and by necessary implication, a duty owed to the franchisees collectively to take reasonable measures to support and enhance the brand.

This included the duty to respond with reasonable measures to help the franchisees as a group to meet the market challenges of the moment and to assist the network of franchisees by enforcing the uniform standards of quality and cleanliness it holds out as critical to the success of the franchise. [ 78 ] Thus when the judge wrote here that the Franchisor has a duty to protect and enhance the brand, he was also speaking to the contractual duty it owes to the whole group.

By imposing duties on the franchisees to keep their stores clean, to use approved products to ensure uniform quality, to keep stores open for long hours, and to contribute to the advertising fund, to cite some examples, the Franchisor also implicitly undertook to the group that it would take reasonable measures to ensure to all that these obligations will be respected. The Franchisor had obligations to individual franchisees – technical assistance, for example – but also what has been described as “obligations de nature collective” [24] that were owed, in a manner of speaking, to the whole network.

It is appropriate that individual franchisees be in a position to exact performance of these obligations to protect and enhance the brand across the network that are ‘owed collectively’ by the Franchisor under the contracts. [25] Yet part of the problem stems from the terms of the agreements: most of the obligations to ensure that the stores were clean and well run, and that the system was adhered to in order to ensure the uniformity of the Dunkin’ Donuts “experience”, were explicitly imposed on the franchisees, as debtors.

As a contracting party, the Franchisor appears in the franchise agreement as bearing “rights”, not duties, including the right to inspect stores, the right to review franchisee financial statements, the right to insist that standards of cleanliness and product quality are respected, and the like. [ 79 ] How are these “rights” transformed into Franchisor obligations?

[ 80 ] Needless to say, the “network” of franchisees is not, formally, a contracting party. The network is, in fact, composed of individual contracting parties, each with separate agreements binding them to a single franchisor. Naturally, in a formal sense, the rules on privity or the relative effect of contracts theoretically preclude any one franchisee from suing the franchisor for non-performance of a contract that the franchisor may have with another franchisee. But the franchisor’s duty to maintain the health and prosperity of the network is relevant to every individual contract.

As author Generosa Bras Miranda has usefully written, the nature of the contract can bring with it a “devoir général de veiller à la bonne gestion du réseau” [26] of which each franchisee can avail itself. The undertaking to take reasonable measures to protect and enhance the network, owed to the network, can best be thought of as an implicit duty in each contract upon which an individual franchisee can take action in the event of breach.

The judge was right to see it as a part of the agreements here upon which each franchisee relies when he or she agrees to become a member of the Dunkin’ Donuts system. [ 81 ] This reliance interest is a central feature of all the agreements. The Franchisor held out to each franchisee, individually, that the brand is something of value as an inducement to join the network. This was done very explicitly in our case, in the

preamble to both contracts, by insisting on the value of the reputation of the brand to each of the contracting parties, by emphasizing the esteem with which the public holds the brand, and by underscoring the importance of the uniform experience to the reputation of the brand. [27] The franchisee, naturally, relied on this in deciding to join the network.

The franchisee signs the franchise agreement in order to profit from the established renown of the network, and he or she both understands and expects that this established track record will be maintained through a rigorous programme of imposed standards of quality and cleanliness, of training, of assistance and support. The opportunity to join the Dunkin’ Donuts network, with its promised reputation for quality and uniform experience and the sense that the Franchisor would be present over the life of the agreement to ensure that quality, induces them to invest in the franchise.

It is what the civil law calls the “cause” of the franchisee agreement: “the cause of the contract is the reason that determines each of the parties to enter into the contract / la cause du contrat est la raison qui détermine chacune des parties à le conclure” (article 1440 C.C.Q.).

By denying that it has a duty to protect and enhance the brand, the judge rightly saw the Franchisor as going back on its word in each individual contract by denying the existence of the very cause of the arrangement. [ 82 ] Nowhere is the implicit obligation to the network more evident than in the unstated duty of the Franchisor to see that delinquent franchisees – those who fail to keep their stores clean, or fail to respect the rules of the system in respect to quality of product and store hours – be called to account by the Franchisor.

In our case, this was an important finding of the judge: he recognized that there were “bad apples” in amongst the franchisees (although not, as the Franchisor had argued, amongst the respondent Franchisees).

He held that the Franchisor had failed to protect the brand by taking appropriate action against these bad apples, and that this failure constituted a fault – the breach of an implied obligation to support the brand under the contracts – that the respondents could invoke in support of their cause of action. [ 83 ] The fact that this unstated obligation reflects the intention of the parties here seems beyond doubt.

Franchisees, like franchisors, abhor what economists call “free-riders” across the network. [28] A franchisee who cuts corners in his or her own business in violation of the franchise agreement – invests less in cleaning the store, or in fresh products, or in local advertising, or in keeping the store open at unprofitable hours – may achieve some short term economy but risks damaging the whole of the network.

The other franchisees who do adhere to the stringent standards of the “system” imposed by the franchise agreements – like the respondents here – are allowing the underperforming colleague to coast freely on the reputation and goodwill generated by their hard work and investments.

Moreover, the Franchisor understands, as do the franchisees who respect the dictates of the system, the negative impact that a free-rider has on the group: the underperforming franchisee can spoil the Dunkin’ Donuts “experience” for a customer and, as a result, deter that customer from patronizing any other Dunkin’ Donuts store thereafter. [ 84 ] What can a franchisee do about a free-rider who, for example, fails to adhere to the contractual standards of product quality or store cleanliness?

Little or nothing. [ 85 ] It is up to the Franchisor to police the network by taking reasonable measures to root out the free-riders. It is up to the Franchisor to enforce the authority it has given itself under the franchise agreement. The explicit contractual “right” it has to insist that the franchisee respect the uniform standards of the system brings with it a correlative obligation of means, owed collectively and individually to the complying franchisees, to see that the franchisees adhere to those standards.

This is part of its obligation to protect the brand – an obligation “owed to the network” that, juridically, is a duty owed to each of the franchisees as part of the agreement, whether that duty is explicit or not. [29] It is in the nature of a long-term relational contract like the ones in the present case. These powers are especially wide-ranging in the Dunkin’ Donuts’ standard-form contracts.

In paragraph 5 of the 1992 agreement, for example, the Franchisor has the right to ensure that each franchisee use materials and ingredients that conform to network standard and that the franchisee keep his or her store clean and in good repair. In paragraph 6, it is accorded the right to inspect premises, examine a franchisee’s books, and even his or her personal income tax returns. At paragraph 10, the Franchisor has special powers where a franchisee seeks to sell or transfer its rights to a third party. Many of these same obligations were also imposed on franchisees in the 2002 agreement.

All of these “rights” came with mirror obligations: the Franchisor had implicitly undertaken to all franchisees that it would take reasonable measures to protect and enhance the brand; that it would not sit on its rights at the expense of franchisees who relied on the undertaking made to them when they bought their franchise that the Franchisor was selling them a business opportunity that was worth the investment.

It was the failure to meet this obligation that the judge found, in part, to be grounds for establishing fault in paragraphs [54] to [59] of his reasons. [ 86 ] The Franchisor took strong objection to the idea that it had assigned to itself a duty to “enhance” the brand, which it took as tantamount to guaranteeing profits to the Franchisees. The Franchisor is mistaken. First, the term “enhance” was used repeatedly in the express terms of the 1990s standard form.

Not only is it found in paragraph 3.C of the 1992 agreement quoted by the judge, but also in paragraph 3.E regarding the Franchisor’s responsibility for advertising (the purpose of which is “to increase sales and enhance and further develop the public reputation and image” of the brand), and in the introduction to paragraph 5 on covenants of the franchisee (that the Franchisor implicitly undertakes to oversee).

The duty to take reasonable measures to protect the brand – the judge saw this duty as the source of the Franchisor’s “greatest failing” (para. [57]) – is inseparable, according to the judge’s view of parties’ intent, from the duty to take reasonable measures to enhance its reputation (para. [58]). In suggesting this imposes an obligation to ensure profitability of the franchisees, the Franchisor has offered an unfair reading of the term “enhance” that is found in its own standard form.

The Franchisor did not guarantee that the reputation of the brand would be enhanced but undertook to adopt reasonable measures to that end and the judge did not say otherwise. No error has been shown here.

[ 87 ] This duty to enhance the brand also reflects the fact that both parties were wrapped up in a long-term relationship requiring of both of them, within their respective spheres, to adopt conduct promoting what two French scholars called “innovation permanente”. [30] This Court alluded to this very idea in Provigo when it held that the Franchisor must take the lead in assisting the franchisees to adapt to a market in constant evolution given its know-how and control over the group. [31] This obviously extends to the presence of new competitors in the marketplace and requires the Franchisor and the franchisees, in their respective spheres, to react with reasonable measures to remain competitive.

Standing still in this long-term relationship is not an option and, generally, as in our case, it is the Franchisor, not the franchisees, who is best placed to adjust the “system” as a whole in order to meet new market conditions. Given the nature of the relationship, the Franchisor initiates the response across the network, the franchisee undertakes to comply with the response.

Neither party is imagined as taking up a role of passively supporting the brand; those duties – always on a standard of means – require a measure of constant adaptation and innovation, and the Franchisor must hold up its end to sustain “la pertinence du contrat”, [32] as the judge suggested in his reading of the agreements. [ 88 ] In sum, the judge made no revisable error in his identification of the obligational content of the franchise agreements.

IV.A.2 The Intensity of the Franchisor’s Contractual Obligation [ 89 ] The Franchisor says the judge erred in law by imposing on it an obligation of result to enhance the brand, specifically that of guaranteeing profits to the Franchisees, as opposed to an obligation of means to take reasonable steps to protect the Dunkin’ Donuts system.

By blaming it for “allowing the fox into the hen-house” – the “fox” being Tim Hortons, the “hen-house” being Dunkin’ Donuts’ market share – the judge is said to have wrongly held the Franchisor to outperform the competition at all costs and indeed to insulate the Franchisees from any change to their income and profitability. [33] [ 90 ] By awarding the franchisees 100% of the profits they claim to have lost, the judge is alleged to have demonstrated his mistaken view that the Franchisor was held to an obligation to guarantee that result.

This is a blatant error, says the Franchisor: the Franchisor’s contractual obligation is one of “means/moyens” only. For the Franchisor, this constitutes an error of law that requires that the trial judgment be set aside. [ 91 ] This argument is without merit. [ 92 ] The Franchisor is right to say that the contract did not impose an obligation on it to guarantee the Franchisees’ success or insulate them from competition. [34] There is no disputing the fact that the Franchisor’s obligation was limited to taking reasonable measures to protect and enhance the brand. But the judge rightly recognized this.

In paragraph [62] of his reasons, he made plain his sense of the extent of the Franchisor’s duty to protect and enhance the brand: “Although not the insurer of the Franchisees nor the guarantor of their successes, ADRIC is nevertheless responsible to them for the harm caused by its civil faults”. The judge both said, and clearly meant, that the obligation imposed on the Franchisor was one of means, not of result. [ 93 ] The judge then considered the measures that the Franchisor did and did not take in support of its obligations under the contract.

It is clear from his comments that he viewed these measures to be insufficient to meet the reasonableness standard or intensity of means of the obligation. The Franchisor did not take reasonable measures, in particular, to protect and enhance the brand in the face of the competition. To return to his colourful expression, the judge understood that the Franchisor was not bound to guarantee that the fox did not enter the hen-house, but merely to take reasonable measures to protect the Dunkin’ Donuts’ system.

Had the Franchisor taken proper measures to protect and enhance the brand and, notwithstanding those efforts, Tim Hortons or another competitor had encroached on some of the Franchisees’ market share, the latter would have had no basis for complaint. [ 94 ] If the judge were to have made the mistake that the appellant attributed to him, he would have simply observed that the result was not met and held the Franchisor liable on that basis, without examining any of the measures it took, and leaving only a defence of superior force or force majeure open to the Franchisor.

This is what is meant, in law, by “obligation of means” as against an “obligation of result”. [35] [ 95 ] In my respectful view, the Franchisor appears to misunderstand this basic concept. By arguing that the judge’s award of 100% of the Franchisees’ claim demonstrates that the judge held them to an obligation of result, the Franchisor has confused the intensity of the obligation with the quantum of damage caused by non-performance. The judge was entitled to find that the Franchisor’s violation of a contractual obligation of means caused the whole of the damages claimed if the evidence supported that view.

It does not necessarily follow that he imposed on it an obligation of result. [ 96 ] In any event, the Franchisor has failed to show a revisable error here. In the final analysis, its disagreement with the judge turns on whether the measures it took were reasonable ones – this disagreement is one of fact, not of law and as noted, absent a demonstration by the Franchisor of a palpable and overriding error, the judge’s findings must stand.

IV.A. 3 The Application of the Business Judgment Rule [ 97 ] The Franchisor argues further that the judge failed to consider the impact of the “business judgment rule” which precludes a court from second-guessing business decisions made in good faith even when those decisions fail to bring about the desired results.

This is said to be an error of law. [ 98 ] According to the Franchisor, the trial judge’s conclusions regarding the inadequacy of the strategic growth plan, of the remodel incentive plan, of the transfer of the Quebec market to Couche-Tard are some examples, among others, of his failure to defer to properly- made business decisions undertaken in good faith.

The Franchisor says the trial judge ignored the business judgment rule and substituted his own result-oriented views for those of its experienced executives. [ 99 ] This argument is also without merit. [ 100 ] The Franchisor proposes to apply the business judgment rule without regard to its proper meaning in order to avoid ordinary liability for breach of contract to the Franchisees as independent businesses under the franchise agreements.

[ 101 ] The parameters of the business judgment rule, described notably by the Supreme Court in Peoples’ Department Store (Trustee of) v. Wise , [36] are both well known and limited in scope in matters of civil liability. The rule is usually applied in matters relating principally to the personal responsibility of directors and officers to shareholders and not as a means of exculpating a corporate contracting party from liability for fault under a contract with third parties.

As legal scholars have explained, the rule is designed to allow for directors to take appropriate risks without undue fear of personal liability, but not as a shield against civil liability of their corporations. [37] [ 102 ] In the circumstances, it would be inappropriate to extend the protection afforded to corporate directors to shield the Franchisor from contractual liability under

article 1458 C.C.Q. to the Franchisees who, defined in the contracts as independent businesses, [38] are entitled to remedies for breach of contract. The proposed application of the rule is completely out of step with its purpose. [39] Needless to say, a business has a degree of latitude in deciding what are the appropriate measures to be taken in conducting its affairs and, in particular, in the performance of a contractual obligation of means as is the case here.

But to say a business enjoys latitude is not to say that its conduct is insulated from review by the courts when the business is alleged to have violated a contract with a third party. The judge was entitled to ask, in his review of the facts, whether the business strategy of the Franchisor met the obligation of means it owed under the franchise agreements. This ground of appeal is rejected.

IV.A.4 Evidence of the Franchisor’s Fault [ 103 ] Fourthly, the judge is alleged to have committed a series of palpable and overriding errors of fact in measuring the efforts made by the Franchisor to assist the Franchisees to meet the ch

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