In a 2015 decision, Dunkin’ Brands Canada Ltd. v. Bertico, Inc., the highest court in the Quebec province of Canada upheld claims by Dunkin’ Donuts franchisees that their franchisor had breached its duty of good faith and fair dealing by failing to take steps over the years to keep the brand competitive in the marketplace. Back home in the U.S.A., franchisors and their attorneys quickly expressed disagreement with this decision and proclaimed it was irrelevant to franchising in the United States. However, the franchisor community’s dismissive attitude toward Dunkin’ Brands Canada is arguably a case of wishful thinking. It is only a matter of time before courts (and arbitrators) in the United States recognize not only that Dunkin’ Brands Canada was correctly decided under Quebec law, but that the law of good faith and fair dealing in most U.S. jurisdictions is close enough to the law in Quebec that the same result would be compelled here.
Specifically, the court in Dunkin’ Brands Canada correctly viewed the Dunkin’ brands franchise agreement as a long-term relational contract in which the enumerated duties of the parties, especially those of the franchisor, are necessarily incomplete and not exhaustive of the entire duties imposed on the franchisor. This exact observation was made years ago in an influential law review article by Professor Gillian Hadfield, who aptly observed that franchise agreements are “relational contracts” because they require mutual performance over several years; they are necessarily incomplete in defining the parties’ exact duties in every situation; and they vest discretion in both parties, but especially in the franchisor, as to exactly how the agreement will be performed over a period of years. As Professor Hadfield explained, few franchisors accept specific mandatory performance duties beyond licensing the trademark. Everything else, ranging from the substance and quality of training and ongoing support for franchisees to the ongoing development for the brand, is left to a franchisor’s discretion, as “there are essentially no clauses creating any [specific] obligation for the franchisor to develop the system, to continue in operation, to continue to advertise, or to maintain the trademark.”
From the fact that franchisor’s almost always enjoy nearly unbridled discretion in managing their brand, Professor Hadfield rightly concluded that under the common law as it has developed in the United States, franchisors must exercise their discretion consistent with the implied covenant of good faith and fair dealing.
No doubt Professor Hadfield was correct. As explained by the United States Court of Appeals in Interim Health Care of Northern Illinois v. Interim Health Care, Inc., a case in which I argued for the franchisee, and will never become tired of citing, the Court explained:
[mk_blockquote style=”quote-style” font_family=”none” text_size=”12″ align=”left”]When one party to a contract is vested with contractual discretion, it must exercise that discretion reasonably and with proper motive, and may not do so arbitrarily, capriciously or in a manner inconsistent with the reasonable expectations of the parties.[/mk_blockquote]
For franchisors hoping to dismiss Dunkin’ Brands Canada as a quirky result not relevant south of our northern border, here is the rub. The implied covenant of good faith and fair dealing in the United States is fundamentally the same as the implied covenant of good faith and fair dealing in Canada. The duty to act in good faith towards your contracting partner is one of the oldest duties recognized in the law. If a franchisor like Dunkin’ Brands can (and was) found liable in Canada because it fell asleep at the switch and did not do enough to protect its brand from upstart competitors putting the equity investments of all of its franchisees at needless risk, U.S. franchisors that fall asleep at the switch face the same risk – and have the same incentives from our legal system to proactively act in good faith.
Three final words about Dunkin’ Brands Canada:
- The franchisor sought to deflect the good faith and fair dealing claim by arguing that its franchisees were seeking a guaranty of success, but the court rejected that argument as balderdash. The franchisor was found liable because it was not trying hard enough to earn the substantial fees it was earning from its franchisees dependent on its good faith efforts and entitled to sue when no real effort was made
- American franchisees seeking to rely on Dunkin’ Brands Canada should be heartened by the United States Supreme Court’s increased reference to foreign law in determining standards of behavior. There is no reason world opinion that helps decide questions such as when the punishment of prisoners becomes “cruel and unusual” cannot help us decide how low franchisors can go before they breach their duty of good faith and fair dealing.
- Finally, we must not ignore the Quebec court’s observation that the losing franchisor “pointed to no express term that would have ousted its implied obligations that came with the nature of this long-term agreement.” On this blog we have warned franchisees to “run, not walk” away from any franchisor that asks you to waive your right to be treated fairly and with good faith as the price of buying its franchise. The opinion in Dunkin’ Brands Canada provides ample reason to heed this warning.
Carmen D. Caruso is a trial lawyer in Chicago with his own firm. He represents franchisees and dealers across the country in serious cases. He will continue his discussion of good faith and fair dealing and related topics in subsequent posts.