By Justin McNeil
Senior Editor
Tim Hortons dominates the Canadian fast food industry to the tune of $2.536 billion (CDN) in revenue last year alone. Its blend of coffee, fresh doughnuts, and connection to that most Canadian of sports has helped cement its own reputation as quintessentially Canadian. An organizational strategy embraced by other fast food chains, but not the other North American coffee giant, is Hortons’ reliance on franchising. The role this corporate structure has played in the success of the company seems somewhat evident, and now a class action lawsuit that is currently before the Ontario Superior Court of Justice may demonstrate the degree of importance franchises have played in Hortons’ rise. Inherent in this contractual relationship, are notions of good faith in negotiations between franchisor and franchisee. The legal concept of good faith and fair dealing, and how it is both defined and applied by the court may make the difference in whether the suit is ultimately successful or not.
The debate centers on this relationship and alleged misrepresentations over the costs of a new freezing process for doughnuts that are no longer baked in store. A recent article in Macleans takes a look at the dispute and lays out the contested information that has Hortons franchisees bringing suit. While the factual background is immense, the legal challenge which entails multiple causes of action may hinge on a claim that senior management breached the duty of good faith and fair dealing when they introduced the new flash freeze doughnut process. Franchisees say that management misrepresented how much the new technique would end up costing per doughnut. With costs now higher and margins lower than were expected, the franchisee plaintiffs feel the agreement they made was not presented to them with the requisite good faith that is inherently implied in contract negotiations. Now, they seek damages totaling $1.95 billion (CDN).
In most of Canada, good faith and fair dealing exists through the same common law recognition that is found in the U.S., as it is not afforded the strength of legislation (although the U.S. Uniform Commercial Code does codify the duty of good faith for the enforcement of commercial contracts). Only Quebec, in the civil tradition and inspired by French provisions with the same aim, has codified good faith in multiple articles of the Civil Code of Quebec. See Article 6; Article 7 (speaking to abuse of right); Article 1375. Instead, the common law provinces largely rely on the application of other doctrines to invoke breach of good faith and fair dealing, including unconscionability and fiduciary duties. Despite these differences between jurisdictions and legal systems, the concept is often applied in a very similar manner, yielding somewhat corresponding results. Even in Canadian common law though, courts have chosen to invoke the duty of good faith for a myriad of different reasons. Additionally, the duty has been employed differently depending on whether the issue involves contract negotiation, contractual performance, or contract enforcement. In response to this disparity, the increasing prevalence of the doctrine being asserted in legal claims, and its lack of a precise definition, there have been calls for a clear, bright-line rule in Canadian law that can be applied uniformly and provide for more predictability in the bargaining process.
Others have come to different conclusions regarding the relative benefits of applying good faith and fair dealing. In another common law country, it has been argued that the doctrine is neither required nor necessary for the proper operation of New Zealand contract law. The difficulty in arriving at a common definition for the doctrine, its differing application in distinct areas of the law, and justifications of its theoretical underpinnings that vary country by country are all arguments put forward to demonstrate the impracticality of relying on it. Reasons for why the doctrine is unnecessary in New Zealand include inter alia that adequate remedies are already in place—statutory, common law, and equitable—to protect contracting parties, the duty would reduce parties’ freedom to contract, the creation of a good faith duty is left to the legislature, the problems created by extending a general duty throughout diverse areas of contract and societal groups who may not need the protection, and a fear of the flood of litigants that will overwhelm the courts arguing a breach of good faith. Though these are all valid concerns, Canadian courts may continue to be more influenced by the similar codified rights of Quebec, and the traditional recognition the duty enjoys in American common law when grappling with the exact definition and authority to be extended to good faith in the future.
Legal claims aside, the class action suit is further complicated by allegations of impropriety on both sides in another Macleans article that more comprehensively addresses the turbulent recent history of the company and the motivations that animate the lawsuit. The lead plaintiff, Archibald Jollymore, is a store owner, former executive vice-president, and cousin of the former owner and co-founder of Tim Hortons, Ron Joyce. The current owners maintain that Joyce is both funding the plaintiffs’ fees in bringing this action and coloring the character of their claims, continuing a power struggle that began soon after Joyce sold the company to U.S.-based Wendy’s in 1995. With other family relationships involved, as well as different contingents of franchisees loyal to either the current or previous owners, the exact determination of what “good faith and fair dealing” means in this context will likely prove pivotal in the disposition of the case. Such an evaluation may have implications beyond this decision, due to the high level of publicity it already enjoys and the possibility of massive damages.
While the outcome of this case may not drastically alter the contract law of Canada, it may well serve as an impetus in further delineating the boundaries of its good faith and fair dealing doctrine. A reliance on the doctrine may move this area of Canadian common law closer to the law of the U.S., in that the duty is broadly recognized but largely uncodified. Whatever the result, effects will certainly be felt among franchisees of Tim Hortons, and possibly those of other Canadian chains. Any impact on the application of good faith and fair dealing in the U.S., or other common law jurisdictions, will be much more difficult to gauge. In a future post, I hope to follow up with new developments in the class action suit, as well as more fully explore distinctions in the doctrine’s application between Canadian and American law.
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