A Tim Hortons franchisee sued the franchisor for breach of six franchise agreements and an area development agreement. Tim Hortons counterclaimed for breach of contract based on failure by the franchisee to meet the development schedule and pay royalties and advertising fees. The franchisor brought a claim against the franchisee’s guarantor. After a nine-day trial the court rejected the franchisee’s claims and entered judgment for the franchisor.
In 2014, the franchisee agreed to develop 40 Tim Hortons restaurants over five years. Tim Hortons approved 14 of the franchisee’s proposed sites. However, due to capital shortfalls, higher than expected construction costs and other financial difficulties, only half were opened.
That year (2014) the franchisor was acquired. The new owners used a different business model in which franchisees, not Tim Hortons, did site selection and construction. The parties negotiated a more aggressive development schedule under a new agreement. But the agreement was never signed. The franchisee presented another company as a potential equity partner, but the franchisor rejected the proposal. By 2017, the franchisee closed all its restaurants.
The franchisee claimed Tim Hortons anticipatorily breached the development agreement by seeking to replace it with the new agreement. The court held the franchisor’s actions were not a clear and unequivocal manifestation of intent to repudiate the 2014 agreement, because the parties continued under their original agreement after discussing the new one.
The franchisee also claimed the franchisor breached the implied covenant of good faith and fair dealing by rejecting its proposed equity partner to pressure the franchisee to accept the new agreement. The court held the franchisor’s rejection of the proposed equity partner was not unreasonable, because approval would have deprived the franchisee’s majority owner of his controlling interest.
The court awarded judgement to Tim Hortons and against the franchisee and its guarantor. Changes by new management did not violate the franchisor’s actual or implied contractual obligations. Changes to the franchise model imposed by new management had no effect on the franchisee’s financial obligations.
A franchisee considering substantial minimum development obligations in a short time should negotiate reasonable extension procedures, credits for closed locations, and other mechanisms in the development agreement to safeguard against economic and other unforeseen factors outside the franchisee’s control.
