Canada: The Ontario Superior Court Certifies A Class Action Brought By Former Franchisees

Justice Strathy of the Ontario Superior Court of Justice recently certified a class proceeding brought by former General Motors car dealership franchisees against General Motors of Canada Ltd. ("GMC") and Cassels Brock & Blackwell LLP ("Cassels"). The decision illustrates the growing trend of class proceedings stemming from the franchisor/franchisee relationship, as well as the more rare circumstance of legal counsel being defendants to a class proceeding.

Background

The class proceeding arose from the economic downturn and the financial bailout provided by the governments of the United States and Canada to the distressed automaker in 2009. Upon the insistence of the federal and Ontario governments that it fundamentally reorganize its business, GMC informed 240 of its franchisees in May 2009 that their dealer agreements would not be renewed and instead offered franchisees a wind-down package.

The representative plaintiff, Trillium, was one of the GMC dealers that entered into a Wind-Down Agreement ("WDA")1 with GMC in May 2009 and voluntarily terminated its dealership agreement. Trillium sought to represent a class composed of dealers who similarly signed the WDA, claiming that GMC breached its obligations under the Arthur Wishart Act (Franchise Disclosure) 2000 S.O. 2000 c. 3 (the "Arthur Wishart Act") and comparable franchise legislation in Alberta and Prince Edward Island. Trillium also alleged that Cassels had been retained to act on behalf of the GMC dealers' Canadian Automotive Dealers' Association ("CADA"), and drafted a memo to the dealers and participated in a conference call in May 2009. However, by virtue of the fact that Cassels had also been retained by the Canadian government to provide advice on the GMC bailout negotiations, Cassels had an undisclosed conflict of interest and breached duties that it owed to the terminated dealers.

The Plaintiff's claims against GMC

Trillium claimed that GMC breached its duties under the Arthur Wishart Act and the legislation's counterparts in Alberta and PEI2 In particular, it was asserted that the WDA was a "franchise agreement" as defined in the legislation, and that GMC failed to deliver a disclosure document 14 days before a franchisee was required to execute the WDA, pursuant to section 5(1). Instead, GMC adopted a strategy designed to keep franchisees "in the dark" concerning GMC's financial position. Damages were claimed for breach of the statutory duty of fair dealing and interference with the right of association, and Trillium sought a declaration that class members could rescind the WDA due to the failure of GMC to provide a disclosure document.

The Plaintiff's claims against Cassels

It was pleaded that Cassels had failed to properly advise and represent class members, largely by failing to inform franchisees of their rights under the Arthur Wishart Act and in developing a collective response to the WDA. As a result of its breach of contract and negligence, the plaintiffs claimed that Cassels deprived all class members of the opportunity to obtain a more advantageous negotiated wind-down. Moreover, by advising the Canadian government in the bailout negotiations, that Cassels was in an undisclosed conflict of interest (since the bailout was conditional on GMC taking a more aggressive approach to restructuring of its dealership network) and was not in a position to provide independent and impartial advice. It was asserted that this constituted a breach of fiduciary duty.3

The Certification Motion

After addressing the applicable provisions of the Arthur Wishart Act and the purpose of the legislation, Justice Strathy commented on the intersection of franchisee claims and the Class Proceedings Act, 2002 S.O. 2002 c. 6 (the "CPA"). In particular, his Honour quoted the authors of the Ontario Law Reform Commission in 1982, who noted the particular suitability of claims by franchisees for class action treatment. After reviewing prior Ontario class actions involving the franchise relationship,4 Justice Strathy applied the five-part test for certification under section 5 of the CPA.

The Pleadings Disclosed Causes of Action

The Plaintiff asserted three claims under the applicable franchise legislation, namely a claim of breach of the duty of fair dealing, breach of right of association, and breach of the franchisor's obligation of disclosure. On the certification motion GMC only contested the latter claim under section 5 of the Arthur Wishart Act with respect to the provision of a disclosure document. First, it was argued that the disclosure obligation is directed only to a "prospective franchisee" and not to an amendment of an existing franchise agreement. Second, GMC contested the Plaintiff's position that the WDA was a "franchise agreement" so as to trigger the disclosure document obligation, characterizing the WDA as akin to a settlement. In addition, GMC had historically maintained that its dealership agreements were not "franchise agreements" and subject to the Arthur Wishart Act; notwithstanding this fact, the WDA provided that the dealer released all rights under the statute or similar legislation. On the motion, GMC conceded that its dealers were subject to the Arthur Wishart Act.

After noting that the issues raised were novel, Justice Strathy held that it was not plain and obvious that the disclosure obligation did not arise by virtue of the WDA, noting "it does not strike me as unreasonable, or inconsistent, with the statutory purpose" to suggest that GMC had an obligation to make "full and fair disclosure of all material facts known to it that might reasonably affect the franchisee's decision" to enter into the WDA.

With respect to the claims against Cassels, the law firm argued that Trillium had failed to plead the particulars of the cause of action for breach of contract. The terms of the Cassels retainer were disputed, Cassels taking the position that the retainer by CDA was limited to providing advice in the event of a bankruptcy or insolvency of GMC. However, the pleading was read generously by Justice Strathy and allowed to stand. The pleading of negligence was also allowed to proceed. Cassels argued that since each dealer retained counsel in connection with the WDA, there was no proximity or reliance on Cassels nor any causal connection with anything Cassels did (or failed to do) and any damages. However, Justice Strathy referred to the "developing line of authority" permitting a party to assert a claim of negligence against a lawyer where there is no retainer and no direct solicitor-client relationship between the plaintiff and the lawyer.5 He held that it was arguable that Cassels brought itself into a relationship of sufficient proximity to owe the dealers a duty of care, and that the matter was best left for consideration at trial on a full evidentiary record.

Finally, Justice Strathy quickly concluded that the allegations of breaches of the fiduciary obligation of undivided loyalty that are "at the heart of the lawyer-client relationship" were properly pleaded.

Common Issues

In determining whether the claims raised common issues under section 5(1)(c) of the CPA, Justice Strathy noted that the claims arose from a series of events that culminated in May 2009, from a franchise agreement and a WDA that was common to all members of the proposed class, and the conduct of GMC and Cassels that was substantially uniform in relation to all members of the proposed class. Consequently, the proposed common issues with respect to the claims against GMC were held to be appropriate, including:

  • whether GMC was a franchisor within the meaning of the franchise statutes;
  • whether the class members were entitled to the benefit of the statutory duty of fair dealing and if GMC breached the duty;
  • whether GMC breached the dealers' right of association; and
  • whether GMC was required to deliver a disclosure document to the dealers under the WDA, and if so, whether each class member in Ontario, Alberta and PEI is entitled to rescind/cancel the WDA

Of particular note was the approved common issue of whether the Release found in the WDA was void and unenforceable under sections 46 and 117 of the Arthur Wishart Act. With respect to the proposed common issue of whether damages against GMC were to be assessed in the aggregate, Justice Strathy left the issue of aggregate assessment to the trial judge, noting that "this is not a case in which the certification of the action hinges on the availability of an aggregate assessment" and individual assessment would "not be insurmountable."

Similarly, Justice Strathy identified as common to the class members the issues of whether Cassels was in a solicitor/client relationship with the class members, and if it owed a contractual duty, fiduciary duty, or a duty of care to the class and if those duties were breached.

After noting the Court of Appeal's finding in Quizno's Canada Restaurant Corp. v. 2038724 Ontario Ltd. as to the suitability of a franchise claim to class action treatment, Justice Strathy concluded that a trial of the common issues would advance the litigation and a class proceeding was the preferable procedure.

This decision adds to the growing list of franchise claims to have been certified by the courts in recent years.

Footnotes

1. The dealer agreements and WDA incorporated Ontario law. However, the franchisee legislation in Alberta and PEI invalidates contractual terms that exclude the application of the law of that province, and accordingly the law of those provinces was considered to the extent it differed from the Ontario statute.

2. Arthur Wishart Act (Franchisee Disclosure), 2002 S.O. c. 3; Franchises Act, R.S.A. 2000, c. F-23; Franchises Act, R.S.P.E.I. 1988, c. F-14.1

3. The Plaintiff plead that each partner of Cassels knew or ought to have known of the firm's alleged conflict of interest, and asserted a personal claim and served the Statement of Claim personally on each partner.

4. Justice Strathy addressed Rosedale Motors Inc. v. Petro-Canada Inc. [1998] O.J. No. 5461 (Gen. Div.) rev'd [2001] O.J. No. 5368 (Div. Ct.), 909787 Ontario Ltd. v. Bulk Barn Foods Ltd., [1999] O.J. No. 2973 (S.C.J.) rev'd [2000] O.J. No. 3649 (Div. Ct.), Mont-Bleu Ford Inc. v. Ford Motor Co. of Canada, [2000] O.J. No. 1815 (Div. Ct.), 1176560 Ontario Ltd. v. Great Atlantic & Pacific Company of Canada Ltd., [2002] O.J. No. 4781 (S.C.J.) aff'd [2004] O.J. No. 865 (Div. Ct.), 2038724 Ontario Ltd. v. Quizno's Canada Restaurant Corp. (2010), 100 O.R. (3d) 721 (C.A.), 578115 Ontario Inc. v. Sears Canada Inc., [2010] O.J. No. 3921 (S.C.J.) and 1250264 Ontario Inc. v. Pet Valu Canada Inc. 2011 ONSC 297.

5. Citing Robinson v. Rochester Financial Limited, 2010 ONSC 463, CC&L Dedicated Enterprise Fund (Trustee of) v. Fisherman, [2001] O.J. No. 4622 (S.C.J.)

6. Section 4(4) states "any provision in a franchise agreement or other agreement relating to a franchise which purports to interfere with, prohibit or restrict a franchisee from exercising any right under this section [right of association] is void"

7. Section 11 holds that "any purported waiver or release by a franchisee of a right given under this Act or of any obligation or requirement imposed on a franchisor or franchisor's associate by or under this Act is void"

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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