Canada: Ontario Court Reaffirms Extensive Franchisee Protection In Class Actions

Trillium Motor World Ltd.. v. General Motors Canada Ltd. and Cassels Brock and Blackwell LLP is the latest in a string of recent franchisee favourable decisions in class action claims made under the Arthur Wishart Act (Franchise Disclosure). On March 1, 2011, Justice Strathy certified a class action on behalf of General Motors dealers whose dealerships were closed as a condition of government bailouts to GM following the global economic downturn in 2008. Justice Strathy's decision provides a good summary and synthesis of a series of recent decisions of the Ontario Court of Appeal in which the Act has been interpreted broadly with the interests of franchisees taking precedence over those of franchisors. This decision, as well as the recent case law that Justice Strathy summarizes and affirms, establishes Ontario as one of the most franchisee-friendly jurisdictions in the common law world for franchise class actions. It also provides an example of how corporate restructuring can lead to class action claims under the Act and how franchise law should be considered in the context of a pre-insolvency business restructuring of a franchise system.

In May 2009, the iconic carmaker was facing an uncertain future. The "economic quagmire", as Justice Strathy put it, had pushed the company into a precarious financial position. The Ontario Provincial and Canadian Federal governments stepped in to provide bailout funds to GM to avoid the ripple effect on the economy at large of the insolvency of one of the country's largest employers. One of the governments' conditions to these bailouts was that GM had to reduce the size of its dealer network, ending their relationship with 240 of the 705 GM dealers nationwide. GM contacted the 240 dealers on May 20, 2009, in a letter and informed them that they would not be renewing their contracts in October 2010. GM offered the dealers wind-down packages. The dealers were given a six-day period in which they could accept the packages and were informed that all of the dealers had to accept in order for any of the packages to be granted. In the May 20th letter, the dealers were told there was a "strong possibility" that GM would face re-organization under the Companies Creditors' Arrangement Act (CCAA) if they did not accept the packages.

The class is made up of 207 of the dealers who accepted the wind-down packages (GM later backed down from their position that all dealers had to accept the package).

The claims that Justice Strathy certified against GM stem from sections 3 and 4 of the Act. Section 3 imposes a duty of fair dealing on the parties to a franchise agreement and section 4 prohibits franchisors from negatively impacting franchisees right of association. In addition, breach of contract is claimed. The plaintiffs claim that the wind-down package agreements are "franchise agreements" under the Act and that they are therefore subject to rescission due to GM's failure to provide adequate disclosure.

The claims against Cassels Brock and Blackwell LLP are for alleged negligent misrepresentation and an alleged breach of fiduciary duty rooted in an alleged conflict of interest. The plaintiffs claim that Cassels lawyers gave advice to GM in their negotiations with the governments for the bailouts and subsequently gave advice to the dealers. Many of the dealers involved were members of the Canadian Automotive Dealers Association (CADA). CADA formed a special steering committee that considered the interests of GM dealers if GM were to file for protection under the CCAA. CADA asked each of the GM dealers to contribute $2500 or $5000 (depending on how many vehicles were sold in the previous year) to a war chest for legal fees to be used if reorganization occurred. CADA then retained Cassels who prepared a memorandum containing legal advice regarding the dealers' rights in light of GM's letter and wind-down package offer, on May 22, 2009. This memorandum contained no mention of the Act and the dealers claim that they relied on this document in making their decisions to sign the wind-down package agreements. The dealers also claim that Cassels lawyers represented competing interests in the downsizing and that they should never have given advice. Furthermore, the advice that Cassels actually gave constituted bad counsel, as they failed to mention that the dealers had robust rights under the Act.

In certifying the class action, Justice Strathy expressly reaffirmed that franchise claims are particularly suitable for class proceedings. This is particularly true when a standard form franchise agreement is used in a franchise system. Justice Strathy cited the recent Court of Appeal decision of Quizno's Canada Restaurant Corporation v. 2039724 Ontario Ltd., stating that a dispute between a franchisor and several hundred franchisees is exactly the kind of case that class proceedings are designed for. Due to the fact that a common franchise system, common agreements and a common business relationship between franchisees and franchisors is often the case, common issues are likely in the franchise context.

Justice Strathy also makes some interesting comments in his preferable procedure analysis. He points out that the Defendants' submissions on preferable procedure were predicated on the assumption that they would lose the common issues trial. "The determination of some of the A.W.A. common issues in favour of the defendants could well eliminate the need for a trial of any individual issues. At the very least, it would reduce the scope of the individual issues." This statement may be of little consolation to the defendants, but shows that certification can, at least theoretically, simplify proceedings to the benefit of a defendant. However, there has been no practical evidence of this to date in any of the existing jurisprudence or currently proceeding franchise class actions.

This decision sheds light on the potential importance of the Act in a large-scale, pre-insolvency business restructuring, as franchisees may have wide-ranging rights, potentially resulting in the pursuit of sizeable damages awards.

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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