Canada: Ontario Court Clarifies Franchise Issues In Trillium Motor v. General Motors

On July 8, 2015, the Ontario Superior Court of Justice released its decision in the Trillium Motor World Ltd. v. General Motors of Canada Limited  class action trial,1 granting the franchisee plaintiffs damages in the amount of $45 million against Cassels Brock & Blackwell LLP (Cassels), lawyers who were found to have acted in a conflict of interest by representing the plaintiffs as well as the federal government in a complex restructuring of a franchisor's automobile dealer network.2 The court's disposition of the underlying claim—an action for breach of a franchisor's duties under the Arthur Wishart Act3 — has received somewhat less attention than the fate of the lawyers, but is worth noting as it clarifies and affirms the state of the law on issues thrown into doubt in the case.

Background

The class action arose as a result of the execution of a plan by the franchisor, General Motors of Canada Limited (GMCL), to reduce its large GM vehicle dealership network in Canada following the calamitous economic downturn commencing in the fall of 2008. Prior to that time, GMCL knew that it had too many dealers in a single market. The immediate effect of this over-dealering was a reduction in dealer profitability which in turn caused reluctance for investments in facilities and equipment. Combined with GM's general declining market share of the automobile market,  multibillion losses in 2007 and 2008, and GM rapidly running out of cash, over-dealering had to be rectified in the context of any restructuring.

Once the likely depth of the economic downturn became apparent, GMCL engaged in restructuring planning, considered a CCAA proceeding and engaged with the Canadian and US governments for assistance. One of its restructuring plans was to rationalize its dealer network and terminate a large number of its dealership agreements with individual dealers across Canada. In May 2009, GMCL delivered Notices of Non-Renewal and Wind-Down Agreements to 240 GM dealers. If accepted, those Wind-Down Agreements – which carried with them compensation payable to the dealer – would terminate the dealer-GMCL relationships over a period of time. The dealers were given six (6) days to accept or decline the offers. Two-hundred-and-two of the 240 dealers accepted the Wind-Down Agreements (WDAs). Saturn dealers were particularly affected by the restructuring plan in that all Saturn dealers received WDAs following the discontinuance of the Saturn brand.

The Result

The court found Cassels to have acted in a conflict of interest by accepting retainers from multiple parties.4

The claim against GMCL, however, failed, with the court finding GMCL did not breach any obligations owed to the franchisee dealers at common law or under the Arthur Wishart Act.5

The first issue clarified by the court was whether the plaintiffs — many of whom operated outside Ontario — were even covered by the Arthur Wishart Act. Some plaintiffs were in provinces with no similar franchise legislation; others were in provinces covered by similar statutes. All plaintiffs had signed the same Dealer Sales and Service Agreement (DSSA) with the franchisor. That DSSA contained a "choice of law" clause selecting the laws of Ontario to govern the contract. The court held that, by agreeing to Ontario law as the governing law, the franchisees agreed to the application of the Arthur Wishart Act and, in effect, opted into its protections.6

Second, the court clarified that the Supreme Court of Canada's decision in Bhasin v. Hrynew7 — which found a duty of good faith performance of contracts exists but also found it did not give rise to a positive obligation to disclose—was not inconsistent with and thus didn't alter the positive disclosure obligations set out in the pre-existing and more specific Arthur Wishart Act.8 A franchisor's duty to disclose thus remains more comprehensive than any duty to disclose under the common law of contract governing contracts outside of the franchise context.

The court went on to clarify a number of issues that, while somewhat case-specific, offer guidance to franchisors and franchisees assessing franchisors' conduct:

  • An agreement to terminate a franchise agreement (such as the WDAs at issue in this case) does not attract the disclosure requirements of the Arthur Wishart Act, as it "is not a franchise agreement or any other agreement relating to a franchise within the meaning of s. 1(1) of the Wishart Act. Section 5(1) only pertains to the grant of a franchise and related documents that are entered into at that time."9
  • Giving a franchisee less than a week to agree to an agreement terminating the franchise agreement does not breach the franchisor's statutory duty of fair dealing in performance of the still-existing franchise agreement.  While the statute requires a 14 day "cooling-off period" for the disclosure document for prospective franchisees, this period would not apply to disclosure of other documents (such as the terminating agreement), even where such documents concern "an important business decision" for the franchisee.10
  • A franchisor contemplating a radical restructuring of its business need not inform franchisees of its intentions in any detail before its plans have "crystallized" (i.e. the court supported GMCL's decision not to tell franchisees anything more than that a wind-down process was contemplated until it delivered the WDAs to the franchisees for review).11  Until then, the franchisor need not "keep [franchisees] abreast of every development or share the details of its restructuring plan on an ongoing basis."12
  • A franchisor's refusing to disclose to franchisees the identity of other franchisees (in this case, franchisees who had been offered WDAs) did not breach the franchisor's duty of fair dealing,13 nor did it interfere with the franchisees' statutory right to associate for the purpose of protecting their interests.14
  • Franchisees' right to associate under s.4 of the Arthur Wishart Act is a "negative right" only, i.e. franchisors may not interfere with the right, but they are also not obliged to "facilitate or encourage association or do anything beyond refraining from activities that inhibit association."15
  • A settlement agreement that requires a franchisee to release its right to commence a class action against a franchisor technically interferes with the franchisee's statutory right to associate, but the release itself provides a defence to any such action commenced by the franchisee.16
  • A franchisor can rely on a release of claims against it by a franchisee (including the right to bring a class action) where the release is given "with the advice of counsel in settlement of a dispute for existing and fully known breaches of the Wishart Act that would otherwise entitle the franchisee to claims."17 In such circumstances, the release is not voided by s.11 of the Arthur Wishart Act, which otherwise precludes the waiver or release of franchisee rights or franchisor obligations. 

The Trillium decision goes some distance to providing parties greater certainty about a franchisor's obligations to franchisees, particularly in the context of a radical restructuring of the franchisor's business. 

Footnotes

1 2015 ONSC 3824 (CanLII) [Trillium].

2 Cassels has indicated that it is planning to appeal this decision.

3 (Franchise Disclosure), 2000, SO 2000, c 3 [Arthur Wishart Act].

4 Trillium, supra at para. 6.

5 Trillium, supra at para. 5.

6 Trillium, supra at paras. 128-31.

7 2014 SCC 71, [2014] 3 S.C.R. 494.

8 Trillium, supra at para. 161.

9 Trillium, supra at para. 334.

10 Trillium, supra at para. 171.

11 Trillium, supra at paras. 179-82.

12 Trillium, supra at para. 243.

13 Trillium, supra at para. 199.

14 Trillium, supra at para. 284.

15 Trillium, supra at para. 277.

16 Trillium, supra at paras. 353-55.

17 Trillium, supra at para. 307.

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