Canada: Not Everyone Is A Party: Some Comfort For Foreign Franchisors

A recent case, Addison Chevrolet Buick GMC Limited et al. v. General Motors of Canada Limited et al. ("Addison GMC"), considered the role of a foreign franchisor that is not a party to the applicable franchise agreement. In Addison GMC, the Ontario Superior Court of Justice reflected on a claim by a group of Canadian automobile dealers (the "Plaintiffs") that certain bailout monies invested in their US parent company, General Motors Company ("New GM") in connection with the bankruptcy reorganization (the "Reorganization") of General Motors Corporation ("Old GM") should have been used, in part, to provide financial support to Canadian dealers.

The Plaintiffs, as franchisees of General Motors of Canada Limited ("GM Canada") whose shares had been transferred into New GM as part of the Reorganization, alleged that GM Canada and New GM owed them a duty of good faith performance of their franchise agreements as well as a statutory duty of fair dealing under Section 3 of the Arthur Wishart Act (Franchise Disclosure), 2000 (the "Act").

Section 3(2) of the Act provides that a party to a franchise agreement has a right of action for damages against another party to that agreement who breaches the duty of fair dealing in the performance or enforcement of the agreement. The Plaintiffs argued that New GM, as the parent company, was a "franchisor's associate" within the meaning of the Act and therefore should be deemed to be a party to the franchise agreement together with GM Canada. Accordingly, the Plaintiffs would be entitled to have a right of action for damages against New GM pursuant to Section 3(2) of the Act.

In rejecting the Plaintiff's arguments, the Court ruled that there were no provisions in the Act that deemed a franchisor's associate to be a party to a franchise agreement and that Section 3(2) of the Act should be applicable only to the named parties of a franchise agreement. In particular, the Court noted that since the Act expressly differentiates between the liabilities of a franchisor's associate and those of a franchisor, it is inappropriate to impose blanket joint liability on both franchisors and franchisors' associates.

The Court rejected both arguments submitted by the Plaintiffs to suggest that New GM was involved in the "grant of the franchise". First, the Court noted that the decision to retain or terminate certain franchises as part of the Reorganization was made six weeks prior to the date when New GM acquired its interest in GM Canada and was, therefore, not in a position to control GM Canada. Second, the Court ruled that the date of the "grant of the franchise" should not be read as the date of the latest renewal of that franchise, but rather the actual initial grant date in 2005, and concluded that there was an inadequate foundation to support the notion that New GM was directly involved in the grant of the franchise to the Plaintiffs.

The Court also noted that there were no contractual duties in the dealer sales and services agreements to support the Plaintiffs' claim that New GM's allocation of financial assistance only to its dealers in the United States was a breach by GM Canada of its duty of good faith and fair dealing. The franchise relationship is not a fiduciary relationship. Absent express language in a franchise agreement, a franchisor who prefers its own interests in a transaction is not necessarily in breach of its duty of good faith and fair dealing under the Act as long as it deals honestly and reasonably with its franchisees. Further, the Court noted that the doctrine of good faith performance of contractual obligations recently affirmed by the Supreme Court of Canada in Bhasin v. Hrynew, 2014 SCC 71 and the statutory obligation of fair dealing under Section 3(2) of the Act, are not licenses to invent obligations divorced from the actual terms of the contract between the parties but rather a guide to the application of them. A non-fiduciary party may honestly prefer its own interests.

The Addison GMC decision provides foreign franchisors with additional comfort when incorporating a subsidiary or appointing an affiliate to act as its Canadian franchisor. As long as the foreign franchisor does not become a named party to the franchise agreement and is not involved in the grant of the franchises to the Canadian franchisees, the foreign franchisor may be shielded from certain liabilities incurred by such subsidiary or affiliate, as the case may be.

In addition, franchisors should review their standard form franchise agreements to ensure that any financial support provisions are appropriately limited and qualified and that the franchisor is entitled to consider the interests of its franchisees but is not obligated to place the interests of its franchisees above those of the franchisor.

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