Headline news was made last week as the Ontario Superior Court
of Justice released its decision in one of the highest-profile
cases in the history of the Canadian franchise
industry.One of the defendants was one of
the world's largest auto
manufacturers.The plaintiffs were
hundreds of its former dealers.Hundreds of millions of dollars were at
stake.And the result
changed...well, nothing, actually.
In the case ofTrillium Motor World
Inc. v. General Motors of Canada Limited, what
was partly at issue involved a determination of whether a
particular type of wind-down agreement resulting from the federal
government's auto bailout constituted a franchise agreement,
and what rights and remedies may have been owed to the dealers
subject to it as a result.
The case traces its origins back to 2009 when
General Motors of Canada Limited (GMCL) was faced with a
restructuring option in the form of federal government financial
aid which was contingent upon GMCL terminating its dealer
relationships with 240 car dealerships (it is quite common for car
dealerships to operate as franchised
businesses).GMCL issued notices to
these various dealers of numerous General Motors brands and gave
them six days to accept the offer.Failure to accept the terms imposed by GMCL would likely have
resulted in the insolvency of the manufacturer.
In the five provinces which have
enacted franchise law (Ontario, Alberta, Prince Edward Island, New
Brunswick and Manitoba), a franchisor is required to provide a
prospective franchisee with a prospectus-style "disclosure
document" at least fourteen days before the prospect signs a
franchise agreement, so that the prospect is able to make an
informed investment decision regarding the
opportunity.The law takes this
disclosure obligation so seriously that if a franchisor fails to
comply with the statutory requirements, the franchisee may have up
to two years to get out of the franchise agreement and essentially
be placed in the same financial position it was in before the
agreement was ever signed.As a
result, a lot rides on whether these disclosure obligations are
properly discharged by a franchisor, and it should be no surprise
that this is one of the most common sources of litigation between
franchisors and franchisees in Canada.
The General Motors decision
covered more ground in its 160 pages than this blog has space to
cover, but one of the most controversial issues was whether
GMCL's wind-down agreements constituted "franchise
agreements" thereby entitling the subject dealers to a
disclosure document, failing which they might have access to those
aforementioned powerful legal remedies.In the franchise world, the answer to this question is, quite
simply, a huge deal.
The interpretation of the legal definition of a
"franchise" is the subject of much debate, but the
various provincial statutes do contemplate the grant of a right to
engage in a business.Whether the
wind-down agreements were fair or not was another issue in the GMCL
trial (the court found that they were bad deals for the franchisee
dealers, but necessary ones so were defensible), but since they
were agreements offered to existing, rather thanprospectivefranchisees, they did not
constitute franchise agreements.
I have emphasized that the dealers were not
"prospective" franchisees because franchise law requires
that disclosure documents be issued to people who are considering
becoming franchisees.Not those who
are already in the system.The
court found that a wind-down agreement which operated to terminate
a dealer from the GMCL franchise system was not a franchise
agreement which establishes a franchise relationship and,
therefore, no disclosure document obligation had been
As I mentioned, this result does not change the
legal landscape for the franchise industry since it affirms that
disclosure documents and their corresponding liabilities only arise
as between franchisors and prospective franchisees, in relation to
the agreements that those prospects sign to ultimately become
But this one aspect of the massive GMCL decision is
noteworthy for the outcome that was
avoided.Disclosure documents are
already a time-consuming and expensive exercise for franchisors
fraught with potential legal liability. If the GM dealers'
argument had been accepted, it would have opened the door to
mandating ongoing disclosure obligations even after a prospect has
become a franchisee.That outcome
would have confused the Canadian franchise community and likely led
to other litigation in the future.It also may have resulted in increased costs to franchisees
as franchisors sought to flow their new, additional costs of
ongoing disclosure through to franchisees.
Turns out that no news was, in this case, good news for
the franchise industry
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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