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GM US May Hold Duties to Franchisees of GMCL

In a recent decision, the Ontario Court of Appeal overruled a lower court’s finding that GM US could not owe a duty of good faith and fair dealing under the Arthur Wishart Act. While the decision itself is limited in its application, it leaves the issue to be developed in future cases.

The Arthur Wishart Act

The Arthur Wishart Act (the “Act”) governs the relationship between franchisors and franchisees. It imposes certain duties on franchisors, for instance, to disclose to prospective franchisees all “material facts” relevant to the franchise, and to exercise a duty of good faith and fair dealing in the management of the franchise. The duty of good faith and fair dealing, as a general concept, requires that franchisors enforce franchise agreements in a manner that does not unfairly prejudice franchisees. Given the unequal bargaining power between franchisee and franchisor, the Act is thought to be a good way to limit franchisors’ ability to exploit franchisees via the franchise agreement.

The Facts

Sometime around 2009 GM commenced bankruptcy proceedings, resulting in a reorganization wherein GM assets were transferred to a new company, General Motors Company and General Motors LLC (collectively GM US). The plaintiff/appellants are long-standing dealers of GM vehicles in the Greater Toronto Area who hold dealer agreements with General Motors Canada Limited (GMCL). GMCL was subsumed within GM US. After the reorganization, GM US took several actions aimed at increasing the companies overall profitability. The plan included a restructuring of the GMCL dealer network, the introduction of a fresh-line-up of vehicles and the discontinuance of Pontiac brand vehicles and medium-duty trucks. The restructuring was effected by the Dealer Sales and Service Agreements (DSSA), and executed between GMCL and various dealers across the GTA. The appellants sued, alleging that GMCL and GM US breached their duty to act fairly and in good faith under the Act. The appellants argued that the GM US and GMCL structured its dealer network and products in order to maximize their profit per vehicle at the direct expense of the appellants’ profits. GM US brought a motion seeking to have the claim dismissed before trial on the grounds that there was no reasonable cause of action as against GM US because, as a parent company, GM US was not party to the DSSA. The trial judge granted the motion and dismissed the action as against GM US without leave to amend. The dealers appealed.

Our Thoughts

The question to be answered on an appeal of this kind was whether “it is plain and obvious that the claim cannot succeed.” Benotto J.A. of the Court of Appeal held that the motion judge erred in its application of the law and the interpretation of the facts. The evidence suggested the facts, if true, could support the argument that GM US owed a duty to its franchisees due to the fact that they exercised significant operational control over the franchisees and because the franchisees had an ongoing financial obligation to GM US. It was irrelevant at this stage to consider the novelty of the issue or whether the link between GM US and the franchisees is tenuous. The issue should be explored at trial with full appreciation of the facts as they apply to the law.

As such, the decision does not do much by way of changing the law in Canada. It does, however, leave the door open for courts to extend the duty of good faith and fair dealing to the parent companies of franchisors. The concern in extending this duty is that it may become very difficult for corporate entities to predict if and when they have duties to franchisees by virtue of the fact that they hold an interest in franchisor corporations. Courts are generally reluctant to extend duties in the context of franchise agreements between parties with little relation to each other, as this fosters unpredictability and it becomes much more difficult to draw the line. Nevertheless, it remains important to keep in mind the power imbalance between franchisees and franchisors. As such, it may be in the public interest to further extend the duties owed by franchisors to large corporate entities that in turn control these franchisors. It will be interesting to see how the court decides this case and whether this decision will hold any implications for franchise law. 

The above article is for general information purposes only and does not constitute legal advice. If you have concerns with regard to the foregoing issues, please make an appointment with one of our lawyers or a qualified legal practitioner elsewhere.