May 9, 2016

[Doherty, Pardu and Benotto JJ.A.]

Counsel:

Jonathan C. Lisus and James Renihan, for the appellants
Larry P. Lowenstein, Gillian S.G. Scott, and Geoffrey J. Hunnisett, for the respondents

Keywords: Franchise Law, Franchise Agreements, Duty of Good Faith and Fair Dealing, Arthur Wishart Act (Franchise Disclosure), 2000, Reasonable Cause of Action, Rules of Civil Procedure, Rule 21

Facts: The appellants are long-standing dealers of General Motors vehicles in the Greater Toronto Area (GTA). Their dealer agreements are with General Motors Canada Limited (GMCL). GMCL was a subsidiary of General Motors Corporation (GM) in the United States. In 2009, GM commenced bankruptcy proceedings in the United States. GM’s assets were transferred to a new company, General Motors Company, or its subsidiary, General Motors LLC (collectively GM US). As part of the reorganization process, GM US acquired the shares of GMCL. The governments of Ontario and Canada invested substantial funds in GM US and became shareholders. GM US then emerged from bankruptcy. As a result of the financial difficulties, GMCL restructured its dealer network. GMCL informed the appellants that their dealerships would be among those retained in its new dealer network, should they agree to certain conditions. Some of the appellants were offered Transition Assistance Agreements. Some of the appellants were also offered Participation Agreements with GMCL. In 2010, the appellants signed Dealer Sales and Service Agreements (DSSAs) with GMCL. There was an issue on the motion below that the DSSA was not a franchise agreement since the dealers paid no franchise fee. The motion judge proceeded on the assumption that it was a franchise agreement under the Arthur Wishart Act (Franchise Disclosure), 2000 (AWA). The appeal was argued on this basis. The appellants’ claim centers on allegations that GM US and GMCL owed and breached their duty to act fairly and in good faith under the AWA and at common law. They allege that GM US and GMCL preferred their own profit to the dealers’ interests and that this is reflected through changes in vehicle offerings, pricing, and the lack of financial help. Also, the appellants say that GM US financially assisted US dealers, yet ignored its duty to the GTA dealers. The motion judge dismissed the claims.

Issues: The issues that arise are whether it is plain and obvious that GM US:

  1. Could not owe a duty of good faith or fair dealing to the appellants under the AWA; and
  2. Could not owe a duty of good faith or fair dealing to the appellants at common law.

Holding: Appeal allowed.

Reasoning:

Section 1 of the AWA sets out a two-part test in the definition of a “franchisor’s associate.” It is a person: (a) who, directly or indirectly, (i) controls or is controlled by the franchisor, or (ii) is controlled by another person who also controls, directly or indirectly, the franchisor, and (b) who, (i) is directly involved in the grant of the franchise, (A) by being involved in reviewing or approving the grant of the franchise, or (B) by making representations to the prospective franchisee on behalf of the franchisor for the purpose of granting the franchise, marketing the franchise or otherwise offering to grant the franchise, or (ii) exercises significant operational control over the franchisee and to whom the franchisee has a continuing financial obligation in respect of the franchise.

Here, under the first branch, the motion judge erred in concluding that the grant of the franchise occurred well before GM US was in existence, and therefore GM US could not be “directly involved in the grant of the franchise”. Letters evidenced that GM US was making decisions about the grant of the franchise and setting terms. Under the second branch of the definition, the motion judge erred in finding that the appellants failed to plead the material facts necessary to sustain an argument that GM US exercised significant operational control and that the franchisees owed GM US a continuing financial obligation. The pleadings allege that GM US exercises significant operational control and direction over GMCL and the appellants through the terms of the DSSA and the Participation Agreements. If the facts are viewed in the most generous light possible to the appellants, it cannot be said that it is plain and obvious that GM US was not a franchisor’s associate. The test is not whether it is likely or unlikely that the claim will succeed, it is whether it is plain and obvious that it cannot.

Section 3 of the AWA provides that every franchise agreement imposes on each party a duty of fair dealing and good faith in its performance and enforcement. The motion judge erred in finding that, even if GM US was found to be a franchisor’s associate, it did not owe a duty of fair dealing to the appellants under s.3 because it was not a party to the franchise agreement. The motion judge’s approach to this issue demonstrates a misapplication of the rule 21 test. Instead of asking himself whether the s. 3(2) duty of good faith could not apply to a franchisor’s associate, he asked if a franchisor’s associate is deemed to be a party to the franchise agreement. The issue before the motion judge was not to determine whether a franchisor’s associate is “deemed” to be a party to every franchise agreement. The issue was whether, on the facts pleaded, it was plain and obvious that GM US could never owe a duty to the appellants under s. 3(2) of the AWA. By framing the issue in the way he did, the motion judge embarked on a flawed approach.

2. The motion judge erred in dismissing the appellants’ claims that GM US breached the duty to act fairly and in good faith under the DSSA and the common law. Despite the lack of a direct contractual relationship between the appellants and GM US, it is not plain and obvious that GM US could not owe a duty of good faith to the Canadian dealerships. That the cause of action may or may not be a weak one is not determined on a motion under rule 21. The relationship between a franchisor and franchisee is one of vulnerability for the franchisee. In addition to the statutory protections, a duty of good faith exists at common law in the context of this relationship. Further, the obligations of a party in a franchise relationship differ from those in a regular commercial relationship. Whether the level of control alleged and the special obligations owed in the context of a franchise relationship could open the door for the imposition of a common law duty is a novel argument that should be explored at trial. While it may be that the common law claim is untenable as a matter of law, and it may be that in light of s.3 of the AWA it is redundant, however it is not plain and obvious that it cannot succeed.

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