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Canadian GM Dealers at the Center of Major Franchise Litigation

September 03, 2015

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 of Trillium 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 than prospective franchisees, 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 triggered.

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 franchisees. 

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

Tags: Franchising