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Focus: GM ruling offers a lot of fodder for franchise class actions

Focus
|Written By Yamri Taddese

If there’s one major takeaway from the first common issues trial in a franchise class action, it’s that the duty of good faith involves “an extremely fact-sensitive and context-specific” analysis, says a Toronto lawyer.

The decision shows the courts will look at questions of good faith and fair dealing in franchise cases through the lens of commercial reality, says Adam Ship.

While there have been summary judgement motions in the franchise context — most notably the Fairview Donut Inc. v. The TDL Group Corp. case — Trillium Motor World Ltd. v. General Motors of Canada Ltd. is the first full common issues class action trial that involved matters of franchise law.

The GM case involved a live question of breach of good faith, a major issue in franchising. What’s clear from the case is the courts will look at the question of good faith in the context in which decisions were made in the franchising world before ascribing liability to franchisors, says Adam Ship, a partner at McCarthy Tétrault LLP.

“The court focused very heavily on some of the unique pressures and time exigencies this franchisor was facing at that particular point in time,” says Ship.

In Trillium Motor World, the court was sympathetic to the unique pressures GM was facing when it gave dealers wind-down agreements in 2009. The dealers argued they were under pressure to sign those agreements through “ambush, deception, and divide-and-conquer tactics.” They also argued GM gave them just six days to obtain legal advice and sign the agreement when, as a franchisor, the law required it to give them at least 14 days to mull it over.

But in rejecting their claims, the court put a lot of emphasis on the gravity of the situation the automaker was in during the financial crisis.

“The specific context of GMCL’s conduct was that it was making crucial business decisions very quickly during a time of instability and flux for both GMCL and its dealers. When considering each of the sub-issues below I will review the statutory duty of fair dealing through the lens of commercial reality — that is, GMCL’s conduct in that context,” wrote Justice Thomas McEwen.

He added: “In hindsight, it is arguable that it may have been better for GMCL to give the dealers a few more days to make a decision, but, as noted, the timeline was short and there is no evidence that it would have affected the ability of the dealers to protect themselves.

“In my view, such an argument requires too much of GMCL given the time pressures it was facing, the threat to its continued existence as a business enterprise, and the fact that, for the most part, it was reacting to a worsening economic landscape, GMCL’s instructions, and the Canadian and U.S. Governments’ decisions.”

The decision shows courts will look at questions of good faith and fair dealing in the franchise context through the lens of commercial reality, according to Ship. “It’s an important recognition of what I always understood to be the case, but this is a great example of it with a full common issues trial,” he says.

“The court is . . . very, very focused on what the franchisor was dealing with in real time on the ground and that context is going to colour the entire analysis the court is going to do of the good-faith issues,” he adds.

“I think the court is saying that the facts that are going to be most important for the court are the facts that informed the decision-making context that was facing the franchisor at the time.”

The court expressed a concern about getting its facts straight about exactly what the situation was like for GM at the time, Ship notes.

“Once the court is prepared to accept the gravity of the context, there’s going to be a lot of deference shown, in my view, to the ultimate decisions that were made and the dealings with the franchisees.”

Sotos LLP lawyer David Sterns, counsel for the dealers, says his firm is appealing McEwen’s finding that, under the circumstances, GM’s actions were “fair enough.”

In the notice of appeal, Sotos claims the judge made an “overriding error in principle that tainted his analysis of the [Arthur Wishart Act] and his determination of the duties that GMCL owed to the class members.”

“He interpreted the [act] through the ‘lens of commercial reality’ and by reference to the subjective business context in which GMCL was operating in May, 2009 and found, as a result, that the duties GMCL owed to its dealers were diminished,” the notice of appeal states.

“In so doing, the trial judge failed to give consideration to this court’s well-established jurisprudence adopting a purposive approach to a franchisor’s duties under the [act] which gives effect to the statute’s fundamental purposes of: (i) addressing the power imbalance between franchisors and franchisees; and (ii) protecting franchisees.”

The notice of appeal also says the judge misapplied and misinterpreted Bhasin v. Hrynew, a Supreme Court decision from last year.

Bhasin held that a context-specific understanding of a contractual relationship is required to determine whether to ‘invoke’ the duty of good faith. Bhasin does not stand for the proposition, adopted by the trial judge, that the scope and content of the duty of good faith are determined by the degree of solvency of one of the parties to the relationship (in this case, GMCL’s financial challenges in May, 2009), or by one party’s desire to access third-party funding (in this case, GMCL’s desire to access billions of dollars of government funding).”

The appeal notwithstanding, Ship notes it’s hard to say how this ruling will affect future decisions due to the case-specific nature of the ruling.

“Try applying this case to a situation where there wasn’t this economic context and a potential [reorganization] and I think you’re going to have a very different outcome,” he says.

On a more technical side, the GM case also clarified which events trigger an obligation for franchisors to deliver disclosure documents to franchisees. The dealers in the GM case had argued the automaker owed them disclosure documents when it handed them wind-down agreements in 2009.

The court, however, found that disclosures are only necessary where there has been a grant of a franchise. “I agree with GMCL’s submission that Trillium’s characterization of the dealers as prospective franchisees prior to the execution of the [wind-down agreement] is unfounded,” wrote McEwen.

“I find it illogical that an existing franchisee entering into a [wind-down agreement] could also be considered a prospective franchisee.” The dealers will also appeal that finding.

The other part of the GM class action dealt with a conflict of interest claim against Cassels Brock & Blackwell LLP. On that issue, the court awarded $45 million in damages for breaching its contractual and fiduciary duty to the class members. Cassels Brock is appealing the finding against it.

  • Barrister & Solicitor

    jerome Stanleigh
    The GM decision points out once again that predicting the outcome of a court proceeding is an impossible exercise of the intellect. It appears quite apparent that a bad settlement would have served the parties better but we shall see once the Court of Appeal and the SCC become engaged in this action. The award granted as damages for an apparent conflict of interest is a warning to all counsel the importance of making sure such is not the case in undertaking a retainer

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