In a recently released decision of the Ontario Superior Court of Justice, Trillium Motor World Ltd. v. General Motors of Canada Limited, former automotive dealers were unsuccessful in their class action against General Motors of Canada Limited (GMCL) in respect of a broad range of claims brought against the company arising out of its 2009 restructuring during the global financial crisis.1

The former dealers had alleged a variety of breaches of common law and franchise law obligations based on GMCL’s decision to offer 240 dealers notices of non-renewal and wind-down agreements (WDAs) that would terminate their dealer relationships with GMCL. The dealers were given six days to accept or decline the offer. 202 dealers accepted the WDAs, which was a sufficient number to forestall GMCL’s potential insolvency proceeding (along with a variety of other factors). Subsequently, 181 of the 202 dealers sued in respect of the WDA process. In dismissing the action, Justice McEwen held that “GMCL did not breach any common law or statutory obligations toward the Class Members” and dismissed the claim. The court also dismissed GMCL’s counterclaim against the Class Members.

The decision involves a wide array of franchise-related issues and provides continued guidance to Canadian franchisors in respect of class proceedings, potential terminations, releases, the duty of good faith and franchise system-wide changes.

The key franchise-related findings in the decision are as follows:

  • The application of the Wishart Act to out-of-province franchisees:

The court held that Ontario’s franchise legislation, the Arthur Wishart Act (Franchise Disclosure, 2000) applied to the dealership agreements of Class Members that operated outside of Ontario. The judge based this holding on the fact that each agreement contained a choice of law clause in favour of Ontario.

In reaching its conclusion, the Court held that section 2(1) of the Wishart Act – which states that the Act applies to franchise agreements entered into by franchisees operating partly or wholly in Ontario – does not preclude parties outside of Ontario from designating the Wishart Act to govern their agreements. In this regard, the Court followed its earlier decision in 405341 Ontario Limited v. Midas Canada Inc.,2  which was affirmed by the Court of Appeal.3

The Court also considered certain sections in Alberta and Prince Edward Island’s franchise acts that render void any provision in a franchise agreement that would restrict the application of the laws of those provinces. The Court held that these sections did not oust the choice of law clause for Class Members in those provinces because, among other reasons, the class action had been certified in and proceeded in Ontario.

  • The duty of good faith:

The plaintiff complained that GMCL breached the duty of good faith through its actions surrounding the delivery of the WDAs. However, upon examining the evidence surrounding each of these complaints and the unique economic context in which they were made, the court held that GMCL’s conduct was, on the whole, reasonable and did not breach the duty of good faith.  The court noted that GMCL was making crucial business decisions “very quickly during a time of instability and flux for both GMCL and its dealers.”

  • The statutory right of franchisees to associate:

The plaintiff complained that GMCL violated the Class Members’ statutory right to associate under section 4 of the Wishart Act by, among other things: (a) not disclosing the identities of the dealers offered a WDA, and (b) including a confidentiality provision in the WDA that prevented dealers from discussing its terms with other dealers.

The Court dismissed the first complaint on the basis that the right to associate does not impose positive obligations on the franchisor. It is a “negative duty,” which prevents a franchisor from restricting, prohibiting and interfering with a franchisee’s exercise of that right, or attempting to threaten or penalize a franchisee for exercising that right. GMCL was therefore not obligated to identify the dealers that had been offered a WDA, and its refusal to do so did not prevent those dealers from self-identifying and forming a collective. The confidentiality provision in the WDA also did not interfere with the Class Members’ right to associate because dealers were free to discuss its terms prior to executing it.

  • The enforceability of waivers and releases in the WDAs:

The WDAs provided releases of claims against GMCL, including the release of franchise legislation (Wishart Act) rights. The dealers claimed that the release was void and unenforceable because it contravened section 11 of theWishart Act, which holds that any purported waiver or release of Wishart Act rights is void.

The Court held that the release provided under the WDAs was exempt from section 11 because section 11 does not have application to a release given (with the advice of counsel) by a franchisee in the settlement of a dispute. The Court characterized the WDA as a settlement, in that it was a voluntary arrangement that brings a dispute or potential dispute to an end without a final adjudication of the issues between the parties on the merits. As such, it did not breach section 11. This exception is generally known as the Tutor Time exception, based on the 2006 decision which gave rise to this interpretation of the statute.4

  • The obligation to deliver a disclosure document with the WDAs:

The Court held that GMCL was not required to deliver a disclosure document to dealers prior to their execution of the WDA for two reasons.

First, the WDA was not a “franchise agreement or any other agreement relating to the franchise” for purposes of the disclosure obligations at section 5(1) of the Wishart Act. This phrase refers only to agreements that change a prospective franchisee’s legal position so as to become a franchisee, and ancillary agreements signed at that time. The WDA did the opposite: it changed the dealers’ legal position to no longer be GMCL franchisees.

Second, only a “prospective franchisee” is entitled to receive a disclosure document under section 5(1) of theWishart Act. A prospective franchisee is one that has not yet signed a franchise agreement. The dealers that signed the WDA were not prospective franchisees, and were therefore not entitled to receive a disclosure document.

  • Class action releases:

The WDA release prohibited the dealers from commencing a class proceeding relating to the released claims, and required dealers to opt out from any such proceeding. GMCL asserted by counterclaim that the each dealer Class Member breached that provision of the release by commencing the class action and/or failing to opt out.

The Court dismissed GMCL’s counterclaim, finding that the prohibition on the commencement of a class action offended the franchisees’ right to associate under section 4 of the Wishart Act. The court also held that the prohibition was void for public policy reasons because class proceedings play an important role in Canadian society. In the result, the WDAs could not preclude a class action, but the release provided GMCL with a defence to that class action.

It remains to be seen how Trillium can be reconciled with the recent Ontario Superior Court of Justice decision in1146845 Ontario Inc v Pillar to Post Inc.,5 where a proposed franchise class action was dismissed on the basis that the language of an arbitration clause precluded class proceedings. Any appeal of Trillium to the Ontario Court of Appeal may eventually provide guidance on this issue.