On May 3rd, 2016, the Court of Appeal for Ontario (the “OCA”) overturned a decision of the Ontario Superior Court which had held that a franchisor’s parent company could never be liable to a franchisee of its subsidiary for breach of the duty of good faith under the Arthur Wishart Act (the “Act”).
On May 28th, 2015, the Ontario Superior Court allowed a motion brought by the parent company, General Motors US (the “parent company”), to strike the franchisees’ claim that the patent company owed it a duty of good faith under the Act and at common law. A summary of that decision can be found in the following link:
The OCA overturned the motion judge’s decision on the basis that he applied the wrong legal test to whether the claim disclosed a reasonable cause of action. In particular, the OCA held that the motion just erroneously focused on whether it was likely that franchisee’s claim would succeed rather than on whether it was “plain and obvious” that it would not succeed. Since there was no evidentiary record yet and the motion was based on the pleadings alone, a very stringent test applied to whether the claim should be struck.
The OCA also emphasized that the Act is remedial legislation designed to protect franchisees in the face of the power imbalance that exists between a franchisor and franchisee. As such, it was necessary to adopt a purposive approach to the interpretation of the Act in favour of the protection of the franchisee. The OCA highlighted that the duty of good faith also exists under the common law in the context of the franchisor-franchisee relationship. As well, it was noted that the duty of good faith in the context of this case involves important questions of legal interpretation that are addressed properly through a factual record rather than on the basis of the pleadings alone.
On the issue of whether the patent company was a “franchisor’s associate” under Section 1 of the Act, the OCA rejected the motion judge’s finding that the granting of the franchise occurred before the corporate parent came into existence and that therefore the corporate parent could not be directly involved in the granting of the franchise (as required by one of the statutory definitions of “franchisor’s associate” under the Act). The OCA found that there were sufficient facts pled in the claim to demonstrate that the corporate parent could have been involved in the granting of the franchise. In particular, several conditions were imposed on the franchisee before the signing of the Dealer Sales and Service Agreements (DSSAs) which were related directly to the changing structure of the corporate parent. The OCA also noted that the franchisees had pled several facts related to the corporate parent’s operational control over the franchisees (which could satisfy the second definition of “franchisor’s associate” under the Act). These included the corporate parent’s control over pricing, marketing, and structuring of the dealership network in Canada.
On the question of whether the corporate parent owed a duty of good faith to the franchisees under the Act, the OCA noted that the motion judge did not frame this issue properly. While the Act only appears to impose a duty of good faith on parties to a franchise agreement, it was still possible on a proper evidentiary record that a corporate parent with sufficient control over its subsidiary could be liable. The OCA once again noted that the corporate parent was involved in the setting of the terms in the franchise agreements, and controlled the marketing and distribution of products in Canada. The issue should be resolved on a proper evidentiary record.
The OCA noted that it was not yet settled in law whether the duty of good faith and fair dealing only applies to parties to the franchise agreement and not to entities with real control over the signatory. It emphasized that a court should not dismiss a case on a motion to strike where the law is subject to limited jurisprudence and remains unsettled. On this point, the OCA cited the Superior Court of Justice’s decision in WP (33 Sheppard) Gourmet Express Restaurant Corp. v. WP Canada Bistro & Express Co. Inc., 2010 ONSC 2644, in which the defendants could be considered as parties to the franchise agreement because they were the “directing minds” of the franchisor. The OCA noted that in that case, the judge stated that the definition of a “party” under the Act is flexible. On this basis, the OCA held that it could not be concluded that the corporate parent could never be a party to the franchise agreement within the meaning of the Act. Overall, the OCA concluded that despite there being no direct contractual relationship between the franchisees and the corporate parent, it was not plain and obvious that the corporate parent did not owe a duty of good faith to the Canadian dealerships.
The decision presents several important takeaways for parties to franchise agreements, and in particular for parent companies with any degree of involvement in the granting of franchises. First, the OCA affirmed that the threshold for dismissing a claim as disclosing no reasonable cause of action in the context of a franchise dispute is fairly high. Importantly, the Act will be interpreted liberally in favour of franchisees. Second, the OCA affirmed that whether a party that is not a signatory to the franchise agreement will be bound by a duty of good faith and fair dealing continues to be an open question.
Date of Decision: May 3, 2016