The recent Ontario Superior Court of Justice decision in Stuart Budd & Sons Limited v. IFS Vehicle Distributors ULC4 highlights important jurisdictional issues that international franchisors may face when litigation occurs within a Canadian franchise system spanning multiple provinces.

Background

In the midst of its 2009 restructuring, General Motors ceased distributing Saab vehicles in North America and terminated its Canadian Saab dealers. In 2010, the Swedish company Saab Automobile AB sought to re-enter the Canadian market and recruited the defendant, International Fleet Sales Inc. (IFS), a California company, to assist with the importation and distribution of vehicles and parts from Sweden and the US into Canada. In order to have a Canadian operating company, IFS Vehicle Distributors ULC (IFS ULC) was incorporated in British Columbia and registered to do business in Ontario, where it opened a bank account.

IFS then approached the plaintiffs, all former Saab dealers under the GM arrangement, and recruited them to become Saab dealers once again. The dealers were spread across Canada with three located in Ontario, two in Quebec and one each in Alberta, Nova Scotia and British Columbia. IFS ULC provided disclosure documents to the Ontario and Alberta plaintiffs but did not provide any disclosure to the other plaintiffs, whose provinces did not have franchise legislation. In August 2010, IFS ULC entered into dealership agreements with each of the plaintiffs. All of the dealership agreements contained “Applicable Law” provisions designating that Ontario law be applied to the contract.

Pursuant to the dealership agreements, IFS ULC imported cars and parts into Canada and sold them to the dealers. Neither IFS or IFS ULC had any physical presence in Canada other than a “rented desk” at one of the Ontario dealerships and National Service Manager. The dealers communicated with IFS’ senior officers in California and Michigan and National Service Manager based in Ontario.

The Dealers Bring A Group Action in Ontario

IFS’ attempt to re-establish a national network of Saab dealers in Canada was apparently unsuccessful. As a result, the plaintiffs commenced a group action in Ontario against IFS Inc., IFS ULC and the two officers who signed the disclosure certificates provided to the Ontario and Alberta dealers.

The claim alleges that IFS failed to perform its obligations under the dealership agreements and eventually ceased doing business altogether, leaving the plaintiffs with unsold inventory and no continuing presence of the Saab brand in Canada. The claim seeks damages for breach of contract and statutory remedies under the Wishart Act, including damages against the officers personally as franchisor’s associates.

IFS’ Jurisdictional Challenge

As a preliminary matter, the defendants brought a motion to dismiss the action on the basis that Ontario lacked jurisdiction or, alternatively, was not the convenient forum. The defendants suggested that the plaintiffs ought to have brought separate actions in each of their respective provinces or, alternatively, as a group in California. The Court did not agree.

The Court found that jurisdiction simpliciter was made out for all of the plaintiffs’ claims, including those not based in Ontario, on the basis that:

  1. the claims were sufficiently similar that there was a substantial connection to any Canadian jurisdiction where IFS had established dealers, including Ontario; and
  2. IFS ULC had its strongest presence in Ontario.

Perhaps most importantly for franchisors, the Court found that the plaintiffs’ claims were all connected by the contractual provision selecting the application of Ontario law. Following the Ontario Court of Appeal decision in405341 Ontario Ltd. v. Midas Canada Inc., the court found this includes the application of the Wishart Act, even where the franchise is located outside of Ontario. Accordingly, the Court found that Ontario was the most convenient forum for the proceeding.

Notably, the Court sharply criticized the defendants’ conduct in bringing the jurisdiction motion, stating:

A lick of common sense should have made it clear that this motion, as framed, was doomed from the outset. So why bring it? If the honestly held belief was that this case ought to be pursued in California, all I can say to the defendants is “give your heads a shake.”

The net result is two years and tens of thousands of dollars in costs have been wasted. I call that an abuse of process.5

As a result, the Court saw fit to award substantial indemnity costs of the motion to the plaintiffs in the amount of $50,000.

Key Take-Away Principles

IFS provides an important warning for franchisors establishing Canada-wide systems. The establishment of franchises in multiple provinces may provide jurisdiction for a group action in any of the provinces where franchises exist. Further, franchisors ought to be mindful of choice of law provisions in their franchise agreements, as they may give rise to unintended claims through the stipulation of a province with franchise legislation, such as Ontario. Finally, any challenge to jurisdiction must be practical and well grounded, or else run the risk of an adverse costs award.

The Ontario Superior Court’s decision can be viewed here.