A recent Ontario court decision certifying a class action on behalf of 207 franchisees against their franchisor, General Motors of Canada Limited (GM), contains three important messages franchisors should consider in dealing with franchisees. The messages from the decision, Trillium Motor World Ltd. v. General Motors of Canada Limited, are:
- Franchisee/franchisor disputes are well suited to class certification.
- This is particularly so where the conduct at issue is that of the franchisor treating all franchisees in common.
- An important and unilateral amendment to the franchise agreement may well trigger an obligation to deliver a disclosure statement under Ontario’s franchise disclosure legislation, the Arthur Wishart Act.
In May 2009, in the face of dire economic circumstances including government loans and financial support, GM issued notices of non-renewal to over 240 of its 705 franchisees. The franchisees were given six days to accept or reject an agreement whereby they would receive a sum of money in exchange for a speedy shutdown of their operations. GM suggested it would be forced to file for creditor protection under the Companies’ Creditors Arrangement Act if the agreement was rejected.
More than 85% of the franchisees accepted the offer within or shortly after the six-day offer period. In February 2010, the franchisees who accepted the wind-down agreements commenced a class action alleging that GM’s strategy was designed to divide the dealers, conceal GM's true financial position and prevent them from preparing a united response. In particular, the franchisees alleged that:
- GM breached its statutory duty of good faith and fair dealing (primarily under Ontario's Arthur Wishart Act);
- GM breached the franchisees' statutory right to associate with one another;
- The wind-down agreements were subject to rescission because they were "franchise agreements" within the meaning of the Act; and
- GM failed to deliver disclosure statements to the franchisees.
On March 1, 2011, the Ontario Superior Court of Justice certified the class action on behalf of the 207 franchisees against GM.
The Court agreed with the Ontario Court of Appeal (Quizno's Canada Restaurant Corporation v. 2039724 Ontario Ltd.) that "a dispute between a franchisor and several hundred franchisees is exactly the kind of case for a class proceeding," noting that because a franchise relationship involves a common franchise agreement, a common franchise system and often common treatment of the franchisees by the franchisor, such a relationship will often give rise to "common issues [that are] … particularly suitable" for resolution in a class proceeding.
In addition, the Court emphasized that the causes of action against GM dealt primarily with GM's overall collective approach to the franchisees in May 2009; the conduct was common to all the franchisees. In particular, GM communicated with its dealers using a national satellite broadcasting system, issued form letters and form agreements, and took the position that all the dealers who were issued wind-down agreements stood in the same position.
Finally, the Court considered the issue of whether a franchisor is required to deliver a disclosure statement under the Act anytime it attempts to amend the franchise agreement. The Act is silent about amendments. The Court held that, while the legal issue remained unresolved at this stage of the proceeding, it was certainly arguable that an "important and unilateral amendment to the franchise agreement" would, in fact, trigger the statutory obligation to deliver a disclosure statement. The Court also noted that the wind-down agreements in this case required the franchisees to divest themselves of their entire franchises, a decision which is "every bit as significant as [their] initial decision[s] to invest in the first instance."