The recent Ontario Superior Court of Justice decision in Addison Chevrolet Buick GMC Limited et al v. General Motors of Canada Limited et al is a breath of fresh air for franchisors.1

Addison is one of a number of actions by franchisee dealers arising from the 2009 restructuring of General Motors (GM). In this case, Addison was brought by dealers who were retained as part of the restructured Canadian GM dealer network. They alleged that the franchisor, General Motors of Canada Limited (GMCL), and its US parent companies, General Motors Company and General Motors LLC (collectively, GM US), breached their duties of good faith and fair dealing by failing to adequately support and consider the interests of the retained Canadian dealer network following the restructuring, which resulted in reduced sales and profitability for these dealers.

Both GM US and GMCL brought successful motions to strike portions of the plaintiffs’ claim on the basis that they disclosed no reasonable cause of action. In its decision striking much of the plaintiffs’ claim, the court made a number of important findings which are helpful to franchisors.

The Statutory Duty of Good Faith Only Applies to Parties to a Franchise Agreement

The plaintiffs alleged that GM US owed them a duty of good faith and fair dealing pursuant to section 3 of theArthur Wishart Act (Franchise Disclosure), 2000 on the basis that GM US was a “franchisor’s associate” of GMCL.

The Court struck this claim, finding that section 3 of the Wishart Act is, on its face, only applicable to parties to a franchise agreement and no others. Further, the court found that there was nothing in the Wishart Act capable of deeming a “franchisor’s associate” to be a party to the franchise agreement, nor can this be established by a parent company’s “degree of control” over the franchisor. Unless a franchisor’s associate is also a party to the franchise agreement, it will not be subject to claims under section 3 of the Wishart Act.

A “Franchisor’s Associate” Must Be Involved in the Original Grant of the Franchise

The Court also held that, in any event, GM US did not qualify as a “franchisor’s associate” since it did not exist at the time of the original grant of the plaintiffs’ franchises, and therefore could not have been involved in the grant.

It was not disputed that GM US met the “control test” element of the definition of a “franchisor’s associate” by virtue of its 100% ownership of GMCL. It was not alleged that GM US exercised any degree of operational control over the plaintiffs or that the plaintiffs had any ongoing financial obligation to GM US. As such, the determination turned on whether GM US was “directly involved in the grant of the franchise” by reviewing or approving the grant or making representations to the prospective franchisees.

The plaintiffs were all long-standing GM dealers, ranging from 24 to 94 years in operation. GM US, in contrast only came into existence as a result of the US bankruptcy proceedings of GM’s predecessor in 2009. The Court found that GM US could not be deemed to have been involved in the grant of the plaintiffs’ franchises by virtue of its review and approval of subsequent franchise agreements or renewals or its involvement in the decision to retain the plaintiffs as dealers following the 2009 restructuring. GM US was therefore found not to be a “franchisor’s associate” within the meaning of the Wishart Act.

Courts Will Not Lightly “Pierce the Corporate Veil” Absent Fraud or Improper Purpose

The plaintiffs also sought to pursue liability against GM US by “piercing the corporate veil” of GMCL. Following longstanding corporate and contractual law principles, the court will typically not pierce the corporate veil to affix liability to a parent company unless the plaintiff can establish both that the subsidiary is completely dominated and controlled by the parent and that the subsidiary was incorporated for an illegal, fraudulent or improper purpose.

In Addison, the Court also suggested that this will be even rarer in the franchise context, as the legislature has already addressed the issue of “control party” liability in the “franchisor’s associate” provisions of the Wishart Actand this legislative balance should not be disturbed lightly in favour of an ad hoc approach to piercing the corporate veil of franchisors.

The Duty of Good Faith is Not Fiduciary and Must Be Tied to the Contract

Finally, the Court struck a number of claims against GMCL alleging a breach of the statutory and common law duties of good faith alleging that GMCL had “preferred its own interests” to those of the plaintiff franchisees in failing to adequately support the retained Canadian dealer network in the wake of the 2009 restructuring.

First, the Court held that a claim that one side has “preferred its own interests” is incapable of being actionable under section 3 of the Wishart Act, as the statutory duty of good faith and fair dealing is mutual and, logically, both sides cannot be under a similar obligation not to prefer their own interests.

Secondly, the Court found that neither the statutory nor the common law duty of good faith could impose an obligation outside of those set out in the contract at issue. Importantly, the Court found that the Supreme Court of Canada’s recent decision in Bhasin v. Hrynew, which implied a duty of good faith in the performance of all contracts2, did not change the longstanding view that the duty of good faith cannot create freestanding obligations outside of those expressly stated in the franchise agreement. “Bhasin,” the Court stated, “is no authority for unbridled creativity in the creation from whole cloth of obligations in a contractual context which the parties have not provided for or have addressed in a fashion which one party regrets in hindsight.”3

Key Takeaways

Addison helpfully clarifies a number of franchise law issues typically relied upon by plaintiff franchisees to expand their claims against parent entities and into murky “good faith” obligations. In finding that these issues can be resolved on a pleadings motion, the court has restricted the effectiveness of these tactics and brought clarity to the law. Addison will also assist improperly named “franchisor’s associates” seeking to remove themselves from actions at an early stage. International franchisors expanding to Canada should take note of this decision and consult closely with legal counsel in structuring the relationship so that the parent company can take advantage of the protection from liability.

On October 30, 2015, the Divisional Court denied the plaintiff franchisees leave to appeal in respect of GMCL’s successful motion to strike the duty of good faith claims. A copy of the decision can be found here. The plaintiff franchisees are also appealing in respect of the claims against GM US, and we will be watching the appeal proceedings closely.