For years, many automotive manufacturers sought to avoid franchise legislation in Canada by claiming that their dealership agreements were not franchises but rather ‘personal service contracts.’ The term ‘personal service contract’ refers to the fact that for each dealership there is a dealer principal who is personally responsible for the day-to-day operation and management of the dealership. This meant, according to the dogma in the automotive world, that franchise laws did not apply to the relationship between manufacturer and dealer.
The reality is that most automotive dealerships are unquestionably franchises under the laws of all provinces in Canada that have franchise legislation. It does not matter what one calls the agreement, whether it be a ‘franchise agreement,’ a ‘personal services contract,’ a ‘dealership agreement’ or even a ‘ham sandwich.’ In determining whether franchise legislation applies to a given contractual relationship, what matters is the true nature of the relationship and not the terminology used by the parties.
Many dealership agreements adopt the law of Ontario as the governing law. Section 1(1) Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000 (known also as the ‘Wishart Act’) defines what a ‘franchise’ is. In order to fall within the definition of a franchise, three elements must exist: (i) continuing payments by the franchisee to the franchisor or its associate, (ii) a trade-mark, and (iii) significant control.
Let’s leave aside the first element for now and look at the second and third elements. The second element, the right to use the manufacturer’s trade-mark, exists in every automotive dealership agreement. Dealers use their manufacturer’s trade-mark and are thoroughly associated with their manufacturer’s brand in virtually every facet of their business.
The third element—significant control—also exists in virtually every automotive dealership agreement. Manufacturers typically control, for example: the size, design and layout of the dealership premises, the designation of the dealer principal, standards of operation, the ability to sell or assign dealership rights, capital requirements, etc. All of these factors easily satisfy the requirement of ‘significant control’ over the dealership.
Some manufacturers maintain, however, that because their dealer agreements do not require payment of a royalty or an initial franchise fee, they do not meet the ‘continuing payments’ element of the test and therefore they do not fall within the definition of a franchise. However, neither a royalty nor a franchise fee is required to create a franchise. Any form of continuing payment, including payment for goods and services supplied by the franchisor or its associate in the ordinary course of business, satisfies the continuing payment element of the test. As commentator Frank Zaid has written in his text Franchise Law, the continuing payments element:
… need not be related to sales, need not be periodic, and need not be for intellectual property or other intangible rights. In fact, the payments may simply be made in the course of operating the business for products or services supplied by the franchisor or the franchisor’s associate.
A series of court decisions in Ontario confirms that automotive dealerships are as much franchises as businesses commonly associated with the franchise concept such as pizza chains, grocery stores and gas stations. In fact, an Alberta court decision described an automotive dealership as ‘a classic commercial franchise agreement’ under Alberta’s franchise legislation, the Franchises Act.
Despite this, a number of automotive manufacturers continue to deny that they are governed by provincial franchise legislation. Worse still, many dealers do not believe that the powerful rights and remedies under provincial franchise laws apply to them. As a result, many dealers do not think to consult lawyers with expertise in franchise law and are served by general practice lawyers who themselves are often are unaware of their clients’ valuable rights under franchise legislation. Exposing the myth of the personal services contract is the first step to empowering dealers and levelling the playing field with their manufacturers.
The application of provincial franchise legislation to automotive dealerships has a number of important implications for manufacturers and their dealers. I will discuss some of those in a subsequent blog.