::this post ID is 12333::::in categories of ..Legal Corner..::

Ontario court rules foreign franchisor not a party to franchise agreement

The Ontario Superior Court of Justice has ruled against a claim by Canadian automotive dealerships that their franchisor and U.S. parent company owed them a duty of good faith and fair dealing.

According to McCarthy Tetrault lawyers Helen Fotinos, Sam Khajeei and Adam Ship, the owners of Addison Chevrolet Buick GMC, were franchisees of General Motors (GM) of Canada, whose shares had been transferred into General Motors Company (New GM) when General Motors Corporation (Old GM) went into bankruptcy reorganization. They alleged GM Canada and New GM owed them a duty of good faith in the performance of their franchise agreement and statutory duty of fair dealing under section three of the Arthur Wishart (Franchise Disclosure, 2000) Act.

The court noted there were no contractual duties in the dealer sales and services agreements to support the plaintiff’s claim that New GM’s allocation of financial assistance only to its dealers in the U.S. was a breach by GM Canada of its duty of good faith and fair dealing. The franchise relationship is not a fiduciary relationship. It said a franchisor that prefers its own interests in a transaction is not necessarily in breach of its duty of good faith and fair dealing under the act, as long as it deals honestly and reasonably with franchisees.

Section three states a party to a franchise agreement has a right of action for damages against another party to that agreement who breaches the duty of fair dealing in the performance or enforcement of the agreement. The plaintiffs argued New GM, the parent company, was a franchisor’s associate within the meaning of the act and should be deemed a party to the franchise agreement with GM Canada, so they would be entitled to have a right of action for damages against GM Canada.

The court rejected these claims and ruled section three should only be applicable to named parties of a franchise agreement. It also said because the act differentiates between the liabilities of a franchisor’s associate and those of a franchisor, it is inappropriate to force blanket joint liability on both franchisors and franchisors’ associates.

The plaintiffs then argued New GM was involved in the grant of the franchise, but the court rejected that claim. It said the decision to terminate or retain certain franchises as part of the reorganization was made six weeks prior to the date when New GM acquired its interest in GM Canada and was not in a position to control it. It went on to say the date of the grant of the franchise should not read as the date of the latest renewal of that franchise, but the actual initial grant date in 2005. The court then concluded there was not a solid foundation to support the notion that New GM was directly involved in the grant of the franchise to the plaintiffs.

According to the lawyers, the Addison GMC decision provides foreign franchisors with additional comfort when incorporating a subsidiary or appointing an affiliate to act as a Canadian franchisor. As long as the foreign franchisor does not become a named party to the franchise agreement and is not involved in the grant of the franchises to the Canadian franchisees, it may be shielded from certain liabilities incurred by a subsidiary or affiliate. They suggest franchisors should review their standard form franchise agreements to ensure any financial support provisions are appropriately limited and qualified.

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