Like Ontario, Alberta law requires franchisors to act in good faith and deal fairly with franchise holders. So when a Chrysler auto dealer in an affluent Calgary neighbourhood learned the manufacturer was awarding a franchise for a new dealership it felt was too close to its long-established operation, it went to court to block the move.

Courtesy Chrysler Ltd. sought an injunction, claiming that Chrysler Canada was violating its agreement with Courtesy by allowing a competitor to open its doors too close to an existing franchise. Chrysler countered by arguing its franchise agreement gave it the freedom to put new dealerships wherever it felt doing so was in Chrysler’s interest. But an Alberta court agreed with Courtesy, ruling that the manufacturer could not make business decisions that were solely in its interests if doing so ran against the interests of an existing franchisee.

When a franchise territory threatens to “overlap” with another, this is commonly known as “encroachment.” The decision shows that even if a contract has strong language in favour of encroachment, courts will make sure the decision is consistent with the legal obligations of good faith and fair dealing.

Sudden Change

Courtesy Chrysler had invested heavily in expanding its showroom and repair areas over the years to serve the growing area of southern Calgary. Although others had wanted to open dealerships in the area previously, Chrysler denied efforts by would-be competitors to encroach on the market because doing so would have a serious, negative impact on Courtesy’s profitability.

But in 2012, Chrysler changed its mind, deciding to award a new dealership “virtually in the middle of Courtesy’s existing trade zone.”

When Courtesy’s owners objected, Chrysler told it that the automaker could locate the new dealership where it wanted because the franchise agreement gave it the sole right to make these decisions. Courtesy’s contract gave Chrysler the right to determine where, when and how many authorized dealers are necessary, and to appoint additional dealers within an existing dealer’s sales area when in it thought doing so is necessary.

But an Alberta court disagreed with Chrysler, concluding that even though the franchise agreement gives the manufacturer broad discretion to award new dealerships, it still has an obligation to act in good faith. The court said, “Courtesy has demonstrated that … mere compliance with contractual terms does not mean that there has not been a breach of the duty of good faith … (and) whether Chrysler was obligated to – and did – consider any interests other than its own.”

The decision reaffirms the crucial role of good faith and fair dealing even if there is language in an agreement that gives franchisors broad discretion to encroach. Ultimately, as the Courtesy decision reveals, the factual history, business reasons and expert evidence is critical for a court to decide whether to grant relief for alleged encroachment.

The full decision in Courtesy Chrysler (1987) Ltd. v. Chrysler Canada Inc., 2012 ABQC 658 is available on-line.

Reach Jean-Marc Leclerc by phone at 416-977-6857 or email at jleclerc@sotosllp.com.