Disclosure in the context of an ongoing franchise relationship – The case of General Motors’ dealers “wind-down” agreements
Published on November 1, 2011
Posted in: Blog
In May, 2009, General Motors of Canada Limited (“GM”), entered into agreements (“WDA”) with 230 of its dealers to wind down their businesses as part of GM’s restructuring and efforts to obtain billions of dollars in government “bail-out” money.
The dealers were given less than a week to accept the offers made to them and were threatened by GM that if all of the dealers did not take up the offer, GM would invoke insolvency proceedings.
Prior to the “wind-down” offer being made by GM, many of the franchisees had retained the Toronto Law Firm of Cassels Brock & Blackwell (“CBB”) to deal with GM as a body of dealers. Unbeknownst to the dealers, CBB was already representing the Canadian government which was involved as the primary source of the bail-out funds. CBB did not act for the dealers when the wind-down offers were presented. The dealers were told to consult with their local lawyers.
Our firm, together with the firm of Weir & Foulds, commenced a class action on behalf of the dealers against GM and CBB. The position being argued is that the dealers were entitled to receive a disclosure document before they were provided with the WDA to sign. There was no dispute that no disclosure documents were given to the dealers. The action against CBB centres upon that firm allegedly having had a conflict of interest and allegedly abandoning the dealers when faced with the offers to wind down.
On March 1, 2011, following a contested hearing, Justice George Strathy of the Ontario Superior Court of Justice, certified the actions against both defendants. In His Honour’s Reasons for Decision, Justice Strathy reviewed the purpose of franchise and class proceedings legislation as espoused in previous cases. In His Honour’s decision, Justice Strathy reaffirmed that “there are aspects of franchise claims that may promote the goals of both the Arthur Wishart Act (“AWA”) and the Class Proceedings Act.” Justice Strathy certified the following common issues to proceed to a common issues trial as against GM:
(a) Is GM a franchisor within the meaning of the franchise legislation?
(b) Are all class members entitled to the benefit of the statutory duty of fair dealing right of association by virtue of the choice of law provisions in the standard GM Dealer Sales and Service Agreement and the WDA;
(c) If GMCL owed a duty of fair dealing to the Class Members, did GM breach this duty by:
i. delivering the WDA to the Class Members on or after May 20, 2009 and requiring their acceptance by 6 p.m. EST on May 26, 2009;
ii. not disclosing to the Class Members the identities of dealers offered a WDA;
iii. stating in the Notice of Non- Renewal and WDA that GM “will not be renewing the Dealer Sales and Service Agreement” between GM and each of the class members at the expiry of its current term on October 31, 2010;
iv. stating in the WDA that “it has always been and continues to be [GM’s} position that the franchise statutes are not applicable to the Dealer Agreement or the relations between GM and Dealer and/or Deliver Operator”;
v. stating in the Notice of Non-Renewal, the WDA and the May 19, 2009 HIDL broadcasts the GM’s offer of the WDA was conditional upon all of the Non- Retained Dealers accepting the offer on or before May 26, 2009; or
vi. breaching any terms of the WDA;
(d) Did GM have a duty to disclose material facts concerning its restructuring to frachisees at the time of soliciting the WDA? If so, did it fail to disclose material facts and did it breach such duties;
(e) If all Class Members have a statutory right to associate, did GM interfere with, prohibit, restrict, penalize, attempt to penalize or threaten to penalize the Class Members’ exercise of this right for any of the same reasons set out above;
(f) Are the waiver and release contained in s.5 of the WDA null, void and unenforceable in respect of the class members’ statutory rights;
(g) Was GM required to deliver to each class member a disclosure document within the meaning of the franchise statutes, at least fourteen days before the class member signed the WDA;
(h) By virtue of GM’s failure to deliver any disclosure document:
i. is each class member entitled to rescind the WDA within two years of signing the WDA or the grant, if in Alberta;
(i) Is each class member which delivers to GM a notice of rescission or notice of cancellation, as the case may be, in respect of the WDA within two years entitled to statutory compensation?
In addressing GM’s position that the WDA was not a franchise agreement requiring disclosure Justice Strathy stated: “Nor can I say that the policy of the (AWA) runs contrary to imposing an obligation of disclosure when the franchisor proposes to make an important and unilateral amendment to the franchise agreement. One could certainly argue that an amendment that involves the franchisee divesting itself of its investment, and surrendering important rights under its franchise agreement is every bit as significant as its initial decision to invest in the first instance. To put this point in context, consider that Trillium and the other 239 franchisees who had been offered the WDA were essentially being told by GMCL, “if this offer is not accepted by every last one of you, there is a strong possibility that we will seek protection from our creditors and you may get nothing.” It does not strike me as unreasonable, or inconsistent with the statutory purpose, to suggest that GMCL had an obligation to make full and fair disclosure of all material facts known to it that might reasonably affect the franchisees’ decision”.
The following common issues were certified as against CBB:
- Did CBB owe contractual duties to some or all of the class members and, if so, did it breach those duties;
- Did CBB owe fiduciary duties as lawyers to some or all of the class members and if so, did CBB breach those duties;
- Did CBB owe duties of case to some or all of the class members and, if so, did it breach those duties?
On January 12, 2012, the Ontario Divisional Court will decide CBB’s appeal of Justice Strathy’s decision and will decide whether Justice Strathy was correct in certifying issues (d) and (e) as against GM. The case raises the issue of when disclosure must be provided in the context of an ongoing franchise relationship. We shall continue to provide updates on the developments in this action which are otherwise available to be read on our firm’s website at www.sotosllp.com.