Canada is an attractive but highly regulated market for foreign vehicle original equipment manufacturers (“OEMs”). Canada has a safe and stable economy and adheres to the rule of law, making it an attractive destination for OEMs looking to introduce their products into new foreign markets. While the Canadian marketplace often appears similar to the United States at first glance, dealer regulation, franchise protections, different legal systems, tariffs, environmental law requirements, data privacy laws, consumer protection laws, and countless other regimes create a very distinct legal and commercial environment. Careful dealer network structuring at the outset is critical to avoiding regulatory friction, dealer disputes, and costly restructuring later.

This article outlines certain principal considerations non-Canadian OEMs should review when expanding into the Canadian marketplace and designing a Canadian dealer network.

1. Choosing the Right Market Entry Structure

Many OEMs enter Canada by establishing a wholly-owned Canadian subsidiary entity, which contracts directly with dealers and manages national distribution, marketing, and compliance. This structure offers simplicity regarding certain tax, employment, regulatory, and other matters, while also providing liability containment.

Alternative models, such as appointing an independent importer and distributor, may offer speed to market, but may also result in reduced brand control and imaging and increased difficulty transitioning to a direct manufacturer-dealer relationship later. Once dealers are entrenched under a third-party distributor, re-alignment can be highly contentious and expensive.

Regardless of the model an OEM ultimately adopts, early cross-border tax planning is essential. Canada’s corporate tax, sales taxes, transfer pricing, and withholding tax regimes, among other considerations, can materially affect OEM and dealer economics, pricing, and overall profitability if not considered and addressed upfront. Misalignment between legal structure and tax planning can result in compliance exposure and costly retroactive restructuring.

2. Dealer Network Architecture and Coverage Strategy

Canada’s geography, population distribution, and climate materially affect the planning and breadth of any proposed dealer network. While Canada is geographically vast, its population is highly concentrated in a small number of urban corridors, namely southern Ontario, Québec’s St. Lawrence corridor, and pockets of British Columbia and Alberta. This leaves a number of regions with low population density and long travel distances between service points. This uneven distribution complicates dealer placement, service coverage, and vehicle and parts logistics.  Moreover, with the country’s latest emphasis on increased immigration, the country’s population has grown significantly over the last five years.

In the seven provinces in Canada that have (or will soon have) franchise disclosure and relationship laws, including Ontario, British Columbia, and Alberta, OEMs should be aware that automotive dealerships generally constitute “franchises” under such laws (regardless of how the contract attempts to define each party and their relationship). As a result, a franchise relationship will often exist between the OEM and each dealer, even if one is not intended, imposing additional franchise disclosure and relationship obligations on the OEM.  Failing to recognize and comply with these obligations will have significant monetary and reputational impacts on OEMs, and may serve to severely impact an OEM’s entry into the Canadian marketplace.

Moreover, certain OEMs have been moving away from the traditional franchisee dealer model to an agency or direct-to-consumer (D2C) model, where dealers are no longer directly responsible for owning and selling each vehicle, but instead fill certain other primary functions, such as vehicle delivery, test drive and customer touchpoints, service, and used vehicles sales. The reasons for this transition include OEMs making an effort to establish stronger ties with purchasers and reducing floor plan requirements for its dealers, all the while capturing a greater share of the profits to be made from selling new vehicles.

For this and other reasons, and together with the increasing prevalence of direct to consumer and/or hybrid agency models for vehicle sales, certain key considerations for any dealer network include:

• Whether to adopt a traditional franchise dealer model, an agency (D2C) model, or a hybrid between the two models, and whether to apply the chosen model(s) to all of the OEM’s vehicle lines or only to a select line(s).
• How to ensure adequate national and regional coverage, including rural and remote markets, if such markets are to be included in a proposed network.
• Whether dealers may operate single-brand or multi-brand rooftops, including whether existing dealers of other OEMs would be considered to further adopt a new entry OEM.

Manufacturers should expect scrutiny from dealers around network density, point allocation and closures, the opening of additional locations—particularly in growing urban markets, and facility requirements. Dealers currently operating dealerships of other OEMs may also face restrictions in their ability to take on new OEM banners.

3. Dealer Agreement Design and Termination Risk

Dealer agreements in Canada must balance brand control with enforceability and commercial realities. As dealer relationships may last for years, or even decades, such agreements need to be thorough, well-drafted, and as forward looking as possible. Moreover, dealer agreements must provide dealers with a reasonable opportunity to recoup their investment in the dealership. As discussed above, dealer agreements typically constitute “franchise agreements” under applicable franchise disclosure and relationship laws.

Critical drafting considerations include, but are not limited to:

• Term length, renewal rights (if any), and clearly defined performance criteria;
• Facility, branding, staffing, training, and equipment standards;
• Floorplan requirements;
• Sales performance and operational criteria;
• Export restrictions (to avoid grey-marketing);
• Ownership, assignment, and change of control provisions;
• Termination rights and notice periods; and
• Many other legal and business considerations.

4. Provincial and Federal Legal and Regulatory Considerations

Canada’s federal system has a material and often underestimated impact on foreign OEMs and other businesses expanding into the Canadian marketplace. Legislative authority is divided between the federal government and Canada’s ten provinces and three territories, resulting in multiple overlapping regimes across varying laws, regulations, and industries. While matters such as competition law, customs, and certain safety standards are in the federal domain, provinces regulate (among other things) dealer licensing, consumer protection, franchise and disclosure laws, employment standards, and aspects of sales tax and environmental compliance.

With respect specifically to dealer regulations and licensing (such as Ontario’s OMVIC framework), such matters are provincial in nature. As a result, OEMs may need to juggle and maintain compliance with multiple provincial frameworks at any given time. OEMs should also be mindful of laws and regulations, whether at the federal or provincial level, of:

• Advertising and marketing laws, including signage.
• Franchise disclosure laws.
• Competition laws.
• Consumer protection laws.
• Language laws, including in the province of Quebec.
• Environmental laws and mandated emission standards.

Successful expansion into or further into Canada therefore requires a coordinated national strategy that is deliberately adapted to provincial realities, rather than a one-size-fits-all approach.

5. Data, Digital Retail, and Customer Ownership

Data is becoming an ever-important tool and asset for businesses of all types, including OEMs. The nature of the products and services sold by OEMs and their dealers allows manufacturers to be especially-well positioned to capitalize on the ability to collect and employ significant data, including data about its customers.

That being said, OEMs should be acutely aware of the large number of rules and regulations governing data collection, use, disclosure, storage, and destruction in Canada. At the federal level, the Personal Information Protection and Electronic Documents Act (PIPEDA) governs the collection, use, disclosure, storage, and destruction of personal information in commercial activities, while several provinces have enacted enhanced private-sector privacy regimes that impose even stricter requirements.

For OEMs, these laws directly affect digital retail platforms, dealer CRM systems, marketing programs, connected-vehicle and telematics data, and cross-border data transfers. PIPEDA and other legislation places significant emphasis on meaningful consent, purpose limitation, and accountability across the entire data lifecycle. As a result, OEMs expanding into Canada must carefully align their data architecture, dealer agreements, and customer engagement strategies to ensure compliance across multiple jurisdictions’ laws, rules, and regulations – even when all interaction is between the customer and the dealer.

6. Dispute Resolution

To mitigate litigation risk with dealers, OEMs should carefully consider the provisions of their dealer agreements, with mechanisms existing to manage disagreements or issues before and after they escalate into formal conflicts and litigation. This can be achieved through provisions such as:

• Dealer advisory councils created and maintained by the OEM;
• Escalation and remediation frameworks; and
• Tiered dispute resolution clauses (such as mediation and arbitration).

In parallel, most OEMs selling vehicles in Canada participate in the National Automobile Dealer Arbitration Program (often referred to as NADAP), an industry-funded mediation and arbitration program that provides binding dispute resolution for disputes between OEMs and their dealers. Although NADAP is not mandatory for OEMs, most OEMs operating in Canada have adopted it as it provides a more efficient and confidential process than dealing with disputes through the courts, and by having disputes mediated and arbitrated by individuals with specific automotive knowledge and experience.  Foreign OEMs should carefully assess whether their vehicles, distribution model, and market entry plans necessitate participation in NADAP and ensure that their agreements and internal escalation processes are aligned accordingly.

Finally, since Canadian provincial franchise legislation expressly permits franchisees to associate amongst themselves, it should be noted that dealer associations are quite common in Canada and may, depending on the situation, either simplify or complicate the dispute resolution process.

Conclusion

Canada is a stable, sophisticated, and attractive market with significant automotive history and expertise for OEMs, but it is not a “plug-and-play” extension of other jurisdictions. Manufacturers that invest early in thoughtful dealer network structuring, compliance, and balanced dealer economics are far better positioned for sustainable growth and brand stability.

Being informed of all of the various issues impacting OEMs and making sound business decisions will be essential for an OEM to successfully expand into Canada.  This includes carefully considering the operational, contractual, and legal elements of a proposed expansion into Canada.  If you have any questions about expanding into Canada, Sotos LLP can help. Sotos LLP has extensive automotive experience in advising new and established OEMs in all facets of their business.

Please contact Jason Brisebois at 416.572.7323 or jbrisebois@sotos.ca , John Yiokaris at 416.977.3998 or jyiokaris@sotos.ca, or Peter Viitre at 416.977.7754 or pviitre@sotos.ca,  to discuss your automotive industry related inquiries.

About the Authors

Jason Brisebois, Sotos LLP

Jason Brisebois is a partner at Sotos LLP. His practice focuses on corporate, commercial, and franchise law, with a particular emphasis on the automotive sector.

Jason was awarded the Lexology 2024 Client Choice Award, is listed as “Ones to Watch” in Best Lawyers in Canada, and is recognised as “Recommended” in Lexology Index: Canada. He has also been named a “Legal Eagle” by Franchise Times Magazine.

John Yiokaris, Sotos LLP

John Yiokaris is a partner at Sotos LLP and serves as co-managing partner of the firm. He has extensive experience acting as lead counsel for major automotive manufacturers and dealers. John is also head of the firm’s Trademark practice and advises on intellectual property matters, including the registration and licensing of trademarks.

John was awarded the Lexology 2019 Client Choice Award, is ranked by Chambers Canada, and has been consistently listed in Best Lawyers in Canada. He is also recognised in the Best Lawyers Global Business Edition, listed in the Canadian Legal LEXPERT Directory, and recognised in Lexology Index: Canada. John was inducted into the Franchise Times “Hall of Fame” in 2022.

Peter Viitre, Sotos LLP

Peter Viitre is a partner at Sotos LLP and head of the Corporate and Commercial practice. He regularly advises domestic and international clients, including in the automotive sector, on market entry, dealer and franchise network structuring, regulatory compliance, and risk management across Canada.

Peter is ranked in Band 1 by Chambers Canada, has been consistently listed in Best Lawyers in Canada, and has been named “Lawyer of the Year” by Best Lawyers in Canada in 2015 and 2018. He is also recognised in the Best Lawyers Global Business Edition, listed as “Most Frequently Recommended” in the Canadian Legal LEXPERT Directory, and recognised as “Recommended” in Lexology Index: Canada. Peter has further been recognised as “Most Highly Regarded” and as a “Global Elite Thought Leader” by Lexology Index, and was inducted into the Franchise Times “Hall of Fame” in 2022.

The post Vehicle Sales in Canada: How Foreign OEMs can structure a compliant and efficient Dealer Network appeared first on Sotos LLP.

For automotive dealers, the investment required to establish a new dealership can be significant, covering everything from tools and machinery to vehicle inventory and due diligence, along with other associated start-up costs. Meanwhile, manufacturers face ongoing challenges of staying competitive in a rapidly evolving automotive market. A key strategy for manufacturers to remain relevant is ensuring a sufficient number of dealerships exist to meet customer demands and expectations. However, this strategy can sometimes lead to conflicts known as “encroachment”.

Understanding Encroachment

Encroachment occurs when a new dealership is opened or an existing one is relocated closer to another dealership in the same network. Such moves often lead to disputes between existing dealers and manufacturers. To mitigate these conflicts, manufacturers typically include provisions in their dealership agreements that reserve the right to establish new locations or relocate existing ones. However, beyond the agreement’s terms, both dealers and manufacturers need to be mindful of other important factors, such as standards set by the National Automobile Dealer Arbitration Program (NADAP), if applicable, and the obligation to engage in good faith dealings.

The Role of NADAP

NADAP was established to provide a structured process for resolving disputes between manufacturers and dealers for those manufacturers and dealers that have opted into NADAP. Initially, parties are encouraged to use the manufacturer’s internal dispute resolution process. However, if that process is unavailable or fails to resolve the issue, mediation through NADAP is the next step.

For encroachment disputes, Rule 6 of NADAP is particularly important. This rule grants manufacturers the right to determine the size and structure of their dealer network, including the creation of new dealer points, relocation of existing dealerships, and appointment of new dealers. However, manufacturers are required to provide notice to existing dealerships before establishing a new dealership location or relocating an existing dealer point.

Generally, in metropolitan areas, an existing dealer selling identical vehicle brands as those of the proposed new dealer point or relocated dealership may challenge a new or relocated dealership within 8 km (20 km in non-metropolitan areas). If these distance requirements are not offended, an existing dealer cannot bring its NADAP challenge. While these distance requirements are a common basis for challenges, they are not definitive. According to Rule 6(e), even if the distance requirements are met, the dealer must also prove potential losses in sales and profits as a precondition for obtaining relief.

Good Faith Obligations

Separate and apart from any NADAP rules regarding new dealer points and relocation, pursuant to Canadian law, automotive manufacturers are required to exercise the powers granted to them by a dealership agreement honestly, fairly, and in good faith. Given the potential power imbalance between local dealerships and automobile manufacturers, courts work to ensure that neither party engages in conduct that undermines the core purpose of their business relationship.

How are courts dealing with claims of encroachment?

1. Consideration of dealer interests: Courts have clarified that even when a manufacturer retains broad powers under a dealership agreement, it must still consider the interests of existing dealers. Manufacturers are required to evaluate the potential adverse impact on individual dealers before making decisions that could affect them.
2. Case-by-case approach: Courts emphasize that every encroachment case is unique. As a result, an existing dealer must provide substantial expert evidence demonstrating that a new or relocated dealership would harm its financial interests.

Conclusion

When a dealer is granted an exclusive selling territory or a designated market area, it has a reasonable expectation that the manufacturer will not encroach on its territory. Manufacturers are under an obligation to treat their dealers fairly, and exercise the powers they have reserved for themselves under the dealership agreement in such a manner so as to not unfairly disadvantage their dealers. At the end of the day, a well planned dealership network not only meets the needs of the marketplace, but it provides its dealers with a favourable environment in which to obtain a reasonable return on their investment.

John Yiokaris, Partner

John Yiokaris is a partner with Sotos LLP in Toronto, Canada’s leading franchise law firm. He has been recognized by Chambers Canada, LEXPERT, Who’s Who Legal, Lexology, and Best Lawyers in Canada as a leading Canadian franchise law practitioner. John can be reached directly at 416.977.3998 or jyiokaris@sotos.ca.

Bailee Kleinhandler, Associate

Bailee is an associate in the corporate and commercial group of Sotos LLP. She is building a diverse practice in corporate and franchise law. Bailee can be reached by email at bkleinhandler@sotos.ca or by phone at 416.572.7311.

The post Keep your distance! appeared first on Sotos LLP.

Automotive dealers know all too well, the cost of establishing a new dealership is substantial. The showroom and service area must be constructed, the land must be developed, costly tools and machinery must be purchased, and an initial inventory of vehicles must be acquired. This is in addition to a host of additional costs associated with start-up, including conducting business due diligence, hiring professional advisors, and advertising expenses.

At the same time, manufacturers are under constant pressure to remain relevant in a hyper-competitive automotive market environment. In order to ensure that customers are adequately serviced, manufacturers are constantly re-evaluating key markets to ensure that an adequate number of image-compliant dealerships are available to meet customer needs and expectations. This constant tension between providing the best available standard of service to customers, while ensuring that individual dealerships are able to recoup their substantial investment, is an ongoing concern for dealers and manufacturers alike. Understanding whether the establishment of new dealer points or the relocation of existing dealerships is within the powers of the manufacturer, or otherwise an encroachment on the market area of a dealership, requires a careful consideration of the unique circumstances facing the existing dealership.

What is encroachment?

Put simply, encroachment occurs when a new automotive dealer point is established or an existing dealership is relocated in closer proximity to another existing dealership. This may occur in response to demographic or socioeconomic changes in a market area which has made the establishment of a new dealership point viable, or when an existing dealer has found better premises within its market area to relocate its dealership. Not surprisingly, the establishment of new or relocated nearby dealerships can quickly put existing dealers and their manufacturer into conflict.

Manufacturers will almost always include broad provisions in their dealership agreement reserving their right to manage the overall dealer network, including by establishing new dealer points or relocating existing dealerships. In addition to the terms of the dealership agreement, however, dealers and manufacturers alike should be mindful that a manufacturer’s ability to establish nearby dealerships is also affected by a variety of other requirements and considerations, including the guidelines set out in National Automobile Dealer Arbitration Program (NADAP), if applicable, and the obligation that manufacturers deal with their dealers in good faith.

The National Automobile Dealer Arbitration Program (NADAP)

If the manufacturer and dealers have opted into NADAP, the manufacturer must consider the NADAP rules when considering its right to establish a new dealer point or relocate an existing dealership. Under Rule 6 of the NADAP rules, the manufacturer has the right to determine the size and structure of its dealer body and to create new dealer points, relocate dealerships, appoint new dealers, and fill existing dealer points. The manufacturer is obligated, however, to provide notice to an existing dealership of its intention to create a new dealer point or relocate an existing dealership. Generally, in metropolitan markets, an existing dealer that sells identical vehicle brands as those of the proposed new dealer point or relocated dealership may challenge a new dealership that is established or relocated within 8 km of the existing dealer (20 km for nonmetropolitan markets).

If these distance requirements are not offended, an existing dealer cannot bring its NADAP challenge. However, the distance requirements are not an absolute rule. If the new dealer point or relocating dealership offends the distance requirements, the existing dealer must still prove that it is more likely than not that it will suffer a significant loss of sales and profits as a result of the new dealer point or relocated dealership.When considering whether encroachment has occurred, the arbitrator must balance the dealer’s alleged significant loss of sales and profits with the interests of the manufacturer in creating the new dealership or relocating the existing dealership, as well as the collective interests of the manufacturer and all of its dealers, and the interests of the customers of those dealerships.

The manufacturers’ Duty of Good Faith

Separate and apart from any NADAP rules regarding relocation, pursuant to Canadian law, automotive manufacturers are required to exercise the powers granted to them by a dealership agreement honestly, fairly, and in good faith. Considering that a power imbalance may exist between a local dealership, on the one hand, and an automobile manufacturer on the other, courts are keenly focused on ensuring that neither party, through its conduct, can defeat the very purpose they entered into business together in the first place.

On multiple occasions, the courts have been called upon by aggrieved dealers to rule on whether a manufacturer, through its establishment of a new or relocated dealership, is encroaching upon the territory of an existing dealer, which will, ultimately, harm the existing dealer’s profitability. The courts’ analysis in these cases have provided us two key insights into how such claims will be dealt with.

Firstly, the courts have confirmed that, even if a manufacturer reserves itself broad powers under its dealership agreement, this does not mean it can act without consideration of the interests of existing dealers. Although manufacturers are not required to prioritize the interests of an individual dealership over its own interests or those of the dealership system generally, they are required to consider the interests of that individual dealership when the manufacturer’s decision could have an adverse impact upon it. Manufacturers are well-advised to ensure that prior to taking any such action, proper consultation and studies are conducted to fully consider the impact
on existing dealers.

Moreover, the courts have stressed that each situation involving dealership encroachment is different, and the existing dealer will need to provide substantive evidence that the establishment of a new dealer point or relocated dealership will harm its financial interests before a court will intervene. Dealers challenging the encroachment of a new or relocated dealership should be prepared to provide meaningful evidence that the new or relocated dealership will have a significant impact on its business, including relevant consumer data, customer records, business and market reports, and expert evidence. Conversely, manufacturers should be prepared to prove that they have undertaken their own business and market research, and can demonstrate that their decision will not have a substantial effect on the profitability of the existing dealership and not substantially prejudicial to the dealership in question.

Conclusion
When a dealer is granted an exclusive selling territory or a designated market area, it has a reasonable expectation that the manufacturer will not encroach on its territory. Manufacturers are under an obligation to treat their dealers fairly, and exercise the powers they have reserved for themselves under the dealership agreement in such a manner so as to not unfairly disadvantage their dealers. At the end of the day, a well planned dealership network not only meets the needs of the marketplace, but it provides its dealers with a favourable environment in which to obtain a reasonable return on their investment.

John Yiokaris, Sotos LLP

John Yiokaris is a partner with Sotos LLP in Toronto, Canada’s leading franchise law firm. He has been recognized by Chambers Canada, LEXPERT, Who’s Who Legal, Lexology, and Best Lawyers in Canada as a leading Canadian franchise law practitioner. John can be reached directly at 416.977.3998 or jyiokaris@sotos.ca.

Jason Brisebois, Sotos LLP

Jason Brisebois is a senior associate with Sotos LLP in Toronto, Canada’s leading franchise law firm. He has been recognized by Best Lawyers in Canada in the Ones to Watch category. Jason can be reached directly at 416.572.7323 or jbrisebois@sotos.ca.

The post Keep your distance! Navigating New Dealer Points and Relocated Dealerships appeared first on Sotos LLP.

A traditional exit option available to dealer principals is selling your dealership to an unrelated third party. Leaving your dealership to the next generation or a family member isn’t always a viable option for principals looking to exit their business. As a result, dealer principals (and dealership groups) should understand the key issues when it comes to selling their dealership.

Preparing for the Sale:

Before beginning the search for a purchaser, principals looking to sell should critically analyze their dealership.  Consider how the dealership has been performing over the previous months and years, whether the dealership has outstanding obligations (facilities upgrades, for instance) that will need to be addressed prior to its sale, what the state and health of the local automotive market are, and what the dealership’s outlook is for the future.  From an early stage, it’s critical to understand your business and the market in which it is operating to properly assess the value of the dealership and what steps will need to be taken to unlock any potential value.

Equally critical upon making the decision to sell is to ensure you’re properly managing your dealership’s inventory levels, both with respect to vehicles and parts.  Potential purchasers will typically not purchase obsolete or unauthorized vehicles and parts inventory that they’ll struggle to resell.  Moreover, old and obsolete inventory adversely affects your cash flow, as you are not able to fully recapture funds tied up in this inventory.  To ensure you maximize your return and avoid costly negotiations, you will need to manage your inventory in the leadup to a sale and begin to sell-off or dispose of any items that a purchaser will not want.

It is critical to involve your business and accounting advisors early in the sale process to help determine a fair asking price and what the potential tax consequences may be for your business and you personally.  It’s crucial to ensure that, well in advance of any sale, your financial and tax records are current and that you’ve discussed the topic of tax planning with your accountant.  In most cases, effective tax planning will help secure more money for yourself once the transaction closes.

It’s equally critical to engage your legal advisors from an early stage to assist you with structuring a potential transaction (as further explored below) and addressing potential roadblocks to closing the sale, including:

• ensuring that your manufacturer is prepared to consent to the proposed sale and what requisitions it may impose on both you and the purchaser as part of any transaction;
• understanding the requirements of your dealership agreement;
• ensuring that the corporation’s legal records are up to date and that contracts necessary to the operation of the dealership can be assigned to the purchaser, if necessary;
• ensuring that the proper consents have been obtained from the landlord and other third parties in order to effect the transaction without risk to the dealership, its operation, or its continued possession of the dealership premises, as applicable;
• managing any potential environmental liabilities that may exist on the premises as a result of the dealership’s operations;
• addressing employment law considerations and minimizing risk arising from potential employee transfers or layoffs at the time of sale;
• addressing any outstanding litigation or potential litigation concerning the dealership and its operations that may impede its sale; and
• tax and estate planning, which is crucial to consider as part of the sale process to proactively manage potential personal tax and legal exposure.

Most of these processes take several months to complete; as a result, it’s crucial to engage your legal advisors as soon as possible after making the decision to sell.

How to Structure the Transaction

The eventual transaction can be structured in two different ways: an asset sale or a share sale.  Both transaction structures have unique advantages and drawbacks (especially with respect to tax planning), and your legal and accounting advisors should be consulted well in advance of any sale to determine which structure is most beneficial for you and your business.

In an asset sale transaction, the buyer purchases your business’ assets (often including equipment, land and building, customer lists, inventory, and goodwill), but does not purchase or take control of your operating corporation.  As a result, you retain the unpurchased assets and all liabilities (including any debt) of your operating corporation.  This structure allows the buyer to pick and choose what assets it would like to purchase, while avoiding any liabilities owed by the seller.  As the seller, you will still be required to address the obligations and liabilities associated with your corporation (including paying down outstanding debt on or before closing), and you may be required to use some of the proceeds payable to you on closing to pay off any existing loans, financing arrangements, etc.  At the end of the day, the purchaser’s lawyer will not permit the transaction to close unless he/she has confirmed that the assets the seller is selling to the buyer are free and clear of any and all liens and encumbrances.

Asset sales are generally less risky for the purchaser, as they won’t be assuming any unforeseen or then-unknown liabilities associated with the operating corporation.  Nonetheless, the purchaser will have to ensure they’re able to transfer all purchased contracts, licenses, and permits into the purchasing corporation’s name and that the new business will be able to secure the approval of the Ontario Motor Vehicle Industry Counsel (or similar bodies).

In a share purchase transaction, the buyer purchases all of the outstanding shares in your operating corporation.  At the culmination of the transaction, total legal ownership of your corporation is transferred to the purchaser, who assumes all assets and liabilities associated with this corporation.  This form of transaction is generally simpler, as there is (generally) no need to effect the transfer of assets, specific licenses, or permits to a new corporation.  Nonetheless, any personal assets of the seller, or any assets the purchaser does not wish to purchase (i.e. obsolete inventory), will need to be flushed out from the seller’s corporation prior to the sale, which may have negative tax implications on the seller.

In a share transaction, keep in mind that the resulting change in control of the operating corporation may nonetheless require consent and approval from other parties relevant to the business, including the manufacturer, landlord, and major suppliers.  Typically, these consents take time to obtain.

Consider the Terms of your Dealership Agreement

In addition to ensuring that the transaction is organized in a manner that won’t prejudice your interests, dealer principals also need to ensure that the sale is not running afoul of the requirements found in their dealership agreement.  In particular, be on the lookout for the following types of provisions:

• Manufacturer’s Consent: Manufacturers will typically require that you seek and obtain (1) their consent to you selling your dealership, and (2) their consent as to the acceptability of the proposed purchaser. Manufacturers will generally reserve broad powers to reject sales or the proposed purchaser should they not deem them to be in the best interests of their brand or dealer network. Be sure to understand what steps must be taken to obtain the manufacturer’s consent and understand that obtaining such consent can take time.
• Right of First Refusal: Consider whether the manufacturer has the right to exercise a right of first refusal (ROFR) to purchase the dealership if you receive an offer for your dealership.  If so, consider if the manufacturer has a history of triggering this ROFR, and ensure the proposed purchaser understands you’re subject to this right. Purchasers may be hesitant to explore a transaction (beyond making an initial offer) if a manufacturer does not first waive its ROFR. It’s crucial to understand what information the seller must provide the manufacturer in light of a ROFR existing, and it’s equally important for both you and the buyer to understand the timelines for dealing with a manufacturer’s ROFR.
• Reimaging and Renovations: Consider whether there are requirements that, upon the sale of the dealership, reimaging or substantial renovations must occur at the dealership.  As a result of such requirements, it may even mean that the manufacturer will require your dealership to relocate to new premises better suited for such reimaging or upgrades.  Such renovations can be extremely costly and complicate the transaction (especially if new premises are required), and it should be verified if the manufacturer will require them as part of any sale to ensure adequate capital can be allotted for this work.
• Leasing and Financing Records: Manufacturers often require that all original records relating to the dealership’s leasing and financing activities are kept at the dealership premises, despite a sale.  You will need to ensure that all such records are, in fact, in existence and readily available to the purchaser on closing.

Each dealership agreement is different, and failing to abide by its provisions as part of a transaction can endanger the transaction and your operation of the dealership itself.  Be sure you understand the obligations placed on you by your dealership agreement, and plan in advance as to how best to comply with them.

Conclusion

Selling a dealership is a complicated matter, and sufficient time should be allotted to carrying out the work associated with preparing and planning for such a transaction, obtaining the necessary consent to undertake the transaction, and coming to terms with the buyer and other interested parties.  Remember that a deal isn’t complete until all of the agreements are fully signed, the conditions of the transaction have been fulfilled, and the purchase price has been made into your bank account.

John Yiokaris, Sotos LLP

John Yiokaris is a partner with Sotos LLP in Toronto, Canada’s largest franchise law firm. He has been recognized by Chambers Canada, LEXPERT, Who’s Who Legal, Lexology, and Best Lawyers in Canada as a leading Canadian franchise law practitioner.

John practices business law with a specific focus on the automotive industry, franchising, and disputes, and he is a trusted counsel to both automotive dealers and manufacturers. John can be reached directly at 416.977.3998 or jyiokaris@sotos.ca.

Jason Brisebois, Sotos LLP

Jason Brisebois is a senior associate with Sotos LLP in Toronto, Canada’s largest franchise law firm. He is head of the firm’s personal services franchise practice area, and practices business law with a focus on franchising, distribution, and licensing. Jason can be reached directly at 416.572.7323 or jbrisebois@sotos.ca.

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Before entering into a dealership or retailer agreement, both dealers and automakers should carefully consider the terms governing the duration of their relationship as well as the circumstances which could lead to the termination of the agreement. Often, dealer agreements will automatically renew after a set period of time, so long as certain conditions are met. In those instances, if neither party breaches the agreement, the relationship may continue indefinitely.

This brings us to a discussion of indefinite term contracts containing what are commonly referred to as “evergreen” clauses. An indefinite term contract is an agreement that does not have an “expiry date”. An “evergreen” clause entails the automatic renewal of the agreement year after year. What does this mean in practice? Well, in most cases, if both parties are acting in accordance with the terms of the agreement, the relationship may continue indefinitely. However, what if one party wants out in circumstances where there have been no events of default entitling the innocent party to terminate the agreement?

In some instances, indefinite term contracts may be terminated on reasonable notice in the absence of any clause permitting such right. Courts have been willing, in some cases, to find an implied term which permits the termination of a contract without cause. The Ontario Court of Appeal has stated that when the term of a contract is not fixed and there is no provision for the termination of the contract on reasonable notice, a court may treat a contract as either perpetual in nature or as an indefinite term contract with an implied unilateral termination right on reasonable notice. In the latter instance, either party to the agreement can terminate the contract if they give the other party reasonable notice. How the court determines what is ‘reasonable’ is largely dependent on the facts of each particular situation. In order to make this determination, the court must consider the following:

1. the relationship between the parties;
2. the specific terms of the contract; and
3. all surrounding circumstances.

Type of Relationship: Some types of contracts which depend upon mutual trust between the parties naturally give rise to an implied right to terminate upon reasonable notice. For example, distributorship agreements are generally of a class of agreements that can be terminated upon reasonable notice without cause. This is because distributorship agreements are the type of contract that involve mutual trust, and each party should have the right to terminate the contract unilaterally on notice in the event there is a breakdown of that trust. In other words, trust between the parties is so important in this type of relationship that the absence of it is sufficient grounds for either party to end the contract. Similarly, franchise relationships depend upon mutual trust between the contracting parties. Accordingly, franchise agreements will generally be found to contain an implied right to terminate upon reasonable notice in situations where the agreement does not contain terms related to termination.

Given that dealers and automakers are in a franchise relationship with each other, there is a strong likelihood that an implied right to terminate upon reasonable notice would be found to exist, although final determination must be balanced against other factors, as described below.

Specific Terms: There may be specific terms within the dealer contract which either point towards or away from an implied right to terminate without cause on reasonable notice. For example, if an agreement stipulates that it can only be terminated by mutual agreement or for a material breach of contract, then likely only in those two circumstances mentioned could the parties actually terminate the agreement. When an agreement contains specific terms which set out when termination may occur, it is more difficult to establish an implied right to terminate on reasonable notice without cause. In the context of an agreement with numerous termination provisions, an additional implied right to terminate would arguably be inconsistent with the intention of the parties.

Surrounding Circumstances: In addition to the nature of the relationship and specific terms in the contract, the surrounding circumstances help determine whether there is an implied right to terminate on reasonable notice. These factors include:

• the level of sophistication of the parties;
• whether the parties were strangers at the time they entered into the agreement;
• whether the parties had done prior business together;
• whether the relationship involved the need for trust, confidence, and satisfaction; and
• the amounts invested by each party pursuant to the agreement.

Maybe Not Forever

What appears to be a long-term, an endless relationship may not be forever.

Before moving forward with a dealer agreement, think about the kind of relationship you want to have with your dealers or your automaker. Are you prepared to offer your dealers automatic renewals year after year? Are you prepared to enter into an agreement that allows your automaker to terminate you without any cause on 60 days’ notice? What will happen to the dealer’s investment if the agreement is terminated? No one expects a relationship to end on unhappy terms, but it happens, and it is better to contemplate termination scenarios at the beginning of the relationship, rather than at the end.

John Yiokaris, Sotos LLP

John Yiokaris is a partner with Sotos LLP in Toronto, Canada’s largest franchise law firm. He has been recognized by Chambers Canada, LEXPERT, Who’s Who Legal, and Best Lawyers Canada as a leading Canadian franchise law practitioner.

John practices business law with a specific focus on the automotive industry, franchising, and disputes. He is trusted counsel to both automotive manufacturers and dealers. John can be reached directly at 416.977.3998 or jyiokaris@sotos.ca.

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The issue for dealerships is whether, because of these challenging business conditions, they would have the right to temporarily cease operations without the express written approval of the manufacturer.  However, prior to shutting its doors, a dealer must make sure that it is not running offside the terms of its dealer agreement.  Under most dealer agreements, it is a material default for the dealership to cease operations for a period of time, typically 7 to 14 days, unless performance is rendered impossible.  If a dealership ceases operations for this length of time, a manufacturer may be entitled under the dealer agreement to immediately terminate the dealer agreement (and ultimately, the dealership’s ability to sell the manufacturer’s vehicles and parts) without notice to cure.  As such, if a dealer unilaterally elects to shut its doors because of the COVID-19 pandemic, then a manufacturer could potentially terminate the dealer agreement under the strict terms of the dealer agreement.

Before taking any steps to cease operations, a dealer should consider whether its dealer agreement contains a “force majeure” clause that permits it to temporarily cease operations. While some manufacturer dealer agreements contain force majeure clauses, not all do – dealer agreements should be reviewed on a case-by-case basis to consider whether one is present and if so, is it applicable to the situation at hand.  The Supreme Court of Canada has described a force majeure clause as follows: “[a] force majeure clause … generally operates to discharge a contracting party when a supervening, sometimes supernatural, event, beyond control of either party, makes performance impossible.”

Given the fact that the Government has permitted dealerships to remain open, it is unlikely that a broadly worded force majeure provision would relieve a dealer from operating because operations, while challenging and potentially not even profitable, have not been rendered impossible.  As such, in order to constitute a force majeure, it is likely that the clause would have to expressly refer to a pandemic of the nature we are currently experiencing in order to excuse the dealer from performance under its dealership agreement. Financial difficulties in operating the dealership would typically not be considered a force majeure.  However, if the Government goes a step further and mandates the closure of dealerships, then a broadly worded force majeure provision would likely apply since operation of the dealership has been rendered impossible.

Rather than relying on its strict legal rights, if a dealer is considering temporarily ceasing operations or fundamentally changing the nature of its operations by, for example, moving to online sales only and closing the showroom, it is best to engage the manufacturer at an early stage and before any decisions are made.  The dealer should have a frank and open dialogue with the manufacturer of why operating the dealership in the traditional manner is imposing too much of a hardship on the dealer and why temporarily ceasing operations would be the right thing to do in the circumstances, both from a financial perspective, and a health and wellness perspective. This is a difficult period for both dealers and manufacturers and so there is incentive on both sides to reach a mutual satisfactory arrangement and to compromise so long as both sides are acting reasonably.  If a temporary cessation is possible, the dealer and manufacturer should try to agree on the timelines and a plan going forward of when the dealership will fully re-open for business.  Any temporary cessation of operations agreed to by the dealer and manufacturer should be confirmed by the manufacturer in writing.

It is important to remember that a manufacturer has an obligation to exercise its rights under the dealer agreement in good faith and in accordance with its duty of fair dealing. Courts have generally evaluated this duty with consideration to the surrounding context facing the parties.  If a manufacturer is enforcing the dealer agreement in a heavy-handed manner in light of the business environment facing dealers at the present time, then arguably it is in breach of its duty of fair dealing.  Forcing a dealership to remain open in light of COVID-19, and threatening termination, could run afoul of the manufacturer’s duties of good faith and fair dealing to the dealers.

If a manufacturer does take steps to terminate, the National Automobile Dealer Arbitration Program (NADAP) rules may provide some protections to the dealer.  Firstly, under NADAP, a termination of the dealer agreement is an arbitrable matter.  Secondly, any termination is enjoined or paused while the merits of the termination are decided by the arbitrator.  As such, provided the dealer files a timely NADAP proceeding, it can stop the termination coming into effect until there is a decision from an arbitrator on the merits of the termination.

In closing, if a dealership is considering temporarily ceasing operations as a result of the COVID-19 pandemic, it is best to notify the manufacturer in advance and obtain written authorization from the manufacturer.  Given the current business climate, many manufacturers have already granted such requests, and we would expect most, if not all, to follow suit. If a manufacturer refuses, a dealership must know its legal rights before proceeding unilaterally.

This article was published in the May 2020 issue of the Canadian AutoWorld magazine.

Jason Brisebois, Sotos LLP

Jason Brisebois is an associate with Sotos LLP in Toronto, Canada’s largest franchise law firm. He is head of the firm’s personal services franchise practice area, and practices business law with a focus on franchising, distribution, and licensing. He has been recognized as a 2020 “Legal Eagle” by the Franchise Times as a leading Canadian franchise law practitioner. Jason can be reached directly at 416.572.7323 or jbrisebois@sotosllp.com.

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Video interview: John Yiokaris of SOTOS discusses dealership agreements, force majeure provisions, and OEM communications amid COVID-19

John Yiokaris is a partner with Sotos LLP in Toronto, Canada’s largest franchise law firm.  He has been recognized by Chambers Canada, LEXPERT, Who’s Who Legal, Lexology, and Best Lawyers in Canada as a leading Canadian franchise law practitioner.

John practices business law with a specific focus on the automotive industry, franchising, and disputes and he is trusted counsel to both automotive dealers and manufacturers.  John can be reached directly at 416.977.3998 or jyiokaris@sotosllp.com.

The post John Yiokaris on Canadian Auto Dealer magazine appeared first on Sotos LLP.

Having explored the topic of succession planning for automotive dealer principals in the January 2020 issue of Canadian AutoWorld (read here), we now consider another exit option available to dealer principals: selling your dealership to an unrelated third party.  Leaving your dealership to the next generation or a family member isn’t always a viable option for principals looking to exit their business.  As a result, dealer principals (and dealership groups) should understand the key issues when it comes to selling their dealership.

Preparing for the Sale:

Before beginning the search for a purchaser, principals looking to sell should critically analyze their dealership.  Consider how the dealership has been performing over the previous months and years, whether the dealership has outstanding obligations (facilities upgrades for instance) that will need to be addressed prior to its sale, what the state and health of the local automotive market is, and what the dealership’s outlook is for the future.  From an early stage, it’s critical to understand your business and the market in which it is operating to properly assess the value of the dealership, and what steps will need to be taken to unlock any potential value.

Equally critical upon making the decision to sell is to ensure you’re properly managing your dealership’s inventory levels, both with respect to vehicles and parts.  Potential purchasers will typically not purchase obsolete or unauthorized vehicle and parts inventory that they’ll struggle to resell.  Moreover, old and obsolete inventory adversely affects your cash flow, as you are not able to fully recapture funds tied up in this inventory.  To ensure you maximize your return and avoid costly negotiations, you will need to manage your inventory in the leadup to a sale and begin to sell-off or dispose of any items that a purchaser will not want.

It is critical to involve your business and accounting advisors early in the sale process to help determine a fair asking price, and what the potential tax consequences may be for your business and you personally.  It’s crucial to ensure that, well in advance of any sale, your financial and tax records are current and that you’ve discussed the topic of tax planning with your accountant.  In most cases, effective tax planning will help secure more money for yourself once the transaction closes.

It’s equally critical to engage your legal advisors from an early stage to assist you with structuring a potential transaction (as further explored below), and addressing potential roadblocks to closing the sale, including:

• ensuring that your manufacturer is prepared to consent to the proposed sale and what requisitions it may impose on both you and the purchaser as part of any transaction;
• understanding the requirements of your dealership agreement;
• ensuring that the corporation’s legal records are up to date and that contracts necessary to the operation of the dealership can be assigned to the purchaser, if necessary;
• ensuring that the proper consents have been obtained from the landlord and other third parties in order to effect the transaction without risk to the dealership, its operation, or its continued possession of the dealership premises, as applicable;
• managing any potential environmental liabilities that may exist on the premises as a result of the dealership’s operations;
• addressing employment law considerations, and minimizing risk arising from potential employee transfers or layoffs at the time of sale;
• addressing any outstanding litigation or potential litigation concerning the dealership and its operations that may impede its sale; and
• tax and estate planning, which is crucial to consider as part of the sale process to proactively manage potential personal tax and legal exposure.

Most of these processes take several months to complete; as a result, it’s crucial to engage your legal advisors as soon as possible after making the decision to sell.

How to Structure the Transaction

The eventual transaction can be structured in two different ways: an asset sale or a share sale.  Both transaction structures have unique advantages and drawbacks (especially with respect to tax planning), and your legal and accounting advisors should be consulted well in advance of any sale to determine which structure is most beneficial for you and your business.

In an asset sale transaction, the buyer purchases your business’ assets (often including equipment, land and building, customer lists, inventory, and goodwill), but does not purchase or take control of your operating corporation.  As a result, you retain the unpurchased assets and all liabilities (including any debt) of your operating corporation.  This structure allows the buyer to pick and choose what assets it would like to purchase, while avoiding any liabilities owed by the seller.  As the seller, you will still be required to address the obligations and liabilities associated with your corporation (including paying down outstanding debt on or before closing), and you may be required to use some of the proceeds payable to you on closing to pay off any existing loans, financing arrangements, etc.  At the end of the day, the purchaser’s lawyer will not permit the transaction to close unless he/she has confirmed that the assets the seller is selling to the buyer are free and clear of any and all liens and encumbrances.

Asset sales are generally less risky for the purchaser, as they won’t be assuming any unforeseen or then-unknown liabilities associated with the operating corporation.  Nonetheless, the purchaser will have to ensure they’re able to transfer all purchased contracts, licenses, and permits into the purchasing corporation’s name, and that the new business will be able to secure the approval of the Ontario Motor Vehicle Industry Counsel (or similar bodies).

In a share purchase transaction, the buyer purchases all of the outstanding shares in your operating corporation.  At the culmination of the transaction, total legal ownership of your corporation is transferred to the purchaser, who assumes all assets and liabilities associated with this corporation.  This form of transaction is generally simpler, as there is (generally) no need to effect the transfer of assets, specific licenses, or permits to a new corporation.  Nonetheless, any personal assets of the seller, or any assets the purchaser does not wish to purchase (ie. obsolete inventory), will need to be flushed out from the seller’s corporation prior to the sale, which may have negative tax implications on the seller.

In a share transaction, keep in mind that the resulting change in control of the operating corporation may nonetheless require consent and approval from other parties relevant to the business, including the manufacturer, landlord, and major suppliers.  Typically, these consents take time to obtain.

Consider the Terms of your Dealership Agreement

In addition to ensuring that the transaction is organized in a manner that won’t prejudice your interests, dealer principals also need to ensure that the sale is not running afoul of the requirements found in their dealership agreement.  In particular, be on the look out for the following types of provisions:

• Manufacturer’s Consent: Manufacturers will typically require that you seek and obtain (1) their consent to you selling your dealership, and (2) their consent as to the acceptability of the proposed purchaser. Manufacturers will generally reserve broad powers to reject sales or the proposed purchaser should they not deem them to be in the best interests of their brand or dealer network. Be sure to understand what steps must be taken to obtain the manufacturer’s consent, and understand that obtaining such consent can take time.
• Right of First Refusal: Consider whether the manufacturer has the right to exercise a right of first refusal (ROFR) to purchase the dealership if you receive an offer for your dealership.  If so, consider if the manufacturer has a history of triggering this ROFR, and ensure the proposed purchaser understands you’re subject to this right. Purchasers may be hesitant to explore a transaction (beyond making an initial offer) if a manufacturer does not first waive its ROFR. It’s crucial to understand what information the seller must provide the manufacturer in light of a ROFR existing, and its equally important for both you and the buyer to understand the timelines for dealing with a manufacturer’s ROFR.
• Reimaging and Renovations: Consider whether there are requirements that, upon the sale of the dealership, reimaging or substantial renovations must occur at the dealership.  As a result of such requirements, it may even mean that the manufacturer will require your dealership to relocate to new premises better suited for such reimaging or upgrades.  Such renovations can be extremely costly and complicate the transaction (especially if new premises are required), and it should be verified if the manufacturer will require them as part of any sale to ensure adequate capital can be allotted for this work.
• Leasing and Financing Records: Manufactures often require that all original records relating to the dealership’s leasing and financing activities are kept at the dealership premises, despite a sale.  You will need to ensure that all such records are in fact in existence and readily available to the purchaser on closing.

Each dealership agreement is different, and failing to abide by its provisions as part of a transaction can endanger the transaction and your operation of the dealership itself.  Be sure you understand the obligations placed on you by your dealership agreement, and plan in advance as to how best to comply with them.

Conclusion

Selling a dealership is a complicated matter, and sufficient time should be allotted to carrying out the work associated with preparing and planning for such a transaction, obtaining the necessary consents to undertake the transaction, and coming to terms with the buyer and other interested parties.  Remember that a deal isn’t complete until all of the agreements are fully signed, the conditions to the transaction have been fulfilled, and the purchase price has made into your bank account.

John Yiokaris, Sotos LLP

John Yiokaris is a partner with Sotos LLP in Toronto, Canada’s largest franchise law firm. He has been recognized by Chambers Canada, LEXPERT, Who’s Who Legal, Lexology, and Best Lawyers in Canada as a leading Canadian franchise law practitioner.

John practices business law with a specific focus on the automotive industry, franchising, and disputes and he is trusted counsel to both automotive dealers and manufacturers. John can be reached directly at 416.977.3998 or jyiokaris@sotosllp.com.

Jason Brisebois, Sotos LLP

Jason Brisebois is an associate with Sotos LLP in Toronto, Canada’s largest franchise law firm. He is head of the firm’s personal services franchise practice area, and practices business law with a focus on franchising, distribution, and licensing. Jason can be reached directly at 416.572.7323 or jbrisebois@sotosllp.com.

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Automotive dealers are operating in a retail environment that is more competitive than ever before. With a crowd of new competitors, vehicles, and features emerging, dealers must find innovative and effective ways to reach potential consumers. They should be weary, however, of the restrictions that exist with respect to their ability to advertise their newest models and latest promotions. In particular, dealers should keep in mind that they are subject to extensive laws and regulations with respect to electronic advertising, in addition to commonplace advertising restrictions that exist in their dealership agreements.

All advertisers (including automotive dealers) must adhere to the Canadian Code of Advertising Standards, while also ensuring that their advertising activities do not violate the terms of the Competition Act (Canada). Although the obligations and restrictions on advertisers are extensive and too numerous to explore in just one article, the cornerstone requirement placed on advertisers is to ensure that their advertising content is neither false nor misleading. Advertisers who knowingly or recklessly publish false or misleading content can be found to be criminally liable, and subject to substantial fines.

Canada’s Anti-Spam Legislation

Although dozens of considerations exist for advertisers of all sizes, automotive dealers in particular should consider whether their electronic advertising is fully in compliance with Canada’s anti-spam legislation (“CASL”) governing electronic advertising. Coming fully into force in 2017, CASL regulates how companies may electronically advertise to potential customers, including via e-mail and text message.

Prior to sending a “commercial electronic message” to a potential customer (that is, an electronic message (such as an e-mail) with a commercial purpose, including to advertise the dealer’s latest models or offering for sale goods and services), the advertiser must have the intended recipient’s consent, such consent having been explicitly or implicitly received by the advertiser.

Explicit consent has been received when the proposed recipient has expressly agreed, either verbally, in writing, or by checking a box online, to receive a commercial electronic message from the advertiser. Advertisers must be sure that their efforts to seek explicit consent from a recipient comply with CASL’s requirements, which include (but are not limited to):

• fully informing the recipient of the purpose of the message,
• the identity, address, and contact information of the sender, and
• a notification that the recipient may opt out of future messages at any time.

The sender may also have received implicit consent to solicit a potential customer, which means the recipient (i.e. the potential customer) has previously engaged in an activity that allows the sender to assume they have the recipient’s consent. Implicit consent exists when there is an “existing business relationship” between the sender and the recipient. For an existing business relationship to exist, the sender (automotive dealer) must prove that:

1. the recipient has purchased or leased a product or service from the sender within the last two years;
2. the recipient has previously accepted a business, investment, or gaming opportunity from the sender within the last two years;
3. the recipient and the sender have bartered over any of the items listed above within the last two years;
4. a contract (in writing) was previously entered into by the parties, and this contract is either still in effect, or has expired within the last two years; or
5. the recipient has made a business inquiry to the sender within the last six months.

Even when commercial electronic messages are sent with the consent of the recipient, the messages must provide the recipient with the opportunity to unsubscribe from receiving further messages from the sender. When the sender receives a request to unsubscribe, the sender must comply with this request and cease sending the recipient commercial electronic messages within 10 business days.

Advertisers that fail to abide by CASL may face significant monetary and criminal penalties, including fines totaling as much as $10,000,000. Officers and directors of non-compliant senders may also be held personally liable for their company’s non-compliance. It is worth noting that CASL requirements do not apply to commercial electronic messages directed at a general audience, such as messages posted on a Facebook or Instagram page or a street-facing advertising billboard, but would apply when the message is sent to specific e-mail addresses or social media accounts.

Commonplace Dealer Agreement Restrictions

In addition to applicable advertising laws and regulations, dealers should also be mindful of the obligations and restrictions on advertising that they have agreed to in their dealer agreement with their manufacturer. Although the specific requirements concerning advertising will vary from one manufacturer to another, virtually every manufacturer requires dealers conduct their advertising in a manner that will not mislead or confuse the public about the manufacturer’s products, or that will otherwise impact the goodwill and brand standards of the manufacturer.

Manufacturers will often have comprehensive policies in place to regulate a dealer’s advertising activities, including the dealer’s obligations to advertise in its local market area, the permitted forms and methods of advertising, use of the manufacturer’s trademarks, and permissible and impermissible types of content that may be used. Many manufacturers will require dealers to submit copies of their proposed local advertising to the manufacturer for its approval prior to publication to ensure that the message is consistent with the manufacturer’s vision and brand standards, and to ensure that it would not be considered lewd or in poor taste.

Is your Dealership’s Advertising Fully Compliant?

To ensure that your dealership is complaint with Canadian advertising laws and regulations (such as CASL), as well as its obligations under its respective dealer agreement, consider taking the following preliminary steps:

• Review the accuracy of all advertising materials prior to being published to ensure they are not likely to mislead or deceive customers.
• Review and update any existing e-mail contact mailing lists on an ongoing basis to ensure you retain explicit or implicit consent from the listed recipients.
• Ensure all commercial electronic messages provide the recipient the ability to unsubscribe from future correspondence.
• Retain all records of recipient consent to receiving commercial electronic messages, as well as all recipient requests to unsubscribe.
• Ensure that proper policies and procedures are established governing the transmission of commercial electronic messages, including through social media.
• Carefully review the contents of your dealer agreements to ensure that your ongoing local advertising is compliant with your contractual obligations.

Canadian advertising laws and regulations are complex and multifaceted. As necessary, seek appropriate legal counsel to assist you in ensuring that your advertising initiatives are, and remain, fully compliant with applicable laws and your dealership agreement.

John Yiokaris, Sotos LLP

John Yiokaris is a partner with Sotos LLP in Toronto, Canada’s largest franchise law firm. He has been recognized by Chambers Canada, LEXPERT, Who’s Who Legal, Lexology, and Best Lawyers in Canada as a leading Canadian franchise law practitioner.

John practices business law with a specific focus on the automotive industry, franchising, and disputes and he is trusted counsel to both automotive dealers and manufacturers. John can be reached directly at 416.977.3998 or jyiokaris@sotosllp.com.

Jason Brisebois, Sotos LLP

Jason Brisebois is an associate with Sotos LLP in Toronto, Canada’s largest franchise law firm. He is head of the firm’s personal services franchise practice area, and practices business law with a focus on franchising, distribution, and licensing. Jason can be reached directly at 416.572.7323 or jbrisebois@sotosllp.com.

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COVID-19, or the 2019 novel coronavirus, has been dominating news cycles since the beginning of 2020. Beyond the obvious risks the coronavirus poses to human health and well-being, the virus also has the potential to severely disrupt manufacturers’ and dealers’ operations alike. As Fiat Chrysler Automobiles N.V. (the parent company of the Fiat, Chrysler, and other automobile brands) succinctly noted in its Form 20-F annual report on February 25^th, “…the recent outbreak of coronavirus… may negatively affect economic conditions regionally as well as globally and may disrupt supply chains and otherwise impact operations. The ultimate severity of the coronavirus outbreak is uncertain at this time and therefore we cannot predict the impact it may have on our end markets and our operations; however, the effect on our results could be material and adverse.”[1].

In response, manufacturers and dealers alike should be proactively preparing a coronavirus response plan and beginning to implement additional procedures in order to protect their customers, staff, and brand. In particular, they should consider taking the following steps, as applicable, to help minimize potential business disruptions and losses:

Keep dealers up to date: Manufacturers should be keeping dealers informed as to developments relating to the coronavirus, any impacts it is having on the system and its own operations, and any potential future disruptions it may have on product offerings, the system’s supply chain, and the business of individual dealerships. Ongoing communication will allow the manufacturer to reassure its dealers that it is monitoring the situation and taking proactive steps to protect franchisee interests. As part of these communications, and in order to manage dealer expectations, manufacturers should ensure that they are being forthcoming with dealers as to challenges being faced by the system and potential issues on the horizon. Dealers can also be expected to surface with their own approaches to how they believe they should be responding to local conditions. Manufacturers should be flexible in how it assesses such input given dealers’ independent obligations.

Review your dealership agreement: Dealers should be closely reviewing their dealership agreements in these uncertain times. Many dealership agreements will provide manufacturers the right to terminate the dealership agreement if a dealer isn’t open for operation for a set number of days (often between seven and ten days). Although some dealership agreements provide an exception for instances where the dealership closure is as a result of factors beyond the dealer’s control, many do not. It is crucial that dealers and manufacturers establish an ongoing dialogue to seek certainty in these uncertain times, while also working to ensure that all parties are finding mutually-acceptable paths forward.

Impose enhanced cleaning protocols on franchisees: Every manufacturer and dealer should revisit their policies with respect to ongoing cleanliness standards. Dealerships should increase the frequency and thoroughness with which they clean their dealerships, with special emphasis placed on disinfecting and cleaning high-traffic areas, and frequently touched surfaces, such as doors and doorknobs, countertops, railings, tables, chairs, touchscreens, and washrooms. Dealerships should ensure that their employees are complying with all health and hygiene standards, including regular and rigorous handwashing.

Assess whether current contracts contain force majeure provisions: Many contracts will contain force majeure provisions, which typically excuse one party from completing its obligations under the contract as a result of a listed event. Such listed events often include war and unrest, but often also reference global health issues or contain general language that cover such events. Key contracts need to be assessed to determine whether a force majeure provision is present, whether its scope addresses this issue, and whether there is any risk of the other party exercising such provision to excuse its performance under the contract.

Review current lease agreements: If dealership premises are leased, dealers should assess each party’s rights and obligations in light of the coronavirus. Many commercial leases will afford landlords special powers in light of a public health emergency and dealers should consider whether these landlords may have the ability to take any action that may disrupt the dealership and its operations.

Assess core staff needs: Manufacturers and dealerships alike should assess staffing levels in light of potential wide-scale absences. Businesses should ensure that essential staff positions are backed up by designated alternate staff members and emphasize that any staff members feeling unwell should remain at home and should avoid the businesses’ offices and operations. As further described below, dealers need to ensure that any employees that have recently travelled abroad are self-isolating for at least fourteen days and that staffing levels are adjusted accordingly.

Assess employee travel: Manufacturers and dealerships alike should assess whether work-related employee travel is critical to the business’ operations. All work-related employee travel that is not essential to business operations should be curtailed, particularly all international travel. Employees returning from trips abroad should self-isolate for at least fourteen days following their return. Parties should also closely monitor governmental updates regarding the status of the virus and abide by all guidance provided.

Assess and enhance employees’ ability to work remotely: In the event that employees are quarantined or otherwise are unable to make it into work, manufacturers and dealerships alike should ensure that they can provide essential employees with the tools to be able to work remotely. The coronavirus may have a severe impact on employee mobility, which will require employers to equip their employees to work from home in order to minimize potential disruptions to operations.

Employers should bear in mind that employees who are working remotely are an attractive target to hackers and other malicious actors, as the business’ information technology security may be weakened by the dispersed nature of the employees and their reliance on personal equipment. This adds further impetus for businesses to begin contemplating remote work and its implications as soon as possible.

Employee layoffs and terminations: In light of COVID-19 and the resulting business disruptions, many dealerships may be considering reducing staffing levels to ensure that they can continue to meet their financial obligations. All businesses should ensure that they’re seeking legal advice prior to laying off or terminating employees, as such actions could have substantial legal and monetary consequences for the employer. Employers are required to provide employees with a safe workplace, and should bear in mind practical employee concerns such as needing to take public transit to work, the potential for close contact with others during the workday, working in an environment that is in compliance with all government-mandated protocols, etc.

Review and reassess business interruption and other insurance coverage: All businesses should review their current business interruption insurance policies to assess their ability to file claims as a result of virus-related business interruptions. In addition to business interruption insurance, parties should also review other active insurance policies, such as directors’ and officers’ insurance and general liability insurance, among others, that may be implicated by complications caused by the coronavirus. It is crucial that businesses understand the extent of their current coverage, any weaknesses in their coverage that should be addressed, and what their options are in the event of business disruptions or other adverse events.

Although the risk the coronavirus poses to business is severe, businesses should avoid taking any premature drastic actions that may adversely impact their operations. Measured and proactive steps, such as those explored above, can allow dealerships to minimize potential coronavirus risks to their businesses in the interim while a better understanding of the true nature and severity of the virus is sought. All levels of government have stated that they are in the process of preparing measures to assist businesses and employees alike, and this relief could come in a variety of forms, including employee subsidies and deferred tax payments. Businesses should continue to stay current on all COVID-19 developments and work with their professional advisors to help navigate the rough tides ahead.

Jason Brisebois, Sotos LLP

Jason Brisebois is an associate with Sotos LLP in Toronto, Canada’s largest franchise law firm. He is head of the firm’s personal services franchise practice area, and practices business law with a focus on franchising, distribution, and licensing. Jason can be reached directly at 416.572.7323 or jbrisebois@sotosllp.com.

John Yiokaris, Sotos LLP

John Yiokaris is a partner with Sotos LLP in Toronto, Canada’s largest franchise law firm.  He has been recognized by Chambers Canada, LEXPERT, Who’s Who Legal, Lexology, and Best Lawyers in Canada as a leading Canadian franchise law practitioner.

John practices business law with a specific focus on the automotive industry, franchising, and disputes and he is trusted counsel to both automotive dealers and manufacturers.  John can be reached directly at 416.977.3998 or jyiokaris@sotosllp.com.

[1]  Fiat Chrysler Automobiles N.V., Form 20-F for Fiscal Year Ended December 31, 2019”, United States Securities and Exchange Commission (25 February 2020), 19, online, EDGAR: <https://www.sec.gov/Archives/edgar/data/1605484/000160548420000011/fca20191231annualreportand.htm>.

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