Law Times

Page 10 September 8, 2015 • Law timeS www.lawtimesnews.com FOCUS GM ruling offers a lot of fodder for franchise class actions BY YAMRI TADDESE Law Times f there's one major takeaway from the first common issues trial in a franchise class action, it's that the duty of good faith involves "an extremely fact-sensi- tive and context-specific" analysis, says a Toronto lawyer. While there have been sum- mary judgement motions in the franchise context — most notably the Fairview Donut Inc. v. The TDL Group Corp. case — Trillium Motor World Ltd. v. General Motors of Canada Ltd. is the first full common issues class action trial that involved matters of franchise law. The GM case involved a live question of breach of good faith, a major issue in franchising. What's clear from the case is the courts will look at the question of good faith in the context in which decisions were made in the franchising world before as- cribing liability to franchisors, says Adam Ship, a partner at McCarthy Tétrault LLP. "The court focused very heavi- ly on some of the unique pressures and time exigencies this franchi- sor was facing at that particular point in time," says Ship. In Trillium Motor World, the court was sympathetic to the unique pressures GM was facing when it gave dealers wind-down agreements in 2009. The dealers argued they were under pressure to sign those agreements through "ambush, deception, and divide- and-conquer tactics." They also argued GM gave them just six days to obtain legal advice and sign the agreement when, as a franchisor, the law required it to give them at least 14 days to mull it over. But in rejecting their claims, the court put a lot of emphasis on the gravity of the situation the automaker was in during the financial crisis. "The specific context of GMCL's conduct was that it was making crucial business decisions very quickly dur- ing a time of instability and f lux for both GMCL and its dealers. When considering each of the sub-issues below I will review the statutory duty of fair dealing through the lens of commercial reality — that is, GMCL's conduct in that context," wrote Justice Thomas McEwen. He added: "In hindsight, it is arguable that it may have been better for GMCL to give the dealers a few more days to make a decision, but, as noted, the timeline was short and there is no evidence that it would have affected the ability of the dealers to protect themselves. "In my view, such an argument requires too much of GMCL given the time pressures it was facing, the threat to its continued existence as a business enterprise, and the fact that, for the most part, it was reacting to a worsening economic landscape, GMCL's in- structions, and the Canadian and U.S. Governments' decisions." The decision shows courts will look at questions of good faith and fair dealing in the fran- chise context through the lens of commercial reality, according to Ship. "It's an important recog- nition of what I always under- stood to be the case, but this is a great example of it with a full common issues trial," he says. "The court is . . . very, very focused on what the franchisor was dealing with in real time on the ground and that context is going to colour the entire analy- sis the court is going to do of the good-faith issues," he adds. "I think the court is saying that the facts that are going to be most important for the court are the facts that informed the decision- making context that was facing the franchisor at the time." The court expressed a con- cern about getting its facts straight about exactly what the situation was like for GM at the time, Ship notes. "Once the court is prepared to accept the gravity of the con- text, there's going to be a lot of deference shown, in my view, to the ultimate decisions that were made and the dealings with the franchisees." Sotos LLP lawyer David Sterns, counsel for the dealers, says his firm is appealing McE- wen's finding that, under the circumstances, GM's actions were "fair enough." In the notice of appeal, So- tos claims the judge made an "overriding error in principle that tainted his analysis of the [Arthur Wishart Act] and his determination of the du- ties that GMCL owed to the class members." "He interpreted the [act] through the 'lens of commer- cial reality' and by reference to the subjective business context in which GMCL was operating in May, 2009 and found, as a re- sult, that the duties GMCL owed to its dealers were diminished," the notice of appeal states. "In so doing, the trial judge failed to give consideration to this court's well-established ju- risprudence adopting a purpo- sive approach to a franchisor's duties under the [act] which gives effect to the statute's fundamen- tal purposes of: (i) addressing the power imbalance between fran- chisors and franchisees; and (ii) protecting franchisees." The notice of appeal also says the judge misapplied and mis- interpreted Bhasin v. Hrynew, a Supreme Court decision from last year. "Bhasin held that a context- specific understanding of a con- tractual relationship is required to determine whether to 'invoke' the duty of good faith. Bhasin does not stand for the proposition, ad- opted by the trial judge, that the scope and content of the duty of good faith are determined by the degree of solvency of one of the parties to the relationship (in this case, GMCL's financial challenges in May, 2009), or by one party's desire to access third-party fund- ing (in this case, GMCL's desire to access billions of dollars of gov- ernment funding)." The appeal notwithstanding, Ship notes it's hard to say how this ruling will affect future de- cisions due to the case-specific nature of the ruling. "Try applying this case to a situation where there wasn't this economic context and a poten- tial [reorganization] and I think you're going to have a very dif- ferent outcome," he says. On a more technical side, the GM case also clarified which events trigger an obligation for franchisors to deliver disclosure documents to franchisees. The dealers in the GM case had ar- gued the automaker owed them disclosure documents when it handed them wind-down agree- ments in 2009. The court, however, found that disclosures are only nec- essary where there has been a grant of a franchise. "I agree with GMCL's submission that Trillium's characterization of the dealers as prospective fran- chisees prior to the execution of the [wind-down agreement] is unfounded," wrote McEwen. "I find it illogical that an ex- isting franchisee entering into a [wind-down agreement] could also be considered a prospec- tive franchisee." The dealers will also appeal that finding. The other part of the GM class action dealt with a conf lict of interest claim against Cassels Brock & Blackwell LLP. On that issue, the court awarded $45 million in damages for breach- ing its contractual and fiduciary duty to the class members. Cas- sels Brock is appealing the find- ing against it. 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Call 1.800.387.5164 or visit www.carswell.com Untitled-7 1 2015-09-02 2:06 PM The decision shows the courts will look at questions of good faith and fair dealing in franchise cases through the lens of commercial reality, says Adam Ship. I AS_LT_Sep8_15.indd 1 2015-09-02 12:15 PM

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