U.S. parent could be liable for breaches of Ontario franchise laws even though not a party to the franchise agreement

The Ontario Court of Appeal recently allowed good faith franchise claims to proceed against a U.S. parent company, ruling the fact that the company was not a party to the agreement was not determinative of its liability under Ontario’s Arthur Wishart Act franchise legislation (Addison Chevrolet Buick GMC Limited v. General Motors of Canada Limited, 2016 ONCA 324).

Whether a U.S. parent company ultimately would be held liable is open for debate, because the Ontario Court of Appeal simply considered whether the alleged claims were so fundamentally flawed that they were obviously doomed to failure. The court held they were not.

The background facts involve the General Motors restructuring. Canadian car dealers who entered into dealership agreements with General Motors Canada Limited (“GMCL”) alleged that GMCL’s U.S. parent company, recently emerged from U.S. bankruptcy proceedings in 2009, was liable for breaches of good faith and fair dealing under Ontario’s Arthur Wishart Act (the “Act”) because it was a “franchisor’s associate” under the Act.

A “franchisor associate” may be liable for a variety of claims under the Act, including liability for rescission damages and misrepresentations. Typically, proving that someone is a “franchisor’s associate” requires evidence that the person is “directly involved in the grant of a franchise” or “exercises significant operational control over the franchisee [...].”

The Ontario Court of Appeal refused to strike the claims, concluding that the plaintiffs had pleaded sufficient ties to the U.S. parent that the claims should be determined on the basis of a “full record.” With respect to the “grant” of a franchise, the Court of Appeal concluded it was arguable that conditions stipulated by the U.S. parent were conditions that needed to be met before obtaining “the right to engage in a business.” The plaintiffs also alleged that the U.S. parent “exercises significant operational control and direction over GMCL and [the dealers] through the terms of the [alleged franchise agreement],” and that “GM US directs and controls the composition and structure of the GMCL dealer network, the products that will be distributed by GMCL in Canada, the pricing of those products, and marketing initiatives and spending.” Taken together, these elements of control were sufficient to allow the plaintiffs’ claims to survive against the U.S. parent as “franchisor’s associate,” even though it was not party to the Canadian franchise agreement.

“Joint employer” issues involving potential franchisor liability for employment laws are hot topics, particularly in the U.S. The Court of Appeal’s decision shows there are still other significant potential sources of liability for parent companies to consider when structuring their Canadian franchise systems.