LEGAL LINE
Duty of Fair Dealing in Dealership Agreements
Matthew Wansink
Kerem Tirmandi
KEREM TIRMANDI AND MATTHEW WANSINK, SHK ASSOCIATES
BC’s Franchises Act imposes a Duty of Fair Dealing upon parties to a franchise agreement. From a practical standpoint, this requires that franchisors and franchisees engage fairly and honestly with each other when exercising their rights and performing their obligations under the franchise agreement. While this sounds straightforward, courts in Canada have carved out some significant distinctions in how these obligations apply to the franchisor-franchisee relationship. For automotive dealers, understanding these distinctions is essential to understanding your rights under the dealership agreement, which is a form of franchise agreement.
Does the Duty of Fair Dealing apply to my agreement? The Duty of Fair Dealing under the BC Franchises Act applies to all franchise agreements, renewals and extensions for franchisee businesses operating wholly or partly in British Columbia. Since automotive dealerships are considered franchisees in British Columbia, they are entitled to the benefits offered by the Act. Importantly, the Duty of Fair Dealings represents a minimum legal standard and cannot be expressly contracted out of by the parties, no matter the written terms or purported jurisdiction of the agreement. It is also important to note that the duty can extend beyond an agreement’s signatories to the franchisor’s parent company. For example, in Addison Chevrolet Buick GMC Limited v. General Motors of Canada Limited, 2016, a group of Greater Toronto Area GM dealerships asserted that GM United States, though not a signatory to their dealership agreements, had breached its Duty of Fair Dealing to the Canadian GM dealerships by prioritizing its profits ahead of theirs, and putting the interests of US dealerships ahead of Canadian GM dealerships. The Ontario Court of Appeal held that GM US, while not a signatory to the Canadian franchise agreements, was a “franchisor’s associate” under Ontario’s franchising act, and owed a Duty of Fair Dealing to the Canadian dealerships. As BC’s Act includes a similar definition of “franchisor’s associate,” it is likely that courts here would arrive at a similar conclusion.
What rights does the Duty of Fair Dealing instill? At its simplest, the Duty of Fair Dealing requires that franchisors and franchisees act honestly by not lying or knowingly misleading each other in the exercise of their rights and performance of their obligations. Courts in Canada have said this includes:
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Signals Magazine July–September 2020
• a requirement to act in accordance with the spirit and intent of the franchise agreement; • a requirement to disclose important and material facts that relate to the ongoing performance of the franchise agreement; and • for franchisors specifically, a requirement to exercise its powers under the franchise agreement with due regard to the interests of the franchisee. The 2009 Ontario Superior Court Decision in 1323257 Ontario Ltd. (c.o.b. Hyundai of Thornhill) v. Hyundai Auto Canada Corp. (“Hyundai of Thornhill”), offers a good example of how these principles can affect dealerships. In Hyundai of Thornhill, the plaintiff dealer and Hyundai had, after arbitration, entered into a temporary extension of the dealership agreement to grant the plaintiff more time to relocate to a premises acceptable to Hyundai. After two months, Hyundai deemed that the plaintiff had failed to find a suitable location, terminated the dealership agreement and then entered into a new dealer agreement with another dealer, and approved a dealership location that Hyundai had, during the course of its negotiations with the plaintiff, previously deemed as unsuitable. At trial, the dealer successfully brought an injunction prohibiting Hyundai from implementing its notice of termination on the grounds that Hyundai had induced the plaintiff to enter into the temporary extension by actively representing that the site, which the plaintiff had suggested for relocation, was not suitable. The Court found that, because Hyundai later approved the same site for the replacement dealer, it had not engaged fairly with the plaintiff, and irreparable harm would result if the injunction were not granted.
Practical considerations The Duty of Fair Dealing offers significant rights and protections that can assist BC dealerships in levelling the playing field when negotiating, renewing or resolving disputes relating to a dealership agreement. While the courts will not invoke the duty to override express written obligations under a dealership agreement, even where the obligation could result in a loss, the duty may afford protection where: • contractual rights are invoked to prevent the renewal of an agreement; • there is a misrepresentation of facts or withholding of information; • there is an unreasonable refusal to renew an agreement; or • one party unreasonably refuses to approve the sale of the franchise. As always, navigating the line between fair and unfair dealing in the context of your dealership agreement can be a complicated matter of legal interpretation. Where a dealer feels that the Duty to Fair Dealing has not been followed by their OEM manufacturer, we recommend that you obtain professional legal assistance before seeking to enforce your rights. For more information on how best to proceed, please contact one of our lawyers at SHK Law Corporation.
