Addison Chevrolet Buick GMC Limited et al. v. General Motors of Canada Limited et al.

[Indexed as: Addison Chevrolet Buick GMC Ltd. v. General Motors of Canada Ltd.]

Ontario Reports

Court of Appeal for Ontario,

Doherty, Pardu and Benotto JJ.A.

May 3, 2016

130 O.R. (3d) 161 | 2016 ONCA 324

Case Summary

Contracts — Franchise agreement — Franchisees suing franchisor and its U.S. parent company for breach of their duties of good faith and fair dealing under Arthur Wishart Act (Franchise Disclosure) and at common law — Action against parent company dismissed on pleadings motion under Rule 21 — Franchisees' appeal allowed — Determination of whether parent company was "franchisor's associate" as defined in Act or was party to agreement such that it owed duty of fair dealing under Act requiring full factual record — Whether parent company owed franchisees duty of good faith at common law being novel issue that should be explored at trial — Claim against parent company not plainly and obviously doomed to fail — Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 — Rules of Civil Procedure, R.R.O. 1990, Reg. 194, Rule 21.

The plaintiffs were dealers of General Motors vehicles in the Greater Toronto Area. Their dealer agreements were with GMCL, a subsidiary of GM in the United States. As a result of GM's financial difficulties, GMCL restructured its dealer network and shifted its focus in a way that allegedly disadvantaged the plaintiffs. The plaintiffs sued GMCL and GM, alleging that they had breached their duties of good faith and fair dealing under the Arthur Wishart Act (Franchise Disclosure), 2000 ("AWA") and at common law. On a pleadings motion under Rule 21 of the Rules of Civil Procedure, the motion judge struck the claim against GM without leave to amend. GM was not a signatory to the franchise agreement, but the plaintiffs argued that it was a "franchisor's associate" under the AWA and, by virtue of the degree of its control over GMCL, was subject to the duty of fair dealing imposed by s. 3 of the AWA. The motion judge found that the statutory duty of fair dealing under s. 3 does not apply to franchisor's associates and only applies to parties. He also found that GM was not a franchisor's associate in any event. Accordingly, he concluded that the claims under the AWA had to be dismissed. With respect to the common law claim, he found that there were no extraordinary circumstances that justified piercing the corporate veil and making GM liable for the actions of its subsidiary. The plaintiffs appealed.

Held, the appeal should be allowed.

The motion judge erred in dismissing the action against GM on a Rule 21 motion. In the circumstances of this case, the determination of the issues of whether GM was a franchisor's associate or a party to the franchise agreement required a full factual record. There is limited and somewhat unsettled jurisprudence on the scope of who owes a duty under s. 3 of the AWA. It is also significant that the AWA is remedial legislation intended to address the perceived power imbalance between a franchisor and a franchisee and to protect franchisees. The remedial purpose of the AWA calls for a broad and generous interpretation. It is not at all clear whether it can be said that the AWA is to be interpreted so that the duties of good faith and fair dealing apply only to the signatory to the [page162] franchise agreement and not to the real party in control. Moreover, whether the level of control alleged and the special obligations owed in the context of a franchise relationship could open the door for the imposition of a common law duty was a novel argument that should be explored at trial. It was not plain and obvious that the claim against GM could not succeed at trial.

Cases referred to

8150184 Canada Corp. v. Rotisseries Mom's Express Ltd., [2014] O.J. No. 2600, 2014 ONSC 3256 (S.C.J.); 2130489 Ontario Inc. v. Philthy McNasty's (Enterprises) Inc., [2012] O.J. No. 2521, 2012 ONCA 381, 292 O.A.C. 284, 350 D.L.R. (4th) 326, 4 B.L.R. (5th) 173, 215 A.C.W.S. (3d) 849; Attis v. Canada (Minister of Health) (2008), 93 O.R. (3d) 35, [2008] O.J. No. 3766, 2008 ONCA 660, 254 O.A.C. 91, 300 D.L.R. (4th) 415, 59 C.P.C. (6th) 195, 169 A.C.W.S. (3d) 684 [Leave to appeal to S.C.C. refused [2008] S.C.C.A. No. 491]; Burnett Management Inc. v. Cuts Fitness for Men, [2012] O.J. No. 2527, 2012 ONSC 3358, 4 B.L.R. (5th) 234, 216 A.C.W.S. (3d) 356 (S.C.J.); Kang v. Sun Life Assurance Co. of Canada, [2013] O.J. No. 768, 2013 ONCA 118, 303 O.A.C. 64, [2013] I.L.R. I-5404, 19 C.C.L.I. (5th) 171, 226 A.C.W.S. (3d) 992; McIlvenna v. 1887401 Ontario Ltd., [2015] O.J. No. 6312, 2015 ONCA 830; Miguna v. Ontario (Attorney General), [2008] O.J. No. 4784, 2008 ONCA 799, 301 D.L.R. (4th) 540, 243 O.A.C. 62, 171 A.C.W.S. (3d) 818; Nash v. Ontario (1995), 1995 2934 (ON CA), 27 O.R. (3d) 1, [1995] O.J. No. 4043, 59 A.C.W.S. (3d) 1083 (C.A.); PDC 3 Limited Partnership v. Bregman + Hamann Architects (2001), 2001 38745 (ON CA), 52 O.R. (3d) 533, [2001] O.J. No. 422, 140 O.A.C. 302, 12 B.L.R. (3d) 215, 8 C.L.R. (3d) 167, 103 A.C.W.S. (3d) 231 (C.A.); R. v. Imperial Tobacco Canada Ltd., [2011] 3 S.C.R. 45, [2011] S.C.J. No. 42, 2011 SCC 42, 308 B.C.A.C. 1, 419 N.R. 1, 2011EXP-2380, J.E. 2011-1326, 335 D.L.R. (4th) 513, 21 B.C.L.R. (5th) 215, 25 Admin. L.R. (5th) 1, 86 C.C.L.T. (3d) 1, [2011] 11 W.W.R. 215, 83 C.B.R. (5th) 169, 205 A.C.W.S. (3d) 92; Salah v. Timothy's Coffees of the World Inc., [2010] O.J. No. 4336, 2010 ONCA 673, 268 O.A.C. 279, 74 B.L.R. (4th) 161, 193 A.C.W.S. (3d) 1151; Shelanu Inc. v. Print Three Franchising Corp. (2003), 2003 52151 (ON CA), 64 O.R. (3d) 533, [2003] O.J. No. 1919, 226 D.L.R. (4th) 577, 172 O.A.C. 78, 38 B.L.R. (3d) 42, 123 A.C.W.S. (3d) 267 (C.A.); Transamerica Life Canada Inc. v. ING Canada Inc. (2003), 2003 9923 (ON CA), 68 O.R. (3d) 457, [2003] O.J. No. 4656, 234 D.L.R. (4th) 367, 41 B.L.R. (3d) 1, [2004] I.L.R. I-4258, 127 A.C.W.S. (3d) 235 (C.A.); WP (33 Sheppard) Gourmet Express Restaurant Corp. v. WP Canada Bistro & Express Co., [2010] O.J. No. 2069, 2010 ONSC 2644, 188 A.C.W.S. (3d) 955 (S.C.J.)

Statutes referred to

Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 [as am.], ss. 1 [as am.], 3, (2)

Rules and regulations referred to

Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rules 21, 21.01(1)(b)

APPEAL from the order of Dunphy J., [2015] O.J. No. 2743, 2015 ONSC 3404 (S.C.J.) striking a claim and dismissing an action against the respondent.

Jonathan C. Lisus and James Renihan, for appellants.

Larry P. Lowenstein, Gillian S.G. Scott and Geoffrey J. Hunnisett, for respondents. [page163]

The judgment of the court was delivered by

[1] BENOTTO J.A.: — The appellants' action against the respondents was dismissed on a pleadings motion pursuant to Rule 21 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. The action alleged that they, as franchisees, were owed a duty of good faith and fair dealing by the parent company of their franchisor. For the reasons that follow, I conclude that it is not plain and obvious that the action has no reasonable prospect of success and would allow the appeal.

A. Facts

[2] At this stage of the proceedings, the facts have not been established. There are only allegations which are accepted as true for the purpose of the motion. The many documents -- while not evidence -- are referred to set out the narrative.

[3] The appellants are long-standing dealers of General Motors vehicles in the Greater Toronto Area ("GTA"). Their dealer agreements are with General Motors Canada Limited ("GMCL"). GMCL was a subsidiary of General Motors Corporation ("GM") in the United States.

[4] By 2009, the auto industry in Canada and the United States had fallen into financial difficulty. In February 2009, GM and GMCL approached their respective governments for assistance in order to ensure the viability of the industry. Their coordinated proposals described an integrated North American market for GM vehicles.

[5] GM then commenced bankruptcy proceedings in the United States. GM's assets were transferred to a new company, General Motors Company, or its subsidiary, General Motors LLC (collectively "GM US"). As part of the reorganization process, GM US acquired the shares of GMCL.

[6] The governments of Ontario and Canada invested substantial funds in GM US and became shareholders. GM US then emerged from bankruptcy. On August 7, 2009, GMCL wrote to the appellants. The letter stated, in part:

On July 10th, weeks ahead of schedule, we announced the emergence of the new General Motors Company from US bankruptcy proceedings and allowing us to set a course for the future[.]

[7] As a result of the financial difficulties, GMCL explained that it was restructuring its dealer network. This meant that some dealerships would be closed. The August 7 letter referred to an earlier letter dated May 20, 2009, wherein GMCL informed the appellants that their dealerships would be among [page164] those retained in its new dealer network, should they agree to certain conditions.

[8] The August letter referred to "the fundamentals of General Motors Company", a restructuring of the dealer network, a focus on four core brands, a fresh lineup of vehicles and the expectations that GM had for its dealers. The letter outlined an important decision that had been made with respect to the product line: GM was discontinuing the production of Pontiac brand vehicles and medium-duty trucks.

[9] Some of the appellants were offered transition assistance agreements in connection with the discontinuance of these lines. The proposed agreements were attached to the August 7 letter and required dealers to release GMCL and its affiliates from all claims arising from the discontinuance of the Pontiac brand and medium-duty truck manufacturing. The agreements were between the dealer and GMCL.

[10] Some of the appellants were also offered the opportunity to participate in new brands of vehicles provided they agree to a participation agreement with GMCL. This agreement was also attached to the August 7 letter. The participation agreements allowed the dealers to sell and service new GM brands, subject to the dealer fulfilling certain conditions. The conditions included "image commencement", the possible relocation of the dealer's facility and the possible addition of service stalls.

[11] In October 2010, the appellants signed dealer sales and service agreements ("DSSAs") with GMCL. They are, for the purposes of this appeal, substantially identical to each other and to earlier DSSAs signed by the appellants in 2005. The DSSAs are renewed every five years at their expiration date if GMCL determines the dealer has fulfilled its obligations under the agreement. GM US is not a party to the DSSAs.

[12] There was an issue on the motion below that the DSSA was not a franchise agreement since the dealers paid no franchise fee. The motion judge proceeded on the assumption that it was a franchise agreement under the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (the "AWA"). The appeal was argued on this basis.

[13] The appellants' claim centers on allegations that GM US and GMCL owed and breached their duty to act fairly and in good faith under the AWA and at common law. They allege that GM US and GMCL prefer their own profit to the dealers' interests and that this is reflected through changes in vehicle offerings, pricing and the lack of financial help. Also, the appellants say that GM US financially assisted US dealers, yet ignored its duty to the GTA dealers. [page165]

[14] The alleged conflict of interest arises as follows. GM US and GMCL sell new vehicles to their dealers, who then sell the vehicles to retail customers. The profit that GM US and GMCL generate on the sale of those new vehicles is known as "contribution margin". Their focus is therefore on maximizing the profit on the sale of new cars.

[15] The appellants, on the other hand, earn only a small profit from new vehicle sales and instead rely primarily upon revenue generated from ancillary activities such as taking in trade-ins for profitable resale and providing post-sale servicing and parts for GM vehicles. Their interest lies in the volume of vehicles on the road and market share, and not necessarily a high profit on each vehicle sold. This creates a conflict between the manufacturer's desire for contribution margin and the dealers' desire for volume.

[16] The appellants argue that GM US and GMCL's desire for profit per vehicle sold has led to uncompetitive vehicle offerings, and that GM US and GMCL have refused to offer incentives like price reductions or special offers designed to increase market share. The appellants plead that GMCL and GM US "have structured the dealer network and the products sold therein with the aim of maximizing their own profitability at the expense of the [appellants]" and "have preferred their own self-interests in complete disregard for the disastrous financial consequences that these actions have had and are having on the [appellants]". The appellants allege that there has been a devastating impact on their business as GM has suffered a decrease in market share since 2008. This, they say, is inconsistent with GM US's duties of good faith and fair dealing.

[17] The appellants further allege that GM US used the money from the governments of Canada and Ontario -- which they termed a "bailout" -- to prefer the big-city dealers in the United States over those in the GTA. GM US classified the GTA as an "A" market area. In "A" market areas, the costs of operating an automotive dealership are much higher than in other markets and there is increased competition from other manufacturers. Other "A" market areas include New York/New Jersey, Los Angeles and San Francisco. The appellants allege that the American "A" market dealers have received financial assistance and the appellants have not. By doing this, they allege that GM US again breached its duties of good faith and fair dealing. According to the appellants, this intentional refusal to provide assistance to its dealers in the GTA has had a significant negative effect on them. [page166]

[18] Against this background, GM US brought a motion under Rule 21 alleging that it did not owe a duty of good faith to the appellants under the AWA or at common law. To impose any duties, it was argued, would be to improperly pierce the corporate veil.

[19] The motion judge agreed and dismissed the entire claim against GM US without leave to amend. The appellants' claim against GMCL proceeded -- with certain allegations struck out -- and is not the subject of this appeal.

B. Issues on the Appeal

[20] There is no dispute as to the standard of review or the test under Rule 21.

[21] The standard of review on an appeal of a motion judge's order striking out a claim under rule 21.01(1)(b) is correctness: Kang v. Sun Life Assurance Co. of Canada, [2013] O.J. No. 768, 2013 ONCA 118, 303 O.A.C. 64, at para. 27. The test under Rule 21 requires the moving party to show that it is plain and obvious that the pleadings disclose no reasonable cause of action or that the claim has no reasonable prospect of success: R. v. Imperial Tobacco Canada Ltd., [2011] 3 S.C.R. 45, [2011] S.C.J. No. 42, 2011 SCC 42, at para. 17.

[22] The issues that arise are therefore whether it is plain and obvious that GM US

(1) could not owe a duty of good faith or fair dealing to the appellants under the AWA; and

(2) could not owe a duty of good faith or fair dealing to the appellants at common law.

C. Analysis

[23] Although the motion judge correctly directed himself as to the "plain and obvious test", his reasons, read as a whole, reveal an approach that required the appellants to demonstrate that they would succeed rather than to require the respondent to demonstrate that they could not possibly succeed. It was through this lens that he considered both the statutory and the common law claims and dismissed the action against GM US.

[24] The AWA is remedial legislation. The duties owed involve important questions of legal interpretation, are the subject of limited jurisprudence, and, in this case, require a factual record. The interaction between the franchise context and the duties of good faith and fair dealing at common law raises a novel and not implausible argument that should not have been struck on a Rule 21 motion. [page167]

[25] I do not agree that the appellants' claims have no reasonable prospect of success. It is not plain and obvious that a parent company in the position of GM US could never owe a duty of good faith or fair dealing to the appellants under the AWA or at common law.

Duty under the [AWA](https://www.canlii.org/en/on/laws/stat/so-2000-c-3/latest/so-2000-c-3.html)

(1) The motion judge's dismissal of all claims against GM US under the [AWA](https://www.canlii.org/en/on/laws/stat/so-2000-c-3/latest/so-2000-c-3.html)

[26] It was conceded by the appellants that GM US was not a signatory to the franchise agreement. However, they submitted that GM US is a "franchisor's associate" under the AWA and, by virtue of the degree of its control over GMCL, is subject to the duty of fair dealing imposed by s. 3 of the AWA.

[27] The respondents argued that duties under s. 3 are only imposed on a "party" to the franchise agreement and that GM US is neither a franchisor's associate nor a party to the agreement. The motion judge agreed with the respondents and struck out the claim against GM US.

[28] Section 3 of the AWA provides:

3(1) Every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement.

(2) A party to a franchise agreement has a right of action for damages against another party to the franchise agreement who breaches the duty of fair dealing in the performance or enforcement of the franchise agreement.

(3) For the purpose of this section, the duty of fair dealing includes the duty to act in good faith and in accordance with reasonable commercial standards.

[29] The motion judge determined that, since no provision of the AWA deems a franchisor's associate to be a party to the franchise agreement, the statutory duty of fair dealing only applies to parties to a franchise agreement. He concluded that s. 3 only applies to parties to a franchise agreement and no others. In his view, the construction of this section was a pure question of law that did not require additional facts and could be decided on a motion pursuant to rule 21.01(1)(b).

[30] Although this was dispositive of the motion before him, the motion judge went on to conclude that GM US was not a franchisor's associate in any event. He reviewed s. 1 of the AWA, which sets out a two-part test in the definition of a "franchisor's associate." It is a person

(a) who, directly or indirectly,

(i) controls or is controlled by the franchisor, or [page168]

(ii) is controlled by another person who also controls, directly or indirectly, the franchisor, and

(b) who,

(i) is directly involved in the grant of the franchise,

(A) by being involved in reviewing or approving the grant of the franchise, or

(B) by making representations to the prospective franchisee on behalf of the franchisor for the purpose of granting the franchise, marketing the franchise or otherwise offering to grant the franchise, or

(ii) exercises significant operational control over the franchisee and to whom the franchisee has a continuing financial obligation in respect of the franchise[.]

[31] According to the motion judge, the first branch of the definition was met here. GM US controlled GMCL. The second branch of the definition was not. This branch itself has two parts that relate to the actions of the prospective franchisor's associate with respect to the franchise in question: first, the involvement in the grant of the franchise; or second, the operational control exercised over the franchisee and to whom the franchisee has a continuing financial obligation.

[32] The motion judge concluded that the pleadings did not allege any factual basis for the involvement of GM US in the grant of the franchise. The appellants were long-standing dealers who received the grant of their franchise on or before November 1, 2005. GM US, therefore, cannot be described as being involved in the "grant" of the franchise. At para. 67, the motion judge noted:

Both at the time the 2005 DSSA's were entered into and at the time the plaintiffs were notified by GMCL of their retention as dealers on May 20, 2009, GMCL (the franchisor) was a subsidiary of Old GM and GM US had thus not yet entered the picture. . . . [E]ach of the plaintiffs received the grant of their franchise on or before November 1, 2005. GM US cannot be described as being involved in the "grant" of the franchise since GM US cannot have granted something before it was born.

[33] The motion judge also rejected the appellants' arguments that GM US was involved in the selection of the dealers to be retained and those terminated in the 2009 bankruptcy restructuring process and that GM US was involved in reviewing the terms of the 2010 DSSA when each franchise was renewed. He said that "the franchise agreement is not like the phoenix, born anew with each cycle of expiry and renewal". In 2010, the 2005 agreements were simply renewed in accordance with their terms; this is not a "grant" of the franchise under cl. (b)(i). [page169] In addition, the decision in May 2009 to retain the appellants as dealers pre-dated the existence of GM US.

[34] Turning to the second part of the definition -- significant operational control and a continuing financial obligation -- the motion judge concluded that all the obligations were found in agreements with GMCL alone and there was no operational control or continuing financial obligation.

[35] The motion judge concluded that since GM US is not a "franchisor's associate" or a party to any franchise agreement, all claims against GM US founded upon the AWA must be dismissed under rule 21.01(1)(b).

(2) Discussion

[36] First, I will discuss the motion judge's determination that GM US was not a franchisor's associate under s. 1 of the AWA. Then I will turn to the analysis of the s. 3 duty of fair dealing.

(i) [AWA, s. 1](https://www.canlii.org/en/on/laws/stat/so-2000-c-3/latest/so-2000-c-3.html): "Franchisor's associate"

[37] Given the pleadings of this case, the determination of who is a franchisor's associate requires a full factual record: WP (33 Sheppard) Gourmet Express Restaurant Corp. v. WP Canada Bistro & Express Co., [2010] O.J. No. 2069, 2010 ONSC 2644 (S.C.J.), at paras. 133-38. Both branches of the definition involve a highly fact-specific analysis.

[38] Under the first branch, the motion judge concluded that the grant of the franchise occurred well before GM US was in existence, and therefore GM US could not be "directly involved in the grant of the franchise". There are two problems with this conclusion.

[39] First, a franchise is defined in s. 1 of the AWA as "a right to engage in a business". It is arguable on the pleadings that the right did not exist until the conditions put forth by GM were met and the DSSAs were signed in October 2010.

[40] The pleadings disclose that various conditions were imposed on the dealers before entering the 2010 DSSAs, in part because of the changing situation at GM US. The pleadings and incorporated documents reveal that DSSAs are renewed only if GMCL determines that the dealer has fulfilled its obligations under the old agreement, that only certain dealers were to be retained in the restructured network, and that dealers sign the participation and transition assistance agreements as a condition to their retention. Whether this context could lead a trial judge to conclude that the 2010 DSSAs constituted a "grant of a franchise" under the AWA must be based on a full record. [page170]

[41] Second, the motion judge based his finding that GM US did not yet exist when the decision was made to renew the appellants' DSSAs won the August 7, 2009 letter sent to dealers by GMCL. A judge hearing a Rule 21 motion is not to treat documentation as evidence. The letter says that, "[o]n July 10th . . . we announced the emergence of the new" GM US. It does not say when the company was created.

[42] The letter of August 7, 2009, accompanied by the participation and transition assistance agreements that included releases and details about the significant restructuring underway, could be interpreted to disclose that GM US -- then in existence -- was making decisions about the grant of the franchise and setting terms.

[43] Under the second branch of the definition, the motion judge found that the appellants failed to plead the material facts necessary to sustain an argument that GM US exercised significant operational control and that the franchisees owed GM US a continuing financial obligation. However, the pleadings allege that GM US exercises significant operational control and direction over GMCL and the appellants through the terms of the DSSA and the participation agreements. The appellants further specify 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.

[44] The appellants pleaded that their commitment to perform substantial renovations on their dealerships is a continuing financial obligation. This "re-imaging" obligation has or will cost each appellant up to $10 million. The motion judge stated that these obligations were all found in agreements with GMCL alone and that GM US was not implicated. However, given that the appellants concede GM US was not a party to the DSSA and base their claims on GM US's control and direction over GMCL, this reasoning is circular. In my view, the judge weighed the evidence of the allegations and concluded that the appellants would not succeed. This is not the correct approach on a Rule 21 motion.

[45] If the facts are viewed in the most generous light possible to the appellants, it cannot be said that it is plain and obvious that GM US was not a franchisor's associate. The test is not whether it is likely or unlikely that the claim will succeed, it is whether it is plain and obvious that it cannot: Miguna v. Ontario (Attorney General), [2008] O.J. No. 4784, 2008 ONCA 799, 301 D.L.R. (4th) 540, at para. 34. [page171]

(ii) [AWA, s. 3](https://www.canlii.org/en/on/laws/stat/so-2000-c-3/latest/so-2000-c-3.html): Duty of fair dealing

[46] The motion judge found that, even if GM US was found to be a franchisor's associate, it did not owe a duty of fair dealing to the appellants under s. 3 because it was not a party to the franchise agreement. GM US submits that this is dispositive of the appellants' claims and a full record cannot affect this conclusion.

[47] Again, I disagree. The motion judge's approach to this issue demonstrates a continued misapplication of the Rule 21 test. Instead of asking himself whether the s. 3(2) duty of good faith could not apply to a franchisor's associate, he asked if a franchisor's associate is deemed to be a party to the franchise agreement. His analysis [at para. 34] proceeded under the heading "Does GM US owe the plaintiffs any duties pursuant to s. 3 of the AWA?" At para. 44 of his reasons, he posed the question: ". . . is a franchisor's associate deemed to be a party to every franchise agreement . . . ?"

[48] The issue before the motion judge was not to determine whether a franchisor's associate is "deemed" to be a party to every franchise agreement. The issue was whether, on the facts pleaded, it was plain and obvious that GM US could never owe a duty to the appellants under s. 3(2) of the AWA. By framing the issue in the way he did, the motion judge embarked on a flawed approach.

[49] It appears as though the judge approached the motion as if it were a motion for summary judgment. This court has repeatedly noted that the function of the court differs in a Rule 21 motion than during a summary judgment motion or trial: McIlvenna v. 1887401 Ontario Ltd., [2015] O.J. No. 6312, 2015 ONCA 830, at paras. 19-20; Miguna, at para. 34.

[50] The appellants pleaded that GM US was the real decision maker in the grant and operation of the franchise. The referenced documents indicate that North America was considered to be one market and one network of dealerships. The restructuring plans of both Canada and US were related. The GM plan presented to the United States Department of the Treasury in February 2009 explained:

The Canadian market as well as GM's Canadian operations (GMCL) are highly integrated into GM's overall North American strategy and operations. Approximately 90% of GMCL's production in 2008 was exported outside of Canada, primarily to the U.S. Approximately 88% of GMCL's domestic sales were imports from the Company's U.S. operations.

. . . . . [page172]

In the event agreements cannot be reached, GM will be required to re-evaluate its future strategy for GMCL, as the subsidiary would not be viable on a stand-alone basis.

[51] On August 7, 2009, when GMCL wrote to the GTA dealers being offered continued contracts, there were multiple references to the decisions being made by GM US, including the discontinuance of the Pontiac line and medium-duty trucks. Conditions were also set out for the dealers should they wish to continue as dealers. Dealers were asked to sign releases in favour of GMCL and its affiliates.

[52] Is it plain and obvious that a parent company and possible franchisor's associate who controls the market, the distribution and sets the terms of the franchise agreement is never to be considered a party to the agreement such that a duty of fair dealing is owed under the AWA? The answer should be decided on a full record. This is particularly true because there is limited jurisprudence, and little appellate authority, on how far the duty in s. 3 extends. The interpretation of this section of the AWA will be crucial to resolving these claims and will likely have important precedential value. In these circumstances, evidence may be necessary to determine the legal questions, and striking the claim at the pleadings stage is not appropriate: PDC 3 Limited Partnership v. Bregman + Hamann Architects (2001), 2001 38745 (ON CA), 52 O.R. (3d) 533, [2001] O.J. No. 422 (C.A.), at para. 12.

[53] Within the case law that exists, the scope of s. 3 is unsettled. When the applicable law is not fully settled, the court should not dispose of a claim on a motion to strike: Kang, at para. 33; Transamerica Life Canada Inc. v. ING Canada Inc. (2003), 2003 9923 (ON CA), 68 O.R. (3d) 457, [2003] O.J. No. 4656 (C.A.), at para. 54; Nash v. Ontario (1995), 1995 2934 (ON CA), 27 O.R. (3d) 1, [1995] O.J. No. 4043 (C.A.).

[54] The scope of s. 3 was discussed by Cameron J. in the context of a motion to strike in WP (33 Sheppard). The court allowed the action to proceed on the basis that two of the defendants could be considered parties to a franchise agreement because they were the "directing minds" of the franchisor. Cameron J. said the issue should be determined on a full evidentiary record.

[55] The respondents argue that this decision does not assist the appellants because there was a finding that the defendants were, in fact, parties to the franchise agreement. But Cameron J. [at para. 129] was clear that the proposed parties were parties to a franchise agreement, "[e]ither directly or in their capacity as the directing minds" (emphasis added). [page173]

[56] In coming to this conclusion, Cameron J. emphasized [at para. 128] that a franchise agreement for the purpose of s. 3 "incorporates a more flexible approach to the definition of a aeparty'". He concluded that the issue could not be resolved on a pleadings motion under Rule 21. Similarly, if a flexible approach is taken to "party" in this case, it cannot be said that GM US could never be found to be a party to a franchise agreement.

[57] Other decisions have also found the parents of franchisors to be liable as parties under s. 3, but in circumstances where the parent company or directing minds appear to have also been parties to the franchise agreement: 8150184 Canada Corp. v. Rotisseries Mom's Express Ltd., [2014] O.J. No. 2600, 2014 ONSC 3256 (S.C.J.); Burnett Management Inc. v. Cuts Fitness for Men, [2012] O.J. No. 2527, 2012 ONSC 3358 (S.C.J.).

[58] The interpretation of "party" under s. 3 of the AWA, and the question of whether GM US falls under that term, warrant a trial. There is limited and somewhat unsettled jurisprudence on the scope of who owes a duty in that section.

[59] It is also significant that the AWA is remedial legislation intended to address the perceived power imbalance between a franchisor and a franchisee and to protect franchisees. The purpose of the Act is the umbrella under which issues must be addressed: 2130489 Ontario Inc. v. Philthy McNasty's (Enterprises) Inc., [2012] O.J. No. 2521, 2012 ONCA 381, 292 O.A.C. 284, at para. 26. In Salah v. Timothy's Coffee of the World Inc., [2010] O.J. No. 4336, 2010 ONCA 673, 268 O.A.C. 279, at para. 26, Winkler C.J.O. said that the remedial purpose of the AWA deserves "a broad and generous interpretation". Can it therefore be said that this remedial legislation is to be strictly interpreted so that the duties of good faith and fair dealing apply only to the signatory to the agreement and not to the real party in control? The answer at this point in the jurisprudence is not clear. It is thus not plain and obvious that the action cannot succeed.

Duty at common law

(1) The motion judge's dismissal of the other claims

[60] The motion judge went on to consider the appellants' claims that GM US breached the duty to act fairly and in good faith under the DSSA and the common law.

[61] As GM US is not a party to the DSSAs, to conclude that there is a duty would be to go against the long-standing prohibition against piercing the corporate veil. He found there was no basis to do so here, as there was no foundation in the pleadings [page174] to support a finding of the extraordinary circumstances that must exist to pierce the corporate veil and make GM US liable for the actions of its subsidiary; there was no allegation of fraud or dishonesty.

[62] On the application of Rule 21, the motion judge concluded that the action had no reasonable possibility of success and dismissed the claim against GM US.

(2) Discussion

[63] The franchise context is important in deciding whether this claim cannot possibly succeed at trial. In my view, despite the lack of a direct contractual relationship between the appellants and GM US, it is not plain and obvious that GM US could not owe a duty of good faith to the Canadian dealerships. That the cause of action may or may not be a weak one is not determined on a motion under Rule 21.

[64] The relationship between a franchisor and franchisee is one of vulnerability for the franchisee. In addition to the statutory protections, a duty of good faith exists at common law in the context of this relationship: Shelanu Inc. v. Print Three Franchising Corp. (2003), 2003 52151 (ON CA), 64 O.R. (3d) 533, [2003] O.J. No. 1919 (C.A.), at para. 66. Further, the obligations of a party in a franchise relationship differ from those in a regular commercial relationship: WP, at para. 145.

[65] Whether the level of control alleged and the special obligations owed in the context of a franchise relationship could open the door for the imposition of a common law duty is a novel argument that should be explored at trial. Novel arguments will not necessarily be struck down: Kang, at para. 26; Attis v. Canada (Minister of Health) (2008), 93 O.R. (3d) 35, [2008] O.J. No. 3766, 2008 ONCA 660, at para. 23, leave to appeal to S.C.C. refused [2008] S.C.C.A. No. 491. In Kang, at para. 39, Laskin J.A. said: "the jurisprudence on the duty of good faith and fair dealing . . . is not settled in this country". As the scope of the legal duty has not been decided, the claim should not have been dismissed on a Rule 21 motion: Kang, at para. 39; Folland, at para. 11.

[66] While it may be that the common law claim is untenable as a matter of law, and it may be that in light of s. 3 of the AWA it is redundant, however, it is not plain and obvious that it cannot succeed.

D. Disposition

[67] I would allow the appeal with costs payable to the appellants fixed at $20,000, inclusive of disbursements and HST. If the [page175] parties do not agree on the costs of the Rule 21 motion, I would invite them to submit written submissions within two weeks of the release of these reasons.

Appeal allowed.

End of Document