By Lawrence Papoff
Dealers should keep in mind that their OEM might not have as much power as the dealer sales and service agreement (DSSA) says it does because of the duty of fair dealing and the obligation to act in good faith. In other words, said franchise law lawyer Shaun Laubman, the OEM has to “at least consider the party on the other side.”
Laubman went on to explain that the duty, or rule, “sets a box around the exercise of unilateral or discretionary rights in a franchise agreement.”
This means the OEM can’t use the considerable discretion the DSSA gives it to “defeat the very objectives of the agreement or override the expectations the dealer might have when entering into the agreement.”
This rule is contained in provincial franchise legislation and in the common law. So if the dealer does business in a province that has no franchise legislation, they can still rely on the common law, a body of law developed over time by judges ruling on the cases before them.
The OEM also cannot interfere with the right to associate. An example of this shows up in the class action lawsuit, Trillium versus General Motors Canada, involving the former GM dealers whose DSSAs were cancelled when the automaker received federal aid during the recent recession.
The wind-down agreement stated that dealers signing the agreement waived any further claims against the automaker and agreed not to discuss the terms with any third party. The dealers claimed these conditions violated their right to associate.
The dealers also claimed that the conditions in the agreement violated the duty of fair dealing.
The court has yet to rule on the second claim, but the court has not thrown out the action and that means the right of association trumps the conditions in the wind-down agreement, he said.
One case that might explain what the duty of fair dealing and acting in good faith mean, he said, is a Dunkin’ Donuts case where Quebec franchisees sued the franchisor for failing to support them and the brand in the face of voracious competition from Tim Hortons. That competition, he noted, caused Dunkin’ Donuts’ sales to shrink and dealer numbers to drop from 210 in 1998 to 13 in 2012.
The court ruled that the franchisor ignored calls for help from the franchisees and that when it did act, it was too little and too late.
The court also ruled that high management turnover at the parent company, poor services and lack of support all caused sales to slide and franchisees to fall by the wayside.
When the company did act to upgrade facilities, franchisees had to sign agreements waiving any claims they might have against the company.
The court ruled all were violations of the duty of fair dealing and the obligation to act in good faith and awarded the franchisees over $16.4 million plus legal fees.
The decision has been appealed.
Despite the appeal, Laubman said the interesting takeaway from the case is the question of what obligations the franchisor has beyond the contractual obligations to deliver product and train franchisees and staff.
He wondered whether the franchisor has to heed the warnings from their franchisees as to what they see happening in the market and do they have to go that extra mile to take on the competition or growing the brand.
“It will be interesting to see whether this case has broader implications,” he said.