Grading NADAP

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John Sotos
Legal Columnist

Back in 1997, dealers and factories made a choice together. Instead of resolving all of their disputes under the harsh glare of courthouse lights, they would attempt to solve most dealer/factory issues privately through a mix of mediation and arbitration. The result was that most dealers and factories agreed to participate in the National Automobile Dealer Arbitration Program or NADAP.

Now 17 years later, has NADAP been a success? Has it lived up to its promise?
My answer is both yes and no.

Certain types of disputes have turned out to be well suited for resolution under NADAP rules. Others, not so much.

When used effectively, NADAP mediation/arbitration can help dealers and factories reach fair decisions quickly, privately and relatively cheaply. Used poorly, parties can spend just as much money on NADAP arbitrations as they would in court and not receive the benefit of the transparency and fulsomeness of litigation.

Looking back at how NADAP has performed since its inception, I present this not-so-scientific report card on how NADAP has met its various goals.

Background
The way NADAP works is simple. In the 1990s, the Canadian Automobile Dealers Association, the Canadian Vehicle Manufacturers Association and the Association of International Automobile Manufacturers of Canada negotiated the first set of NADAP rules.

The same groups have reconvened every five years since then to negotiate changes to the rules to try and improve them. The rules are the same for all factories and all dealers.

When a dealer signs a sales and service contract with a factory, the factory must offer a NADAP agreement to the dealer. Most dealers (around 90 per cent) accept and enter into NADAP contracts with their factory. Unless one of the parties withdraws, both the dealer and the factory will be obliged to use NADAP process to resolve designated disputes.

Mediation:  A
If a factory’s own internal dispute resolution procedure fails to resolve a dispute, the parties proceed to mediation. Mediation is basically an in-person meeting between the parties where they discuss the dispute frankly and try to reach an amicable settlement.

The meeting is hosted by an experienced person called a mediator who guides the discussion and helps the parties reach a solution.

Skeptics may be surprised to learn that mediation is frequently successful. In fact, the mediation part of NADAP has been one of the program’s great successes. Often all it takes for a dispute to get settled is for the parties to get in a room together and hear each other out.

It forces all of the parties to take the dispute seriously. Mediators are also very good at convincing parties that it is in everyone’s best financial interests to solve problems collaboratively rather than combatively. Well-represented parties with solid preparation and an experienced mediator can drive parties to reach a resolution.

Cost:  C-
If one of the goals of NADAP is to provide an inexpensive way for dealers and factories to solve problems that do not resolve at mediation, it hasn’t been successful. Arbitration can, if not properly managed, be just as expensive as going to court.

NADAP matters proceed to arbitration if mediation fails. Arbitration is like a private court where the parties get to pick the judge. After hearing arguments from both sides, the arbitrator picks a winner and the loser must abide by the result.

Parties in NADAP arbitrations control how much process they want to have. The parties can choose to make arbitration very court-like and adversarial, which tends to be fair, but expensive.

Lawyer fees can skyrocket when the arbitration process allows for formal legal rules of evidence, arbitration briefs and lengthy in-person hearings.

Alternatively, the parties may agree to keep the arbitration simple and informal, which can be less expensive. The downside of having less process is that there’s a greater chance that one of the parties may feel that its case was not properly considered or that the other side was being duplicitous.

When what is at stake for the dealer is a bet on the farm, the all-out option is unarbitrable. Factories can intentionally run up costs to pursue.

Transparency and Privacy:  C

The NADAP process is private. Although NADAP arbitral decisions are available for other NADAP members to review they are generally skimpy on reasons.

NADAP decisions also aren’t precedent setting – two arbitrations about the exact same issue can have inconsistent results.

This can be contrasted with court proceedings, which are matters of public record and are binding on future court decisions.

On the one hand, this means that parties go into NADAP arbitrations with a little bit more risk, since anything can happen. On the other hand, it means a dispute won’t be splashed all over the newspapers, which is bad for everyone’s business.

Speed:  A-
Arbitration can be fast, especially if both parties are motivated for a speedy resolution.

When you don’t have to wait for court dates, endless motions and opposition delay tactics, disputes can be solved quickly. Again, it’s largely up to the parties themselves to agree to short timetables for mediation and arbitration.

Rather than giving the parties a month or two to submit their arguments, you can agree to make the deadline one week, and impose a shorter page limit. Properly managed, disputes can be resolved through NADAP mediation/arbitration in a matter of months, as opposed to years as is typical in court.

Resolution of Common Disputes:  B+
NADAP is best thought of as a specialized tool, not a Swiss army knife. It was designed to solve the types of disputes that dealers and manufacturers have encountered for years. These types of common disputes include dealer terminations, transfer approvals, disputes over rights in dealer sales and service agreements, encroachment, renewals, and succession planning.

In addition to laying out a process for resolving disputes, the rules also provide dealers and factories with some substantive rights. For example, the NADAP rules say that factories cannot create a new dealer point within eight kilometres of an existing dealer without consulting with the dealer first and giving them a chance to object. This is true even if that right isn’t in the dealer’s sales and service contract. Similarly, the NADAP rules impose a duty of good faith on each party.

Resolution of Large and Complex Disputes:  D-
NADAP cannot deal with big disputes. The system’s own rules expressly state NADAP cannot be used to resolve multi-party disputes, where multiple dealers have the same or similar claims against the factory. Instead, these kinds of claims must generally be raised through a lawsuit.

Similarly, dealers cannot use NADAP to dispute factory decisions to discontinue certain lines. Dealers who would like to resolve these problems through NADAP are out of luck; they must go to court.

It’s not totally clear that this is a failing of NADAP. Rather, these just aren’t the kinds of problems NADAP is intended to address and are best resolved in court.

Overall:  B
The fact that NADAP has been renewed for three successive terms is a testament to its success. Dealers and factories agree that, with a healthy number of exceptions, the program has served its purpose well. Used effectively, NADAP is good at resolving common disputes between dealers and factories, and doing so quickly, privately, and relatively inexpensively. What it isn’t so effective at resolving are complex, critically important, or multi-party disputes. Such disputes either cannot be resolved through NADAP or are really better suited for court anyway.

John Sotos is a franchise lawyer with the largest franchise law practice in the country. John and his partners at Toronto-based firm Sotos LLP have been major contributors to the development of franchise law and franchising in Canada for over 30 years. John may be reached by telephone at (416) 977-0007 or by email at jsotos@sotosllp.com.