Franchising and Automobile Dealers

Franchising and Automobile Dealers

QUESTION:  From last month’s article in Canadian Business Franchise Magazine, it appears well settled that automobile dealers are considered franchisees under provincial franchise legislation.  As a result, they and their automobile manufacturers are subject to the rights and obligations under the legislation, including the right of franchisees to associate, the obligation of a franchisor to deliver a disclosure document, the obligation of both parties to comply with the duty of good faith and fair dealing, and the right of both parties to invoke normal court procedures to resolve disputes under the legislation. 

However, are there special procedures available for automotive dealers and manufacturers to resolve their disputes outside of the usual court process, whether such disputes involve rights or obligations under franchise legislation or contractual disputes under dealer-manufacturer agreements?

ANSWER:  Yes, automotive manufacturers and dealers established a specific program in 1997 known as the National Automobile Dealer Arbitration Program, or NADAP, to provide an expeditious, impartial and less expensive means of resolving disputes that arise from time-to-time between manufacturers and retail dealers. The program outlines specific rules and procedures for such disputes to be submitted to private arbitration.

The program has been reviewed by the manufacturers and dealers and revised every 5 years in 2002, 2007 and 2012.  The program handles roughly ten cases a year, which is a testimony to the constructive and cooperative working relationship between most manufacturers and their franchised new car dealers.

ADR Chambers, a professional, independent arbitration and mediation firm in Toronto administers NADAP on behalf of the manufacturers and dealers.

The purpose of NADAP is to settle any of the following disputes between a manufacturer and its dealers involving:

  • The interpretation/application of the franchise agreement, generally called a Dealer Sales and Service Agreement (“DSSA”) in the automotive industry, for that dealer.
  • The termination of the agreement based on a dealer or dealer employee conviction that will hurt the manufacturer’s or dealer’s reputation or interest.
  • The reasonableness of the length of a cure period provided by the manufacturer in light of the dealer deficiencies to be cured.
  • A refusal of the manufacturer to reasonably provide prior approval to a dealer’s request to sell or transfer by succession the dealership interest including:
    • The reasonableness of the manufacturers conditions and written standards, and any specific requirements set for that new dealer, and if so, whether the new dealer meets them;
    • Whether the new dealer is unwilling to be bound by the terms of the existing agreement;
    • Whether the dealer or new dealer fails to cure an existing dealer default;
    • Whether the demographic or economic factors set by the manufacturer for the continued operation of the dealership by the proposed successor, are reasonable. If so, the dealer can continue to operate the dealership or can the manufacturer close the dealer-point until economic or demographic factors support its re-opening.
  • Failure of the manufacturer to approve the sale or transfer of the dealer interest where the dealer can show that the manufacturer knew for a considerable time that the sale or transfer had occurred.
  • The termination of the dealer agreement based on the adequacy of the dealer’s line of credit/working capital.
  • Whether a dealer owes money to a manufacturer, or vice versa, and the length of time for payment. Where a dealer’s failure to pay funds is grounds for termination of the agreement, the agreement can be terminated. If the termination is set aside, and the arbitrator finds that the dealer owes funds to the manufacturer, the dealer must pay the funds to be reinstated as a dealer.
  • The termination of the agreement for failure to resume dealership operations within a reasonable time following its closure for more than 7 days where the closure was beyond the dealer’s control.
  • The proposed appointment of a new abutting dealer-point or relocating of an existing dealer.
  • The manufacturer’s termination, refusal to renew or extend, without cause the dealer agreement including the awarding of damages by the arbitrator for such wrongful termination or refusal.

These types of disputes are primarily disputes under the DSSA, and do not involve rights or obligations under provincial franchise legislation.  Accordingly, they would ordinarily proceed to court as regular civil suits governed by normal court procedures, resulting in substantial costs, time delays and uncertainty.  NADAP allows a much more defined and speedy process with a high success rate.  In fact, over 70% of the disputes are resolved by mediation, usually within 30 -60 days and at minimal cost, without any steps in arbitration.

Some of the highlights of NADAP include the following:

  • There is an administrator with the power to appoint arbitrators
  • The arbitrators are part of a fixed panel and thereby develop specific subject-matter expertise
  • The procedures are fast and follow a complex track
  • Mediation is available within 15 days
  • The quick procedure results in little need for interim relief like injunctions, resulting in substantial savings to the parties
  • There are rights of appeal to three arbitrators
  • The average length of a dispute to final resolution is 5 months
  • Most cases can be resolved in less than 60 days
  • The process defines specific issues and standards for certain disputes.

The NADAP Statement of Principles can be found at: http://www.globalautomakers.ca/files/Nadap%20Dispute%20Resolution%20Rules%20-%20Eng.pdf, and the NADAP Rules can be found at: http://www.globalautomakers.ca/files/Nadap%20Dispute%20Resolution%20Rules%20-%20Eng.pdf.

The history of NADAP and its evolvement over time is interesting.  When the program was first launched in 1997, almost 95 per cent of Canadian dealers signed implementation agreements with their manufacturers that committed them to NADAP for an initial five-year term during which neither the dealer nor the manufacturer could terminate its application to them. The parties agreed, however, to review the program every five years to ensure the program functioned as it was intended to.  The parties involved are the Canadian Automotive  Dealers’ Association (CADA) and original equipment manufacturers  represented by the Canadian Vehicle Manufacturers’ Association (CVMA) and the Association of International Automobile Manufacturers of Canada (AIAMC).

The first review in 2002 resulted in enhancements to the program, as did a second review in 2007.  For the 2012 review, CADA created a committee made up of dealers, CADA provincial association representatives and CADA staff who met regularly to determine whether the program continued to meet dealers’ needs. Dealers were also surveyed for their input, and the committee studied the results of disputes that went to mediation and arbitration.

After reviewing the program and other comparable provincial and U.S. state franchise laws, the committee recommended a renewal of the NADAP program, but with some suggested enhancements. These included:

1 ) Ensuring NADAP is offered to all dealers by getting a letter from the manufacturer associations committing to this principle and altering language in the NADAP Principles to enshrine it;

2 ) Ensuring CADA got an updated list of all dealers signed onto NADAP,  an issue that has caused uncertainty amongst dealers particularly when they are contemplating using the program;

3 ) Ensuring ADR Chambers, the body responsible for mediating and arbitrating NADAP proceedings, knows which cases have been made public;

4 ) Extending the notice period that a party must provide to the other that a NADAP decision will be made public from 48 hours to 5 days;

5 ) Resolving a cost award language ambiguity; 

6 ) Reviewing the arbitration appeal process and standard to ensure it is still appropriate for the program and following this review agreeing to make no changes to the arbitration appeal process and standard;

7 ) Ensuring that the French rules translation better reflect the English text;

8 ) Further review that any settlement agreement parties enter into does not truncate a party’s right to use NADAP by discussing the insertion of clarification language in the NADAP Principles;

9 ) Reviewing the timeline for bringing a complaint and initiating arbitration and agreeing to make no changes.

For the most part, dealers are fortunate to have NADAP available to them as complaints that a dealer can make under NADAP are not available in contract or common law to dealers in other industries.  There are circumstances in which a dealer can actually challenge the reasonableness of provisions in a dealer agreement which dealers in other industries cannot.

Despite the sophistication of NADAP and its fairly long history, certain disputes (often highly publicized) have resulted in a conflict between the application  of the NADAP Principles and Rules and the normal judicial litigation process.

What follows is a discussion of three such cases in different jurisdictions.

In a 2010 decision of the Ontario Superior Court of Justice, 21 dealers from across the country brought a multi-party action against General Motors of Canada Limited (“GMCL”) in Toronto for specific performance of their DSSA’s. The dealers had been given notice by GMCL in May 2009 that their agreements would not be renewed at the expiry of the current term. The dealers relied on a provision of the agreement which “assured them of the opportunity to enter into a new agreement” at the expiry of the current five-year term provided they were not in default of any provisions of their existing agreement. GMCL’s position was that it had the right under another provision of the DSSA to control its dealer network.

Most of the plaintiffs had signed agreements agreeing to resolve any disputes including non-renewal or termination of their dealer agreements in private one-on-one industry arbitration under the NADAP Rules. GMCL brought a motion to stay the dealers’ group action on the basis of the arbitration agreement. Alternatively, GMCL took the position that the dealers’ claims had been improperly joined under ordinary court rules and should be severed.

The NADAP Rules state that class, multi-party or representative claims are non-arbitrable, and ultimately the court held that the multi-party action was not subject to arbitration. The court found in fact that the NADAP Rules’ preservation of the dealers’ right to advance a class action, multi-party or representative action against GMCL reflected the dealers’ right to associate under Ontario’s franchise legislation. 

It should be noted that the NADAP Rules do provide that an arbitrator has the power to join one arbitral proceeding with another arbitral proceeding but only after each dealer has commenced the arbitration process separately by filing its own request for mediation.

The Stoneleigh case is an illustration of the court’s concern for access to justice as a driver of collective action. The court was heavily influenced by the “litigation realities” of small businesses across the country litigating against a large and powerful franchisor. Further, the court was persuaded by the dealers’ evidence (which was not opposed) that they lacked the informational, economic and human resources to litigate individually against GMCL. Although the court denied GMCL’s motion to stay, the court did recognize that one action with so many plaintiffs would be somewhat cumbersome and that effective trial management by the court would be required. But in the court’s opinion, the alternative of so many separate actions would not promote the convenient administration of justice.

Although not a class action, the dealers in fact presented the case in many respects as a class action. The court emphasized the existence of core questions of fact and law common to all of the plaintiffs’ claims. Of particular significance was the fact that both the claim and the defence were premised on single uniform provisions of the DSSA which were identical to all plaintiffs. In deciding that the plaintiffs’ claims should not be severed, the court made the point of indicating that it should not be taken as accepting the plaintiffs’ proposed procedure nor their proposal to treat the evidence of some of the plaintiffs as evidence of all. The court stated that procedural issues would be properly addressed at a judicial case conference.

In a 2011 case before  the Quebec Court of Appeal, the court provided guidance with respect to an important issue in the law of arbitration in Quebec, outlining that a future potential need for injunctive relief amounted to insufficient justification to find that an arbitrator lacked jurisdiction. As in Stoneleigh, GMCL formally advised the dealer that it would not be renewing the DSSA. The DSSA encouraged the parties to adhere to NADAP and, in fact, following the conclusion of the DSSA, both GM and the dealer agreed that any future disputes would be resolved by way of arbitration undertaken pursuant to NADAP. NADAP provided that GMCL was to launch an internal management review, following an initial request by a dealer; thereafter, if GMCL maintained its position, the dealer could initiate mediation proceedings, followed by arbitration proceedings, if necessary.

When GMCL informed the dealer that it would not renew the DSSA, the dealer immediately availed itself of NADAP and on the same day requested a management review. Subsequently, the dealer advised GMCL that it would no longer be adhering to NADAP.  Thereafter, following its management review, GMCL advised the dealer that it was maintaining its initial decision, and the DSSA would not be renewed.

The dealer then  initiated proceedings before the Quebec Superior Court, requesting that the court issue a safeguard order to maintain the contract and allow the dealership to remain open until a decision on the merits was rendered. GMCL objected to the Superior Court's jurisdiction on the basis that NADAP arbitration was the proper forum for the dispute.  The court agreed with GMCL and ruled that the parties had first to avail themselves of NADAP.  The dealer then appealed to the Quebec Court of Appeal.

The dealer based its appeal on two grounds:

  • The purview of the arbitration provisions in the contract - recourse to arbitration under the contract was optional; the nature of the dispute was not within the purview of NADAP; and because the dealer had rescinded its adherence to NADAP, it could seek court intervention so as to obtain relief; and
  • The jurisdiction of the arbitrator in relation to injunctions - pursuant to Quebec law, only the Superior Court, as opposed to arbitrators, has the power to award injunctive relief.

The Quebec Court of Appeal maintained the lower court ruling and held that in light of the undertaking to arbitrate, the dealer had to carry out NADAP arbitral proceedings so as to obtain relief.

The dealer argued that the undertaking to arbitrate was neither valid nor conclusive because the agreement outlined that should a dispute arise, the parties could have recourse to either arbitration or judicial proceedings. The court dismissed this argument because when a party entered into a franchise contract with GMCL, adherence to NADAP was encouraged, but not obligatory; thus, it was logical that the agreement outlined possible recourse to both judicial and arbitral proceedings. However, in this case, since the parties elected to rely on NADAP, the reference to judicial proceedings in the agreement could be discounted and the undertaking to arbitrate was both valid and conclusive.

Furthermore, the court of appeal also found that the nature of the dispute fell within the purview of  NADAP which specifically outlined that the decision by GMCL not to renew a franchise agreement was arbitrable. In an attempt to demonstrate that the dispute was not arbitrable, the dealer also set forth two arguments in relation to the fact that:

  • another dealer was also a party to the dealer’s claim against GMCL, giving rise to possible class proceedings; and
  • GMCL's decision not to renew the contract was a direct result of its decision to discontinue the Pontiac line of cars.

However, the court dismissed both of these arguments because it found that the English version of the contract provided a restrictive interpretation of what amounted to a 'class action' and the proceedings submitted by the dealer made no mention of GMCL's decision to discontinue the Pontiac line-up as the basis for its claim.

Finally, the dealer had also claimed that its notice informing GMCL that it would no longer be adhering to NADAP precluded the dispute from arbitration.  However, the court ruled that when the dealer initiated the management review, the dispute had crystallised and the dealer could not thereafter attempt to rescind its adherence to NADAP once the dispute resolution procedure had been initiated.

After citing several Supreme Court of Canada cases which affirmed that the granting of injunctive relief in Quebec was the sole jurisdiction of the Superior Court, the court of appeal concluded that the dealer’s attempt to seek injunctive relief was at this point premature.

The court found that the NADAP Rules granted the arbitrator the capacity to ensure specific performance of the agreement; thus, the parties had already agreed that if an arbitrator concluded that GMCL had failed to renew the agreement, the arbitrator could then issue an order so as to force GMCL to implement the appropriate action. The court then pointed out that orders for specific performance were not automatically forms of injunctive relief.  Rather, the dealer’s need for injunctive relief would arise only after an arbitrator's order for GMCL to renew the agreement was followed by GMCL's failure to respect this order. Consequently, the court dismissed the dealer’s appeal and the parties were required to undertake arbitration proceedings pursuant to NADAP.

The case illustrates the substantial importance of the parties' contractual intentions and reinforces that when an undertaking to arbitrate is both valid and conclusive, the Quebec courts will strive to ensure not only that the parties' intention receives full merit, but also that arbitral proceedings should be allowed to proceed without unnecessary recourse or intervention by the courts. Had the court followed the dealer’s line of reasoning, it would have possibly allowed the claimants to undermine their earlier choice of arbitral proceedings and seek specific performance by way of court intervention, under the guise of injunctive relief.

In a 2012 case before the Alberta Court of Queen’s Bench, a Chrysler dealer brought a motion for an order granting an interlocutory injunction preventing the defendant Chrysler Canada Inc. from permitting or approving the placement of a new automotive dealership proposed by another dealer group and prohibiting the group from taking any further steps with respect to the proposed new dealership pending trial. 

There were currently seven Chrysler dealerships in Calgary, one of which is the plaintiff.  Chrysler proposed an eighth dealership essentially located in the middle of the dealer’s existing trade zone. The dealer argued that establishing the proposed dealership in this area would essentially eliminate any business from the surrounding affluent communities and that such actions were in breach of Chrysler's obligation to conduct its dealings with the dealer in good faith.

The sole issue to be determined in the case was whether the dealer should be granted an interlocutory injunction.  The dealer alleged that in granting the proposed dealership Chrysler failed to exercise good faith, as required under contract, statute and common law and would cause the dealer to suffer economic loss. It submitted that an injunction was necessary before trial.

Chrysler argued that there was no serious issue to be tried, given the contractual rights afforded under the DSSA and NADAP. It submitted that Chrysler was well within contractual its rights to establish the proposed dealership and that there was no evidence of bad faith. The proposed dealership was approximately 12 kilometers from the plaintiff’s dealership and NADAP only created a limited right of dealers to challenge the creation of a new dealership where it is less than 8 kilometers from an existing dealership.

Chrysler submitted that it is critical to the success of its business that it has the right to determine the size and structure of its dealerships and that this right is expressly preserved in the DSSA and NADAP. It argued that its only motivation was to address the market need for an additional dealership to service the requirements of the expanding population.

The dealer argued that it had plainly established that a serious issue exists to be tried, namely, whether Chrysler had failed to deal with it in good faith. It stated that this duty exists under contract, relevant legislation and at common law.  NADAP requires the parties to interpret the DSSA in good faith and to exercise any discretionary rights contained in the DSSA in good faith  as defined in NADAP.

However, the DSSA stated that its terms shall be governed by the laws of Ontario. The court noted that Ontario and Alberta have almost identical legislation governing franchises. Each statute states that every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement, and the duty of fair dealing includes the duty to act in good faith and in accordance with reasonable commercial standards, and that the provisions of good faith cannot be waived.

The dealer submitted that the duty to act in good faith can be breached when one party to an agreement substantially nullifies the bargained objective or acts in a manner which is inconsistent with the reasonable expectations of the parties. The dealer took the position that the establishment of the proposed dealership nullifies the objective of its agreement with Chrysler, and is inconsistent with the expectations of the parties. While the dealer acknowledged that the proposed dealership was outside of the eight kilometre radius established under NADAP, it contended that given the fact that it is located in a largely industrial area the eight kilometre boundary is inappropriate as it will leave the dealer with very little residential market.  The dealer alleged that Chrysler failed to act in good faith and with due regard of its interest as franchisee.

The court found that the dealer had established the existence of a serious issue to be tried visavis Chrysler. Simply because the DSSA grants Chrysler the right to determine the number and location of its dealerships, it is not relieved of its obligation to act in good faith. The dealer had demonstrated that it has an argument that mere compliance with contractual terms does not mean that there has not been a breach of the duty of good faith. An argument also exists as to whether Chrysler was obligated to  and did  consider any interests other than its own.

The dealer raised a viable argument that it is not limited from challenging the proposed location simply because it is outside of the eight kilometre zone. It submitted that an issue exists as to whether NADAP simply provides an express ability to challenge within the zone, as opposed to operating as an exclusionary rule. Moreover, the DSSA does not provide a similar restriction. In these circumstances, there is a good argument that the location of the proposed dealership is seriously problematic and the granting of Chrysler’s approval was not made in good faith.

The court acknowledged that while the risk of financial harm would not actually materialize until the opening of the proposed dealership, the court did not think the fact that the opening is not imminent must be fatal to this application.  The test is whether the dealer will likely suffer an irreparable harm; the timing of the harm is not necessarily determinative.  The court stated that it may not be possible to have the ultimate issues determined by a trial court prior to the proposed dealership becoming operational.

Finally, the court had to consider determine which of the parties will suffer a greater harm from the granting or the refusal to grant an interlocutory injunction.

After examining the harm that each party submitted it will suffer from either the granting or the refusal to grant an interim injunction, the court was persuaded that the dealer would suffer the greater harm. While Chrysler may suffer an inconvenience caused by delay in pursuing the project, which may result in an overall short term loss of a potential expansion of market share and connected profit, this is not as detrimental as the risk of harm facing the dealer.

The court awarded an order granting an interlocutory injunction prohibiting  Chrysler from permitting or approving the placement of a new franchise automobile dealership at the proposed location, and directing that no further steps be taken to effect the proposed dealership pending a final determination in the action.

The decision is very important as it establishes that a court will apply the duty of fair dealing to circumvent a NADAP Principle which by its very wording is permissive but not exclusionary.

From these cases, it is quite apparent that the courts will pay significant respect to NADAP when faced with an alleged conflict between NADAP and the judicial process.  Automotive dealers or manufacturers who choose to resort to judicial proceedings when NADAP has been agreed to face the likely prospect of being rejected by the courts and forced back into the very procedures to which they originally agreed.

NADAP is a clear example of a successful alternate dispute resolution program that has been adopted by a particular franchise industry segment to streamline the resolution of disputes and save the parties time, money and possible maintenance of the franchise relationship.  Other industries where there is a franchise relationship would be well advised to consider  the NADAP model in establishing their own alternate dispute resolution programs to achieve the same purposes.  These could include any one or a combination of the well accepted alternate dispute resolution models – private franchise system ombudsman program, mediation and arbitration.