Ontario Court of Appeal Weighs in on Canadian GM Dealer Litigation

The Ontario Court of Appeal has released two decisions involving the appeals arising from trial decisions in a class action commenced on behalf of dealers of General Motors of Canada Limited (“GMCL”) against GMCL and Canadian-based law firm Cassels Brock and Blackwell LLP. In almost every respect, the Court upheld the results of the trial.

A. Claims Against Cassels Brock and Blackwell LLP

The Court dismissed Cassels’ appeal of the trial judgment which found it liable to GMCL dealers for breach of contract, negligence and breach of fiduciary duty which caused the dealers a loss of chance to have negotiated a better deal with GMCL at the time of GMCL’s restructuring in 2009 which resulted in the class members’ dealerships being wound down.

The Court confirmed the findings and decision of the trial judge that the firm was in a conflict of interest when it allowed itself to represent the dealers at the time of GMCL’s restructuring while also representing the Canadian Government. The Government was providing significant funds to help bail GMCL out of the financial difficulties it was facing in 2009 so to avoid a bankruptcy filing at the time.

In its 150 page decision, the Court provided a detailed analysis of the loss of chance doctrine and confirmed the obligations which lawyers have to zealously represent their clients and to avoid conflicts of interest which would prevent them from so doing. In this instance, though Cassels advised its client, the Government, of its retainer with the dealers, Cassels assured the Government that it would “drop” the dealers if their interests conflicted. By contrast, no such advice on the conflict or what would happen if it materialized was ever communicated to the dealers, who retained Cassels to protect their interests. The Court found the conflict “impermissible”.

The Court did, however, reduce the size of the envelope of amounts available to the dealers who retained Cassels because of one error the Court found the trial judge had made in his calculation of the damages award. In correcting that error, the Court reduced the damages envelope before interest and costs from $45 million to $36.9 million.

B. Claims against GMCL

The Court dismissed the dealers’ appeal and the appeal by GMCL.

The Court confirmed, as found by the trial judge, that the releases which the dealers gave GMCL at the time they entered into agreements in 2009 to wind down their dealerships were enforceable against them. Similarly, it confirmed that, the provisions in the same agreements which would have required the dealers to pay GMCL’s costs of the class action, were not enforceable.

It was anticipated that the Court might have taken the opportunity to comment on whether, but for the releases, GMCL would have had liability to the dealers for its conduct in procuring the wind down agreements. The case raised issues relevant to a franchisor’s obligation to disclose before securing material amendments to a franchise agreement and to what extent its conduct might be circumscribed when its network is faced with a financial crisis. The Court declined to comment on this aspect of the dealers’ appeal, having found that the releases applied to the conduct in issue.

In dismissing GMCL’s appeal, the Court also ruled that release provisions could be severable depending on the nature of the valid and invalid provisions. It further confirmed that since class members in a class action who are not plaintiffs are not liable for costs of an unsuccessful class action, GMCL’s attempt to make them liable for these costs in the wind down agreements was not valid. However, that invalidity did not invalidate the entire release.

The parties have rights to seek leave to appeal the decisions of the Court to the Supreme Court of Canada.

*Sotos LLP is representing the former GMCL dealers in the class action. Our lawyers have extensive experience representing franchisors and dealers in multi-party litigation involving franchising disputes.*