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On July 4, 2017, the Court of Appeal for Ontario released a decision in Trillium Motor World Ltd. v. General Motors of Canada Limited about an appeal from a dismissal of a class action trial against General Motors of Canada by a group of its terminated franchisees/dealers.
In the trial, the judge dismissed the class action against GM on the basis that the terminated dealers signed releases in favour of GM as part of an overall termination agreement, and that those releases were legally valid. Technically, the releases fell within the “Tutor Time Exception”, as part of a legal settlement.
Section 11 of Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000, states that any purported waiver or release of rights under the Act is void. This is a prohibition against a waiver or release of any rights of a franchisee under the Act.
However, Ontario courts have held that this statutory prohibition does not apply to settlements. If a franchisee chooses to waive or release any rights under the Act as part of a settlement with a franchisor, that waiver or release is legally valid and enforceable. In other words, section 11 does not apply to waivers or releases that are part of a settlement.
This legal exception is commonly called the “Tutor Time Exception” because it was first decided by an Ontario court in 2006 in 1518628 Ontario Inc. v. Tutor Time Learning Centres, where the franchisee signed a release as part of a settlement. The Ontario Superior Court held that because the release was part of a valid settlement (it was the release of a known claim, part of a negotiated settlement and made with legal advice), the release was valid.
Recently, the British Columbia government codified the Tutor Time Exception in its newly enacted franchise legislation, the Franchises Act, which came into force earlier this year, in February 2017. Subsection 13(2) of the British Columbia Franchises Act states that the prohibition against waiver or release (which is found in subsection 13(1)) does not apply if it is made as part of a settlement of a dispute. Subsection 13(2) of the Franchises Act codifies the Tutor Time Exception.
During the 2009 financial crisis in Canada, GM signed a bailout agreement with the Government of Canada, and negotiated agreements with some of its franchisee dealers across Canada to terminate their dealerships.
GM offered the termination agreements (which it called Wind-Down Agreements) to 240 dealers, with payment in exchange for a release of any claims against GM under any statute, including the Arthur Wishart Act. GM required each of the dealers to obtain independent legal advice and respond to the offer within a strict time limit.
Of the group of 240 dealers, 202 accepted the agreement and provided to GM certificates of independent legal advice. Later, these dealers launched a class action lawsuit against GM, alleging that GM breached its duty to act in good faith when it required that they respond to the termination proposal within only six days.
The trial judge dismissed the class action against GM on the basis that it acted in a fair and
commercially reasonable manner, and that the release in the termination agreements was legally valid because it fit the Tutor Time Exception, i.e., it was part of a valid settlement.
The Ontario Court of Appeal dismissed the dealers’ appeal and upheld the trial judge’s dismissal of the class action against GM.
In assessing GM’s good faith obligations (also called the duty of fair dealing) to its dealers, the Court of Appeal wrote that the legal analysis must be done in the context of reasonable commercial standards and the specific circumstances – GM’s situation during the massive 2009 financial crisis.
Because of GM’s looming insolvency at the time, the court agreed with the trial judge that its decision to terminate the franchise agreements was a rational business decision. The time limit that GM imposed on the dealers was also in good faith because it was a requirement under the bailout agreement that the Government of Canada imposed on GM.
The court upheld the trial judge’s finding that the dealers must have understood that anything short of a full settlement and release would have compromised GM’s ability to obtain the financial bailout from the government.
The Court of Appeal confirmed, as it had done before, that the key elements of the Tutor Time Exception (the legal elements to enforce a negotiated release, despite the statutory prohibition against releases) require a voluntarily-negotiated settlement of existing statutory claims, agreed with the benefit of legal advice, in settlement of a dispute for existing and known breaches.
The court noted that the dealers did not challenge the adequacy of the legal advice that each of them received from his or her own legal counsel. The court also noted the trial judge’s finding that the dealers knew that they were giving up all legal claims against GM.
The court also upheld the decision of the trial judge dismissing the dealers’ argument that the termination agreement in and of itself required a disclosure document and therefore could not have been released. The trial judge found that the dealers knew that GM would not provide a disclosure document. The court upheld the trial judge’s finding that there was nothing inherently wrong with a release fixing’ its own alleged disclosure breaches.
The legal meaning and principles of the term “known and existing claims” under the Tutor Time Exception is not fully developed in these decisions. Is it a requirement that the franchisee subjectively know about the claims that he or she is releasing, or on an objective standard – that he or she must or should have known about those claims based on all the circumstances. The trial judge found that the dealers knew about the releases based on an “abundance of clear facts facing the dealers at the time,” in addition to the independent legal advice they obtained.
It is the writer’s opinion that, like the discoverability principle of limitation periods and many other legal standards, the legal test for the enforceability of settlements and releases in franchise relationships must be approached objectively, not subjectively. The legal test on this front is likely whether the franchisee knew or ought to have known in the circumstances about the existence of the claims that he or she was releasing.
Ben Hanuka, J.D., LL.M., C.S., is principal of Law Works P.C. (in Ontario) and Law Works L.C. (in British Columbia). He is a member of the Ontario and British Columbia Bars and Certified by the Law Society of Upper Canada as a Specialist in Civil Litigation. He is a member of the Chartered Institute of Arbitrators (London), Toronto Commercial Arbitration Society and ADR Institute of Canada.
Tags : Class Action, Disclosure, Good & Bad Faith, Settlement, Termination
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