Franchisor's Obligation to prevent Unfair Competition

Automobile Cordiale Ltd v. DaimlerChrysler Canada Inc., J.E. 2010?164

From Fraser Milner Casgrain Focus on Franchising

In 1994, Automobile Cordiale Ltd. (the "Franchisee") and DaimlerChrysler Canada Inc. (the "Franchisor") signed a contract relating to the sale and service of Eagle and Jeep vehicles (the "Contract"). The Franchisee was granted the exclusive right to sell and lease Jeep and Eagle vehicles in the city of St-J�r�me.

However, between 1996 and 2003, three automobile dealerships located in or near the city of St?J�r�me, being Giraldeau Inter?Auto Inc., Impact Dodge DaimlerChrysler Inc. and DaimlerChrysler Plymouth de Blainville Ltd. (collectively, the "Dealerships"), sold and leased a significant quantity of Jeep vehicles, although they had no rights with respect to the Jeep banner. 

The Dealerships also made warranty repairs on many Jeep vehicles and benefited from the Franchisor's discounts. Although the Franchisee had advised the Franchisor and filed several complaints since 1996 regarding the Dealerships' conduct, no corrective measures were taken by the Franchisor.

During the same period of time, the Franchisor sought to regroup all of its vehicle brands (Dodge, DaimlerChrysler and Jeep) under a single DaimlerChrysler banner. The Franchisee refused to accept this initiative named "Plan Canada 2000" and continued to operate a Jeep Eagle banner dealership with the Franchisor's permission. It must be noted that the Franchisor discontinued Eagle vehicles, thus the Franchisee's claim only concerned Jeep vehicles.

The Franchisor was not bound to protect its brands or to prevent its dealerships from competing with one another, directly or indirectly, under any explicit obligations of the Contract. 

The Franchisor was nevertheless bound by implicit contractual obligations resulting from the nature of the Contract, equity, custom and law, to act with loyalty and in good faith at the time the contract was formed, as well as throughout its performance.

The Court concluded that the Franchisor deliberately chose to abandon the Franchisee and left it to face alone the unfair and illegal competition of the Dealerships. 

The Franchisor's behaviour can be explained by the implementation of "Plan Canada 2000", which was drawn up in order to eliminate the single banner dealerships, such as the dealership of the Franchisee. The Court further concluded that the prohibited sales and leases made by the Dealerships could not be separated from the warranty repairs from which they benefited.

Therefore, the Franchisor could not on the one hand grant the Franchisee the exclusive right to use a brand in a given territory, and on the other hand, deprive same by omitting to prevent other dealerships from using said brand in an unfair and illegal manner. 

The Franchisor was, therefore, in default of its implicit contractual obligations of loyalty and good faith.