Franchisor's Implicit Obligation of Good Faith and Loyalty

The decision in Automobile Cordiale Ltée v. DaimlerChrysler Canada Inc., J.E. 2010-164 raises the question of the implicit obligation of good faith and loyalty in an exclusive dealership contract.

Automobile Cordiale Ltée (the Franchisee) and DaimlerChrysler Canada Inc. (the Franchisor) entered into an agreement in 1994 whereby the Franchisee was granted exclusive right to sell and lease Jeep and Eagle vehicles in the city of St-Jérôme. Between 1996 and 2003, three dealerships located near St-Jérôme sold and leased Jeep vehicles although they had no rights with respect to the Jeep banner. The Franchisee advised the Franchisor of such behaviour but the Franchisor did not take effective corrective measures. The Franchisee filed an action against the Franchisor before the Superior Court of Quebec alleging that the Franchisor breached its obligations under the agreement in tolerating three dealerships selling and servicing Jeep vehicles in its Franchisee’s exclusive territory.

Decision Below

The Superior Court of Québec concluded that the Franchisor’s failure to assist its Franchisee in protecting its exclusive territory against unfair competition from other dealers was a breach of the Franchisor’s duty of good faith and loyalty. Even if there was no specific obligation to that effect in the contract, there was an implicit obligation of good faith and loyalty which imposed upon the Franchisor the obligation to prevent competition among its dealers. The Court allowed the Franchisee’s claim for damages in part, but rejected the claim for exemplary damages, indicating that deprivation of sales did not justify attribution of exemplary damages.

Potential Significance

This decision is of particular interest to franchisors as it imposes upon them additional obligations that may not be specifically provided for in the contract. If exclusive territorial rights are granted, the franchisor or supplier will have an unwritten obligation to assist the franchisee or dealer in protecting its territory against unfair competition.

The decision is currently under appeal and such appeal will be heard on October 26, 2011 at the Court of Appeal in Montréal.

Case Information

Automobile Cordiale Ltée v. DaimlerChrysler Canada Inc.

QCA Docket Number: 500-09-020393-104

Hearing Date:  October 26, 2011

breach contract duty of good faith and loyalty exclusive dealership franchisee franchisor Quebec Court of Appeal Superior Court of Quebec territorial rights

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