Lawyers for 182 former GM car dealers across Canada will face off with General Motors of Canada Ltd. in a Toronto courtroom this week.Brent Lewin/Bloomberg
Lawyers for 182 former GM car dealers across Canada will face off with General Motors of Canada Ltd. in a Toronto courtroom this week, as a trial begins in a $750-million class action alleging the car maker unfairly pressured the dealers to give up their businesses as it sought a government bailout during the financial crisis.
In proceedings set to begin on Tuesday, the former GM dealers allege that GM Canada used "shock and awe" tactics to force them to relinquish their dealerships in May, 2009. They say GM gave them just six days, including over the long weekend of that month, to consider their decision, and threatened dealers that failing to sign away their businesses would plunge the company into bankruptcy protection.
The case has been closely watched by many in the legal profession, because it also includes allegations against a Bay Street law firm, Cassels Brock & Blackwell LLP, that raise questions about the rules that govern conflicts-of-interest for lawyers. The dealers allege the law firm wrongly acted for both the dealers' association and for the government of Canada on the auto-bailout issue, without disclosing the conflict to the dealers.
None of the allegations have been proven in court. A lawyer for the plaintiffs, David Sterns of Sotos LLP, declined to comment publicly. A spokeswoman for Cassels declined to comment as the case is before the courts.
GM argues that it treated its dealer network fairly. In its statement of defence, the company says dealers knew as early as April 27, 2009, or almost a month beforehand, that GM intended to drastically reduce its Canadian dealership network by more than 40 per cent. GM also says the tight six-day turnaround for the wind-down offers was necessary as GM faced a government deadline in order to receive the multibillion-dollar bailouts it needed to survive the financial crisis. Plus, GM gave dealers who signed away their businesses a total of $123-million in payments, or an average of $600,000 each.
"There is no merit to any of the claims asserted by the former dealers," GM Canada spokeswoman Adria MacKenzie said in an e-mail. "GM Canada will defend its interests and is looking forward to a full and fair hearing of the facts."
Reeling from the financial crisis, GM was trying to slash its dealer network as part of a restructuring plan to secure a multibillion-dollar government bailout in 2009. The company targeted more than 200 dealerships across Canada for closing.
The plaintiffs allege GM intentionally forced dealers into quickly signing away their legal rights in "wind-down agreements" that violated provincial laws stating that franchisees must be given at least 14 days to consider such a move. GM disputes that its "wind-down" offers were legally considered franchise agreements and subject to those rules.
The case was filed in 2010, and certified, or given a green light to proceed as a class action, by a judge in 2011.
Facing the conflict-of-interest allegations, Cassels has argued it was only retained by the dealers for advice in the event GM Canada went into bankruptcy, which did not occur. Cassels also launched its own lawsuit that named the approximately 150 lawyers or small law firms that many of the dealers did consult on their own, in the face of the six-day deadline, about whether to accept the deal. The firm alleges that those firms should be liable for any damages Cassels faces.
The plaintiffs filed an amended statement of claim in June that withdraws their claim that the government of Canada had explicitly demanded the reduction of GM's dealership network. But the claim says the government had approved of GM's plan to close the dealerships.
According to the statement of claim, Cassels was retained by the Canadian Automotive Dealers' Association in April, 2009, despite already working working for the government of Canada on the bailout talks. The plaintiffs allege that Cassels "was in an untenable and indefensible conflict-of-interest" and that the law firm itself knew it had a conflict issue.
"Cassels lawyers discussed and agreed amongst themselves in advance that they would 'back off the dealers if their position threatened the [Canada] position,'" the statement of claim reads.
Two days before the deadline to sign the wind-up agreements, Cassels lawyers Glenn Zakaib and Peter Harris spoke with the dealers on a conference call, the plaintiffs claim, and Mr. Harris told them it was a "take it or leave it" deal.
The plaintiffs say the Cassels lawyers did advise the dealers to seek independent legal advice. But the dealers claim they never mentioned the firm was also working for the federal government, or that the dealers' rights under franchise laws may have been violated.
The dealers association itself, the statement of claim alleges, may have also been conflicted. It had chosen to remain neutral on the question of the closing dealerships, as it represented both continuing dealers and those being cut out of GM's network. This, the plaintiffs allege, "was known to Cassels but not to the affected dealers until it was too late."
In his decision certifying the lawsuit as a class action in March, 2011, Justice George Strathy, now the chief justice of Ontario, said the dealers' allegations raise important issues about lawyers' duties to their clients: "These are allegations of breaches of the fiduciary obligation of undivided loyalty that is at the heart of the lawyer-client relationship."
Jeff Gray