NADAP Rules – Can you rely on them for protection?

The National Automobile Dealer Arbitration Program, or NADAP, was instituted in late 2006 providing a process for dispute resolution as between manufacturers and dealers.  It specifically does not apply to disputes between one dealer and another or between one manufacturer and another.  As between a manufacturer and a dealer, however, it is mandatory that any disagreement arising out of a dealer agreement or its interpretation or application, including the question as to whether or not the dispute itself does arise under the terms of the dealer agreement, must be mediated and then arbitrated under the NADAP rules.

For the most part, dealers are fortunate to have the NADAP process available to them.

If a manufacturer or a dealer initiates a lawsuit in connection with such a disagreement, the party being sued can bring a motion to the court to have the lawsuit stopped so that the initiating party is forced to proceed under the NADAP rules.

While it is impossible to articulate every single type of dispute that might arise under the dealer agreement and thereby be subject to the NADAP rules of mediation and arbitration, the rules do list a number of examples of such disputes.  The examples suggest that to a significant extent, the rules exist to protect dealers by permitted dealers to challenge what may be arbitrary or unreasonable decisions on the part of manufacturers.  Some of these would include:

(a)  The reasonableness of the length of the cure period provided by a manufacturer to a dealer to cure or remedy a default.

(b)  A manufacturer’s refusal to act reasonably in approving a dealer’s request to sell or transfer in an interest in a dealership including:

i.  Whether the manufacturer’s conditions in effect for dealers wishing to transfer their interests are reasonable and if so, if the prospective new dealer meets them;

ii.  Whether any specific written requirements established by the manufacturer for the prospective new dealer are unreasonable;

iii.  Whether the factors established by the manufacturer for the continued operation of the dealership by the proposed new dealer are reasonable; or

iv.  Whether the dealer or prospective new dealer is able to cure a default under the dealer agreement existing at the time of the proposed sale or transfer.

(c)  The proposed creation by a manufacturer of a new dealer point abutting an existing dealership under certain circumstances;

(d)  A manufacturer’s (or dealer’s) failure to perform the dealer agreement in good faith including the manufacturer’s termination or refusal to renew or extend the dealer agreement; or

(e)  A manufacturer’s attempt to terminate a dealer agreement under a variety of circumstances which may be unfair or unreasonable.

For the most part, dealers are fortunate to have the NADAP process available to them.  This is so not only because of the expedited process that the NADAP rules offer, but also because on a substantive basis, complaints which a dealer can raise under the NADAP rules are simply not available in contract or common law to business owners in other industries.  For example, and as alluded to above, there are circumstances in which a dealer can actually challenge the reasonablenss of contractual provisions set out in a dealer agreement.  In other circumstance, contracting parties generally are not in a position to challenge the reasonableness of provisions in a contract into which have been entered into freely and willingly. 

Unfortunately, as of January 1, 2012, the applicability of NADAP rules to disputes between dealers and manufacturers cannot be taken for granted.

When the rules were created, they envisioned that the parties would enter into what is defined in the rules as an “implementation agreement” whereby the parties agreed that the rules would apply to disputes between the parties.  The rules specifically provide that:

Any implementation agreement between a manufacturer and one of its dealers shall be for a term from its date of execution to January 1, 2012 and thereafter shall continue to enforce unless terminated by the dealer on  30 days’ written notice to the manufacturer or UNLESS TERMINATED BY THE MANUFACTURER ON 30 DAYS’ WRITTEN NOTICE TO ALL OF ITS DEALERS IN THE PROVINCE OR TERRITORY WHERE THE DEALER IS LOCATED (emphasis added).”

As a result, as of January 1st of this year, any manufacturer is at liberty to terminate its participation in the Program by providing 30 days’ notice to all of its dealers in the province.  Any manufacturer doing so would then be at liberty to behave as would any contracting party in any other industry, and dealers would be deprived of the advantages of NADAP both procedurally and substantively.

As a result, if you are a dealer and you receive such a notice from the manufacturer, be alert to the fact that the NADAP rules will no longer be available to you in the event of a dispute.  If that happens to you, it would probably be wise for you to contact your manufacturer’s area representative to inquire as to why the manufacturer made this decision and specifically as to whether or not the decision was made as a result of any anticipated problems with your dealership.

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