US and Canadian dealers are successfully taking on the new General Motors in its bid to reduce dealer numbers following discontinuation of its Pontiac, Saab, Hummer and Saturn brands.

In the lead-up to their success the dealers effectively took on the Obama administration which, a government watchdog suggests, may have acted unwisely in demanding that both General Motors and Chrysler accelerate the closing of dealerships to ensure their own viability.

Released in July, a report by Neil Barofsky, special inspector general for the US Treasury's corporate bailout program, said the task force established to oversee the GM and Chrysler restructuring did not sufficiently consider the impact of accelerated dealer closings on job losses. The report also said GM was not always consistent in its approach to determining which franchises to terminate.

Decisions made by both companies in 2009 initially affected more than 2400 showrooms and led to a fierce lobbying campaign by dealers. Under pressure, Congress forced the companies to arbitrate appeals and it resulted this year in the potential reversal of a third of planned closures -- mainly at GM.

Initial plans to gradually close 1600 GM dealerships and 789 Chrysler dealerships over several years were rejected by the task force on grounds the companies needed to be more aggressive in their restructuring to ensure continued government support.

GM and Chrysler, whose bankruptcies in 2009 were facilitated by the task force, received more than $80 billion in bailout and restructuring assistance.

Internal task force memos reviewed by Neil Barofsky showed the task force "knew there might be difficulties" with accelerating dealership closings. The task force wanted the companies to take full advantage of unique laws in expedited bankruptcy to "reject dealership franchise agreements without significant upfront costs." The intention was to benefit taxpayers and to assist the companies in becoming viable as soon as possible.

Barofsky's central criticism of the task force was that it did not fully weigh the impact that dealer closings would have on job losses. The report states: "It is not at all clear that the greatly accelerated pace of the dealership closings during one of the most severe economic downturns in our nation's history was either necessary for the sake of the companies' economic survival or prudent for the sake of the nation's economic recovery."

GM responded to the task force's concerns with a new plan involving 1400 dealership retrenchments by October 2010, down 200. Chrysler's revised plan called for cutting 789 dealerships within months with no appeal.

Dealers complained the decisions were arbitrary. GM finally said it would reinstate more than 660 dealers it had threatened with closure, reducing the number of dealers planning to appeal.

GM of Canada has now made an out-of-court settlement with the 21 dealers in Ontario, British Columbia, Alberta, Saskatchewan, and Prince Edward Island who refused to sign wind-down agreements sent to them in May. Under the deal, 13 will remain open while the other dealers receive additional compensation for closing.

GM and members of the dealers group said they could not disclose key terms of the settlement because of confidentiality agreements.

The 21 dealerships argued GM used an arbitrary measure to decide which businesses to close and broke a contract that promised to automatically renew their franchises as long as they fulfilled sales and other obligations. They sought punitive damages of $1.5 million as well as additional damages for "loss of profit, loss of goodwill, loss of reputation, loss of business opportunity and loss of market share."

The “wind down agreements” offered them between $200,000 and about $1.5 million depending on sales. About 85 per cent of the dealers accepted the terms despite complaints the compensation would not cover severance and closing costs.

The dealers claimed GM acted in a “highhanded, oppressive and patently unfair” manner. They described the company’s process of reviewing the terminations as a “sham” and skewed by corporate conflicts of interest. The group sought an injunction to remain open for at least another five years.

In its defence, GM said significant cuts in the dealer network were necessary because of falling demand. GM claimed it had no choice but to close hundreds of dealerships to stay afloat during the recession.

Jonathan Lisus, who acted for the dealers, said after nine months of legal wrangling: “The lawsuit has been resolved to the mutual satisfaction of the plaintiffs and GM. As part of the settlement, a number of the plaintiffs will continue on as dealers; others will accept payment and wind down their operations. I'm sure both parties are pleased the litigation is concluded”.

Three other Canadian actions include two in Quebec and a class-action suit in Ontario involving about 200 dealers who originally signed the wind-down agreement, including waiving the right to sue the company.

They now have an action against both GM and legal firm Cassels Brock & Blackwell. The Toronto firm is alleged to have a conflict of interest, having advised both the federal government on the bailout proceedings and the Canadian Automobile Dealers Association.

David Sterns, a lawyer representing class action dealers, says: "We believe that our case is on very solid ground. We're happy that GM has seen fit to resolve its dispute with the (other dealers), but it's full steam ahead for the class action. We're fully prepared to take this case to trial and to prove our case on the merits, and if GM sees fit to try to come to a reasonable resolution, then we would be all ears".

The dealers are seeking $750 million in damages and they claim GM Canada broke franchise laws by failing to give them adequate information and that "a tremendous amount of undue pressure" was put on them.

What dealers are saying:

Robert Slessor of Ontario’s Robert Slessor Pontiac Buick, says he has accepted a cash settlement, and will take on an undisclosed brand after his 55-year relationship with GM ends in October. “We have a number of opportunities that we’re pursuing,” he says.

"We're very pleased that the ordeal has finally come to a mutual agreement. It will allow us now an opportunity for a little bit of closure regarding the situation and an opportunity to move forward with our future business plans.

"From a personal standpoint, we'll miss our association with General Motors. We've enjoyed a long-term relationship and there's mixed emotions as we move forward, but we are pleased that we've been allowed the opportunity to continue business and that the ordeal is finally behind us,"

Upper Canada Motor Sales is staying with GM under a new November operating agreement. Service manager and owner's son Marc Goupil says: "We have 28 people on staff here and everyone gets to keep their jobs. Morrisburg is not a big community; we need to keep as many businesses as possible. They thought that we were too small a market, that we wouldn't be viable (but) we've always been profitable in all the years we've been here."