Executive Summary: Key Legal and Evidentiary Issues

• Dealer challenged arbitration award upholding termination of his Canadian Tire dealership.

• Alleged errors included misapplication of the wilful blindness test and procedural unfairness during arbitration.

• Arbitrator found the dealer engaged in unethical conduct by selling to resellers and concealing product substitutions.

• Court ruled the arbitrator applied the correct legal test and made factual findings immune from review.

• Procedural fairness claim was rejected as untimely and unsupported by the arbitration record.

• Appeal was fully dismissed, confirming the termination and reinforcing the enforceability of dealer contracts.

Background and dealer relationship
Stephen McCarthy had been a Canadian Tire dealer for over 28 years, operating under a dealer contract through his corporation, McCarthy-Ellis Mercantile Ltd. In 2021, he took over Store #30 at the Eglinton Town Centre in Toronto. Canadian Tire dealers are ranked under a Mobility Sales Volume (MSV) system, where higher sales improve a dealer’s chances of acquiring more profitable stores. The incentive structure created pressure to boost sales volume, including through bulk transactions.

Bulk sale incident and termination
In 2023, Canadian Tire discovered that McCarthy’s store had processed the sale of 4,998 air fryers to a single customer (BSC Canada), for nearly $1 million. The sale raised red flags, as CTC had policies against selling to resellers. McCarthy had previously secured an exemption for BSC based on assurances that it was not reselling merchandise. However, the arbitrator found these assurances were unsupported and that McCarthy took no meaningful steps to verify BSC’s claims. After being told by CTC to reverse the transaction, McCarthy instead substituted unrelated merchandise without notifying the corporation, and falsely claimed to have cancelled the sale. When the truth surfaced, it was too late to unwind the transaction. CTC launched an investigation and terminated the dealer contract in mid-2024 for unethical conduct.

Arbitration and findings
The dispute went to arbitration, where former Justice Gloria Epstein found McCarthy had knowingly engaged in three unethical business practices: selling to a reseller despite company policy, breaching an agreement to reverse the sale, and concealing the substituted goods. These acts met the definition of a "Non-Curable Event of Default" under section 20.1(q) of the Dealer Contract, which permitted immediate termination without remediation.

Appeal to the Superior Court
McCarthy appealed the arbitration award, arguing that the arbitrator applied the wrong legal test for wilful blindness, that he was denied procedural fairness, and that Canadian Tire failed to prove it suffered actual harm. The court dismissed all grounds of appeal. Justice Penman ruled that the arbitrator correctly applied the civil test for wilful blindness and found that McCarthy had an obligation—based on clear warnings from CTC—to verify BSC’s non-reseller status. The failure to make inquiries, paired with McCarthy’s affirmative assurances, supported the arbitrator’s finding of wilful blindness.

No breach of procedural fairness
The court also rejected the procedural fairness argument. McCarthy had claimed that CTC improperly relied on three grounds for termination that had supposedly been withdrawn. The court found that McCarthy was out of time to raise the argument and that he had been fully heard on the issue during arbitration. The arbitrator ruled that the three grounds were never withdrawn and that McCarthy led evidence on all six termination grounds, eliminating any unfairness.

No requirement to prove harm
Finally, the court rejected the argument that Canadian Tire was required to prove actual reputational or financial harm in order to justify termination. Section 20.1(q) of the contract permits termination based solely on the dealer’s engagement in unethical practices, separate from any adjudicated offence or demonstrated harm. Nonetheless, the arbitrator had found real harm, including damage to manufacturer relationships and loss of trust.

Conclusion and final result
The Ontario Superior Court dismissed McCarthy’s appeal in full, upholding the arbitration decision and confirming that Canadian Tire was within its contractual rights to terminate the dealer agreement. The judgment reinforces the legal standard for wilful blindness, confirms the limits of appeal from arbitration, and validates termination clauses triggered by unethical conduct in commercial franchise relationships.