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The Enforceability of Releases in Franchise Agreements

By: Louis Vouloukos
Jun 8, 2015

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It is common practice for franchisors to request a general release from their franchisees as a condition of the renewal, assignment or transfer of a franchise agreement. In light of Section 11 of the Arthur Wishart Act (Franchise Disclosure), 2000, S. O. 2000, c. 3 (the “Act”) which provides that “[a]ny purported waiver or release by a franchisee of a right given under this Act or of an obligation or requirement imposed on a franchisor or franchisor’s associate under the Act is void”, are these releases valid in Ontario? What if the release is provided as part of a settlement agreement? Several recent cases have interpreted the interplay between releases in the franchise context and Section 11 of the Act.

The Tutor Time Case

In 1518628 Ontario Inc. v. Tutor Time Learning Centres LLC, the franchisee purchased an existing franchise location from another franchisee. The franchisee was ultimately unsuccessful in operating the franchise and a dispute arose between the franchisor and the franchisee. The franchisee delivered a notice of rescission to the franchisor claiming that it had not been provided with a disclosure document as required under the Act and seeking damages afforded under the Act. However, the franchisee, with the assistance of its legal counsel, had previously signed a Settlement Agreement with the franchisor whereby the franchisee released its rescission claim against the franchisor.  At trial, the franchisee took the position that the release it had signed was void and unenforceable under Section 11 of the Act.

The Court disagreed. Justice Cumming stated: “In my view, s.11 does not have application to a release given (with the advice of counsel) by a franchisee in the settlement of the dispute for existing, known breaches of the Act by the franchisor in respect of its disclosure obligations, which would otherwise entitle the franchisee to a statutory rescission.”  Therefore, Section 11 of the Act did not invalidate a release given in the settlement of a dispute where the franchisee was aware of known breaches to the Act that it was releasing and had legal representation. 

The Midas Case

In 405341 Ontario Ltd. v. Midas Canada Inc., a decision affirmed by the Ontario Court of Appeal, a provision in the franchise agreement required the franchisee to give the franchisor a general release in exchange for obtaining the franchisor’s consent to the renewal or transfer of a franchise agreement. At issue was whether such a provision was enforceable. The franchisor attempted to rely on the Tutor Time decision noted above. The motions judge concluded that if the exercise of a franchisee’s rights under a franchise agreement requires a release of rights given by the Act, the release will be void by virtue of Section 11. 

The Court of Appeal agreed in stating: “[t] he language of s. 11 could not be clearer. If you include a term in your franchise agreement that purports to be a waiver or release of any rights the franchisee has under the Act, it will be void.” The Court of Appeal was also careful to distinguish this case from the Tutor Time decision, noting that this case did not involve a settlement of known claims where the franchisee had legal representation, but rather a case where the franchise agreement was signed before the claims arose and therefore without full knowledge of the claims. It appears that our Courts will apply Section 11 of the Act to invalidate a provision in a franchise agreement that purports to release any of the franchisee’s rights under the Act. 

The Cora Decision

In the more recent decision of 2176693 Ontario Limited and 2139679 Ontario Inc. v. the Cora Franchise Group Inc., the Ontario Court of Appeal again affirmed a decision of the lower Court that applied Section 11 of the Act to invalidate a general release required under the franchise agreement as a condition to the assignment of a franchise agreement.

In this case, the two franchisees had begun an action against the franchisor for breaches of the franchisor’s obligations under the Act and sought to assign their respective franchise agreements to third parties to mitigate their damages. Such assignment was conditional upon the franchisees executing a broad general release of “any claims” against the franchisor. The franchisees refused to sign a general release, stating that such a release would be void and unenforceable due to the application of Section 11 of the Act. The franchisor attempted to offer the franchisees a narrower form of release. The franchisees refused to sign and brought a declaration that the release was void and unenforceable.

The lower Court found in favour of the franchisees, concluding that the section of the franchise agreement requiring a general release as a condition precedent to the assignment of the franchise agreement was void and unenforceable since it offended Section 11 of the Act. Moreover, the Court refused to read down the offending clause in the franchise agreement to allow the franchisor to provide a narrower form of release. The Court of Appeal confirmed the lower Court’s decision, including that the general release clause provided for in the franchise agreement should not be notionally severed or read down.

Conclusion

Outside of the very narrow exemption provided for in the Tutor Time case, our Courts have applied section 11 to invalidate releases, particularly general releases. They are also not willing to sever or read down broadly drafted general releases.  As a result, franchisors who insist on obtaining general releases as a condition of the renewal, assignment or transfer of franchise agreements should ensure that release provisions in their franchise agreements are carefully worded by an experienced franchise lawyer.

Louis Vouloukos

(905) 452-6883   lvouloukos@lawrences.com

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