In a previous blog, we examined the interplay between releases in the franchise context and Section 11 of the Arthur Wishart Act (Franchise Disclosure), 2000 (the “Act”). Section 11 of the Act provides that “[a]ny purported waiver or release by a franchisee of a right given under this Act …is void”. The Ontario Superior Court of Justice recently had another occasion to explore the interplay of Section 11 and a release given by a franchisee in New Vision Renaissance MX Ltd. v. The Symposium Café Inc. (“New Vision”). In New Vision, the Court upheld a release given by a franchisee as it fell within the judicially established “Tutor Time” exception. What makes this case interesting and welcome news for franchisors is that, in rendering its decision, the Court examines the three components of the “Tutor Time” exception and, in doing so, provides some further guidance on the scope of enforceable releases in the franchise context. Further, it can prove to be of some utility to franchisors that the Court upheld the release in this case, even though it was given before the franchisee actually opened its franchise for business.
In February, 2015 the franchisee entered into a number of agreements with the franchisor including a franchise agreement and an agreement of purchase and sale. The closing date was scheduled for June 26, 2015. Just prior to the scheduled closing date, the franchisee informed the franchisor that it did not have all the closing funds due to a delay in obtaining the funds. The parties met on June 24, 2015 to discuss options for resolving the shortfall of funds and the purchaser franchisee’s inability to close on the scheduled closing date (which date the franchisee itself had requested). Thereafter, the parties negotiated (with the assistance of legal counsel) a “Franchise Amending Agreement” (the “Amending Agreement”) which was signed on June 26, 2015. Pursuant to the Amending Agreement and in consideration of the franchisor assisting the franchisee to arrange a short-term loan to enable the franchisee to satisfy the funds due on closing, the franchisee agreed to release the franchisor for claims under the Act, including claims relating to the franchisor breaching its disclosure obligations under the Act. On June 27, 2015, the franchise location opened for business as scheduled.
On May 13, 2016, the franchisee delivered a notice of rescission under Section 6 of the Act seeking to rescind the franchise agreement for alleged disclosure deficiencies. In its claim against the franchisor, the franchisee also claimed damages under Section 7 of the Act. The franchisor alleged that the franchisee had released these claims under the Amending Agreement. The franchisee took the position that Section 11 of the Act applied to void the release and that the “Tutor Time” exception did not apply to invalidate the release in this case. The Court disagreed with the franchisee. The Court found the release was valid, thereby barring the franchisee’s claims against the franchisor pursuant to Section 6 and 7 of the Act.
Courts “Tutor Time” Analysis
(a) Was the Release Contained in the Amending Agreement Part of a Settlement of a Dispute?
The Court found that a potential dispute existed between the parties at the time the Amending Agreement was signed. The potential dispute was whether the franchisee could open its location without paying at the closing all or some of the outstanding amounts due. The foregoing potential dispute was resolved or settled through the provision of the loan to the franchisee, enabling the franchisee to complete the transaction and close at the scheduled time. As part of the settlement, the franchisee provided a release of the statutory rights arising from any disclosure deficiencies under the Act. The franchisee did attempt to argue that the “Tutor Time” release can only be given in the context of the settlement of the dispute at the end of the franchise relationship. To that argument, the Court stated “[i]t may be that this is a more common time in franchise relationship for there to be disputes that need to be settled, but the timing is not the determinative factor. It is the existence of circumstances that give rise to a dispute or potential dispute that matters”.
(b) Did the Release Pertain to Existing, Known Breaches?
The franchisee attempted to argue that the release language suggests a release of future claims that could not have been known and, thus, it falls outside of the “Tutor Time” exception. In construing the language of the release, the Court reasoned “that the rights released must be those that a releasing party was in a position to exercise at the time of the release because of the same circumstances now relied on. It is not necessary for a claim based upon those rights to have been actually made”.
In light of the facts in New Vision, including the fact that the franchisee’s lawyer (an experienced franchise lawyer) actually tried to vary the terms of the release to exclude a release from the rights under the Act in regards to proper disclosure (which variance was rejected by the franchisor), the Court concluded that the release was given in respect of claims (i.e. deficient disclosure) that the franchisee had knowledge of at the time of entering into the Amending Agreement. The Court further added that “[t]he franchisee was in a position at the time to exercise the rights they release based on the same circumstances now relied upon. It is not necessary for a claim based upon those rights to actually be made”.
(c) Did the Plaintiffs Have the Benefit of Legal Advice When Executing the Settlement?
The Court found that there was compelling evidence that the franchisee was receiving legal advice at the time the Amending Agreement and release contained in it was executed. The franchisee, relying on a previous decision of the Court, attempted to argue that a certificate of independent of legal advice (“ILA”) is required to prove that the franchisee had legal advice when it agreed to the Amending Agreement and the release contained in it.
The Court concluded that ILA certificate was not required to be signed in every case, noting it might be needed where a franchisee is being asked to sign something which has led them to hire a lawyer for the first time to advise them about what is being signed, but that was not the case here as the franchisee had already hired a lawyer (an experienced franchise lawyer) who advised about the disclosure document, and was hired to assist with the closing of the transaction when the release was being negotiated. Further, the Court added that an ILA certificate is only one means of demonstrating that independent legal advice was obtained, noting that ILA can be evidenced in other ways such as, in this case, through the direct involvement of the franchisee’s counsel in negotiating of the settlement and release language.
Franchisor’s should find New Vision to be a welcome decision. Not only does it provide further guidance on the scope of enforceable releases in the franchise context, but provides an opportunity for franchisor’s to obtain such releases in the appropriate circumstances, even before a franchisee begins operation of its franchise business.