A decision was recently made in the 2176693 Ontario Ltd. v. Cora Franchise Group case that reinforces that franchisee rights under Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000 (the AWA) cannot be readily released or waived by franchisees.
Justice W. Matheson of the Ontario Superior Court of Justice held that a provision in Cora’s franchise agreement requiring the franchisee to provide Cora with a general release of any claim as a condition of Cora consenting to the franchisee’s assignment of the franchise agreement was void and could not be re-written to the franchisor’s benefit. This was in spite of the franchisor not requiring the franchisee to release its AWA claims but only its non-AWA claims, i.e. its common law claims such as breach of contract and misrepresentation.
The AWA is remedial legislation and the rights afforded to franchisees under the AWA are intended to restore the perceived power imbalance between a franchisor and franchisee. Under the AWA, a franchisee has the right to a disclosure document at least 14 days before being asked to sign a written agreement with or pay money to the franchisor, the right to rescind the agreement if proper disclosure was not made, the right to be treated by the franchisor in accordance with the duty of good faith and fair dealing, and the right to associate with other franchisees.
These rights are so important that s. 11 of the AWA 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 by or under this Act is void.”
Prior to this recent Cora case, there have been very few cases considering s. 11 of the AWA. There is the 1518628 Ontario Inc. v. Tutor Time Learning Centres LLC decision in which the court held that a franchisee’s release of its AWA rights was enforceable in the context of a settlement of a dispute where the franchisee was aware of its AWA claims and it had legal representation. In that case, the franchisee after having rescinded its franchise agreement, agreed to stay in the system in consideration of certain financial concessions, and released its rescission claim against the franchisor. The motion judge held: “[Section] 11 does not have application to a release given (with the advice of counsel) by a franchisee in the settlement of a dispute for existing, known breaches of the [AWA] by the franchisor in respect of its disclosure obligation, which would otherwise entitle the franchisee to a statutory rescission.”
In the 405341 Ontario Ltd. v. Midas Canada Inc. case, which was affirmed by the Ontario Court of Appeal, the court found a provision in the franchise agreement that, like the Cora franchise agreement, required the franchisee to give a general release to the franchisor in exchange for consent to an assignment of the franchise agreement, void.
Unlike the Tutor Time case, the franchisee release was not being requested in the context of a settlement of known claims when the franchisee had the benefit of legal representation. Rather, the franchisor was looking to enforce an agreement made by the franchisee at the time it entered into the franchise agreement to release the franchisor as a condition of the franchisor consenting to the franchisee’s assignment. The Court of Appeal stated: “If you include a term in your franchise agreement that purports to be a waiver or release of any rights a franchisee has under the [AWA] it will be void.”
In the Cora case, the franchisor argued that because it was only looking for the franchisee to release its non-AWA claims, the provision in the franchise agreement requiring the franchisee to release the franchisor was enforceable.
Justice Matheson disagreed, finding that s. 11 of the AWA is “particularly broad” and “do[es] not expressly contemplate that a provision in an agreement can be void and unenforceable only in part.” “To interpret s. 11 to essentially allow a franchisor to read down its offensive release clause certainly fails to protect franchisees. It allow franchisors to take advantage of franchisees … This is directly contrary to the purpose of the AWA.”
According to Justice Matheson, the result of the contractual provision having been found void was not unfair to the franchisor, “since [the franchisor] imposed the offensive term and ought not to benefit from doing do.”
Justice Matheson also noted that some of the rights found in the AWA are a codification of common law rights. She didn’t specify those she had in mind but must have been referring to the duty of fair dealing under s. 3 of the AWA, which Ontario courts have found to be a codification of the common law duty of good faith (see the Ontario Court of Appeal decision in Shelanu Inc. v. Print Three Franchising Corporation). Section 3 of the AWA imposes on each party to a franchise agreement a duty of fair dealing in its performance and enforcement.
Justice Matheson stated: “The suggestion that the general release should be read down to release only non-statutory right invites considerable debate and confusion about the status of all overlapping claims.”
The Cora decision underscores the importance of staying on top of current developments in franchise law, as the case will very likely change the way franchisors draft and use releases.
They should no longer require a general release as a condition of renewal, assignment or transfer, or should specify that only a release of non-AWA claims will be required. Even with respect to releases of non-AWA claims, however, it remains to be seen if there is a practical way to address any overlapping common law and AWA claims.
This article was first published by the Financial Post on February 11, 2014 and is available here.
Part of the May 2014 - Franchise Review