Applying section 11 of the Arthur Wishart Act (Franchise Disclosure), 2000 (the AWA), the Ontario Court of Appeal in 2176693 Ontario Ltd. and 2130679 Ontario Inc. v. The Cora Franchise Group Inc. affirmed the decision of the Ontario Superior Court of Justice that the requirement to sign a general release contained in the appellant Cora’s standard form franchise agreement was unenforceable. The Court further upheld the decision that it would be inappropriate in the circumstances to “read down” the clause to narrow it to the release of non-AWA claims and bring it into line with the legislation. Please find our previous review of the Ontario Superior Court’s decision here.
Background and Adjudicative History
Two Cora franchisees sought to assign their franchise agreements to third parties. However, their standard form franchise agreements with Cora included a clause requiring a general release of any and all claims as a condition precedent to any assignment. The two Cora franchisees therefore brought an application for a declaration that this clause was void and unenforceable as it was contrary to s. 11 of the AWA which holds that “any 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.”
The Ontario Superior Court of Justice held that the section in dispute was void and unenforceable because it did indeed run contrary to s. 11 of the AWA, and that allowing the term to stand was in conflict with the remedial purpose of the AWA. Cora appealed the decision on the basis that the application judge failed to properly interpret the franchise agreement and failed to apply the proper policy considerations.
Decision of the Ontario Court of Appeal
The Court of Appeal dismissed Cora’s appeal and held that the impugned clause of the franchise agreement requiring a general release for assignment was unenforceable as being contrary to s. 11 of the AWA. The Court further held that the impugned clause could not be notionally severed from a release of non-AWA claims because of the potential for abuse and subversion of the purposes of s. 11 of the AWA; this was in spite of the potential that the franchisees would obtain a windfall if the impugned clause was not severed. The Court did find that while the clause was unenforceable it was not void because it was not a release in and of itself.. The Court did find that while the clause was unenforceable it was not void because it was not a release in and of itself.
Cora argued that the application judge failed to properly consider that the “general release” required by the impugned clause was to be “in the form specified by the Franchisor,” which, allowed the franchisor to determine the scope of the release thereby saving the impugned clause from becoming void or unenforceable. The Court of Appeal rejected this argument and held that the substantive requirement of the impugned clause called for a “general release” and that the words relied on by the franchisor did nothing to modify that requirement.
Further, while Cora acknowledged that the impugned clause could not lawfully operate to require a release of any rights under the AWA, it argued that it should be “read-down” or notionally severed to require a release of only those non-AWA claims. In analyzing whether or not the impugned clause could be “read-down” in this case, the Court reviewed the following considerations:
- whether the purpose or the policy of s. 11 of the AWA would be subverted by severance;
- whether the parties entered into the agreement for an illegal purpose;
- the relative bargaining positions of the parties and their conduct in reaching the agreement; and
- the potential for the franchisee to enjoy an unjustified windfall.
In this instance, the Court focused on the first and fourth factors, holding that the other two factors would rarely be of any assistance in a franchise context. On the one hand, the Court held that permitting notional severance in this case would invite franchisors to “draft overly broad provisions with the prospect that the courts will only sever or read those provisions down.” The Court also held that severing the clause in this case would have a chilling effect on the exercise of franchisees’ rights, erroneously convincing them that they are not entitled to pursue any claims against the franchisor.
However, on the other hand, the Court held that the potential windfall to the franchisees in this case was difficult to assess. The Court noted that there could be no ‘windfall’ to the franchisees by not requiring them to release their AWA claims because such a release would be unenforceable in any event. Moreover, although Cora would lose the benefit of the release that the parties had bargained for, the overarching purpose of the assignment provision at issue was to ensure that the franchise was assigned to a competent franchisee. The Court held that even if the provision was unenforceable, Cora still retained all of its other assignment protections, including the right to approve the assignee as a franchisee. Ultimately, the Court therefore concluded that the potential subversion in severing the clause outweighed any potential windfall, and declined to “read it down”. However, the Court importantly left open the possibility that in other circumstances a non-compliant release could be “read down” or “blue penciled,” further to the consideration of the above enumerated factors.
The Cora decision has potentially wide-reaching implications for franchisors as it raises questions on the enforceability of franchisee releases even in situations where those releases reflect terms negotiated and agreed upon between a franchisor and its franchisee. Best practices for franchisors in drafting release clauses continue to evolve, and it is recommended that in order to lay the groundwork for enforceability, franchisors, with the assistance of counsel, carefully review, consider, and potentially revise any standard release clauses they include in agreements with franchisees.