The Ontario Superior Court of Justice has released its decision in 405341 Ontario Limited v. Midas Canada Inc., in which the franchisee, party to ongoing class proceedings against the franchisor, challenged the enforceability of the requirement in its franchise agreement that it execute a full and final release of the franchisor upon renewal.

In deciding that such a release was not enforceable, the Court has yet again signified that Ontario’s franchise law, the Arthur Wishart Act (the "Act") will be applied, in the Court’s view, to "mitigate and alleviate the power imbalance that exists between franchisors and franchisees" on the assumed basis that all franchise agreements are, again in this Court’s view, contracts of adhesion that are not freely negotiated by the parties.

The decision also includes holdings on other important issues, including the enforceability of a release which has the effect of limiting a franchisee’s right to participate in class proceedings, and the use of Ontario law to govern a franchise relationship where the franchise is located outside of Ontario.

If this decision stands (we understand that an appeal is under consideration) it could signify an expansion of the Act’s reach in ways unforeseen by most who practice in the area.

While Section 11 of the Act provides that a purported waiver or release of any right given by the Act is void, many franchise agreements include a provision that makes transfer or renewal of the franchised business conditional upon the franchisee executing a release of the franchisor, and by consequence, a waiver of certain rights or remedies available under the Act. The Midas decision might impact the consequences of this longstanding practice, as it suggests that where the exercise of a franchisee’s right under a franchise agreement requires a release of rights under the Act, by application of Section 11, such a release will be prima facie void.

The extent to which such a principle may be generally applicable to releases of any rights under the Act is not now known, as the decision may have been influenced by the fact that it was heard in the context of ongoing class proceedings, and by the unwillingness of the Court to give effect to a release which would have deprived the franchisee from participating in the ongoing litigation. Whether or not a similar decision would have been reached in the context of a singular franchisor-franchisee relationship is yet to be determined.

Indeed, the Court held that a release will be void to the extent that it deprives a franchisee from participating in class proceedings in which it is otherwise entitled to participate, as such would amount to a waiver of its right of association, under Section 4(4) of the Act.

If generally applicable, the principle from Midas stands for the proposition that a release of any rights under the Act may not be given effect where it is given as a matter of practice in compliance with a contractual obligation preceding the renewal or transfer of a franchise. To reconcile such a principle with a different judge’s decision in the Tutor Time1 case, the Court held that a release may be enforceable where it is made for the purposes of settling claims for known, existing breaches of the Act.

This decision creates difficulty for those operating franchise companies or practicing franchise law in the day to day world, as parties may now be unable to conclude that a full and final release will have its intended effect. The Court in Midas makes no mention of the public policy position, which likely underscored the Tutor Time decision, that parties need to be able to settle their claims once and for all, as otherwise every dispute would require costly and time consuming litigation while being conclusively decided by the courts.

Many standard-form franchise agreements provide that Ontario law shall govern the franchise relationship, despite the fact that the franchised business operates in another province. This was the case in Midas, where the Court held that the designation of Ontario law resulted in the application of the Act to all of the franchises in Canada, such that the releases required by the franchise agreement were void in all provinces.

The Court was of the view that the intention of the parties was that "their rights and obligations - including the reciprocal and inviolable rights and duties of fair dealing - [were] to be the same as if the business of the franchise was operated in Ontario." The tone and breadth of this language suggests that this extraterritorial application of the Act might extend beyond the enforceability of releases, to include any of the Act’s other provisions, for example its rigorous disclosure requirements. However, the extent and scope of application that such a principle may have on Canadian franchisors is not now known, complicated again by the fact that the decision was rendered amidst, and perhaps influenced by, the ongoing class proceedings to which it related.

Based on this decision, and the uncertainty it now represents, franchisors should consult counsel and conduct an immediate analysis of the risks imposed by those existing franchise agreements, throughout the country, which designate Ontario as governing law.

If it stands as the law, the decision in Midas will have a significant impact on the manner in which franchisors draft and exercise their rights to require releases from franchisees, and the way they deal with prospective and existing franchisees outside of a regulated province.