On March 3, 2012, the Ontario Superior Court of Justice released its decision in Dodd v. Prime Restaurants of Canada Inc. (2012 ONSC 1578). The decision acts as a caution to franchisors to ensure their franchisees are fully informed and properly advised prior to entering into settlement agreements. Without such steps, franchisors may find releases rendered ineffective against subsequent statutory claims by the application of section 11 of the Arthur Wishart Act (the Act).

Background

In Dodd v. Prime Restaurants, a franchisor and franchisee made a voluntary assignment in bankruptcy, with the franchisor agreeing to take over operation for the poorly performing franchisee. This agreement included a mutual release for any claims, debts or actions. Subsequent to the agreement the franchisee notified the franchisor of its intent to seek rescission of the franchise agreement. The franchisor took the position that this was contrary to the agreement between the parties as set out in the mutual release, and continued to operate the franchisees’ business in accordance with the terms of the agreement and release.

In June 2007, the franchisee commenced this action against the franchisor claiming damages for breach of contract, negligence, misrepresentation, and rescission of the franchise agreement. The franchisor responded by bringing a motion for summary judgment on the basis that the action was barred by the mutual release entered into by both parties.

Analysis

The Ontario Superior Court applied the “full appreciation” test as recently laid out in Combined Air Mechanical Services Inc. v. Flesh, ultimately determining that summary judgment was not appropriate. In coming to this decision, the Court spoke at length regarding the application of section 11 of the Act, which provides:

11.   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 franchisee in this instance argued the mutual release entered into between the parties was unconscionable. Further, the franchisee argued that even were the release not unconscionable, it was rendered void due to the application of section 11 of the Act and could not prevent the bringing of this action against the franchisor. The Court quickly determined there were evidentiary issues with respect to unconscionability that could not be resolved on summary judgment. In particular, the franchisor and franchisee had led conflicting evidence as to whether the franchisee had received independent legal advice prior to entering into the release. 

With regard to the application of section 11 of the Act, the franchisor took the position that on a proper construction the section could not be relied upon to render ineffective the agreement between the parties, which was intended to settle claims arising out of any breach the statute. In making this argument, the franchisor relied upon the Superior Court decision in 1518628 Ontario Inc. v. Tutor Time Learning Centres LLC. In Tutor Time, the Court held a settlement agreement inclusive of mutual releases of all rights and claims between a franchisor and franchisee could be valid, despite the application of section 11 of the Act:

... s.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 Act by the franchisor in respect of its disclosure obligations, which would otherwise entitle the franchisee to a statutory rescission.  

Applying a narrow read of the Tutor Time decision, the Court in this case held the release entered into between the franchisor and franchisee did not clearly avoid the application of section 11 of the Act. In particular, the court noted that unlike Tutor Time it was not clear that the franchisee in this instance had the advice of counsel prior to entering into the release, nor was it clear that the franchisee was aware of rescission rights. For the purposes of summary judgment, therefore, the Court was unable to find the release acted as a bar to statutory claims under the Act. That said, the Court did acknowledge the statutory limits of section 11, recognizing the release would still be effective to prevent the franchisee from asserting any common law or equitable claims against the franchisor.

Lessons for Franchisors

Narrow Reading of Tutor Time Decision. The Court applied a narrow read of the Tutor Time decision, holding that it was unable to grant summary judgment in this case due to dissimilar facts. In particular, the Court focused on the fact that, unlike in Tutor Time, it was unclear that the franchisee in this instance had received legal advice prior to entering into the release at issue, nor was it clear that the franchisee had full knowledge of the Act claims being released. To avoid this outcome in future, franchisors would be wise to ensure franchisees are fully informed and properly advised prior to entering into a settlement agreement and release. Franchisors may also require franchisees provide a certificate of independent legal advice to prevent subsequent claims that the franchisee was not properly advised.

Mutual Releases Effective Against Common Law Claims. While section 11 of the Act may be invoked by franchisees seeking to overturn the release of their statutory claims, they will be unable to utilize section 11 to pursue released claims in common law and in equity. Franchisors would be wise to continue the practice of including a full and final release in all settlement agreements as they will, at the least, effectively bar common law and equitable claims. That said, it will always be open to franchisees to argue a release is unconscionable and therefore wholly unenforceable.

Summary Judgment in the Franchise Context. A summary judgment motion can be a useful tool for franchisors seeking to expedite proceedings, with recent decisions in Suncor and Tim Hortons highlighting the success that franchisors may have. There are, however, cost consequences to losing a summary judgment motion and a franchisor runs the risk of an adverse finding. In this case, the franchisor was ultimately ordered to pay costs for its summary judgment motion on a partial indemnity basis, to the tune of $50,000. These risks must be weighed against any potential benefit.