405341 Ontario Limited v. Midas Canada Inc., 2009 CanLII 56298 (ON.S.C.)

A class action was certified by Midas franchisees in which the class was seeking damages and restitutionary remedies from Midas Canada Inc. (the franchisor). Following certification of the class, 405341 Ontario Limited (the franchisee), a franchisee and member of the class, brought before the Court the issue of the franchisees’ obligation to execute a release of their claims against the franchisor as a condition to the renewal of their respective franchise agreements. The franchisee sought a declaration that such agreements, which all contained similar clauses, were unenforceable with respect to some or all of the common issues set out in the certification order. Moreover, the franchisee sought an order prohibiting the franchisor from requiring the release of the former’s claims against the latter as a condition for the renewal of its franchise agreement.

The franchisee’s first argument was that the release of claim provision in its franchise agreement contravened the right of association conferred by section 4(1) of the Arthur Wishart Act (the Act). The statutory provision included the right to join in a class action with other franchisees to enforce the provisions of the Act pertaining to fair dealing. In addition, it was argued that since these provisions purported to restrict a franchisee from exercising its right of association, the provisions were void pursuant to section 4(4) of the Act. It was also argued that even if the clauses were not void under the aforementioned provision, they would be void pursuant to section 11 of the Act, which prohibited any purported waiver or release by a franchisee of a right conferred under the Act.

The Court interpreted section 4(4) of the Act and the use of the verb “purports” so as to not simply render franchise agreements as void due to provisions which would create an intent to contravene the right to associate under the Act. Rather, it rendered void any provisions which effectively contravened section 4 of the Act. The same interpretation was also applied with respect to section 11 of the Act.

The Court also confirmed that the right of association provided for in section 4 of the Act included the right of franchisees to participate in a class action to enforce their rights against the franchisor. The franchisor’s counsel argued that the no-waiver provisions of the Act were not applicable since this case involved consensual releases of claims, as opposed to coerced releases. The Court rejected this argument reiterating that these franchise agreements were contracts of adhesion and that the Act was intended to alleviate the power imbalance between the parties. As such, the franchisor could not claim compliance with the franchise agreements since the agreements contravened the statutory right of association. Furthermore, the Court confirmed that this case was not one in which the franchisee wanted to settle its claim; rather, it sought to assert it.

In summary, if a franchisee is required to release its rights under the Act, the release will prima facie be void pursuant to section 11 of the Act.

With respect to the issue of the applicable law of a franchisee’s businesses operating outside of Ontario, the Court found that, since the controlling law was that of Ontario, the parties agreed that their rights and obligations would be those provided for under the law of that province, including the Act.