The Ontario Court of Appeal recently upheld a decision (which initial decision we wrote about here) striking down a general release clause in a franchise agreement, even though the franchisor sought to be released from non-statutory claims only. The Court of Appeal’s decision underscores the importance of carefully-worded release clauses, demonstrating that an overbroad release clause likely will not withstand scrutiny under section 11 of the Arthur Wishart Act (Franchise Disclosure), 2000 (the “Act”) and the parallel provisions in the franchise legislation of Alberta, Manitoba, New Brunswick and P.E.I.

As more particularly described in our earlier post, 2176693 Ontario Ltd. v. Cora Franchise Group Inc. relates to an action by two franchisees for non-disclosure against the franchisor. The franchisees were looking to assign their franchise agreements to third parties, and the franchise agreements permitted assignments so long as the franchisee executed a “general release,” releasing the franchisor from “any claims” as a condition of assignment. The franchisees refused to execute the general release, claiming that it was contrary to section 11 of the Act, which provides 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.

In response to the franchisees’ objections, the franchisor provided a release which specifically stated that it did not constitute a waiver of any rights prescribed by the Act. The franchisees nonetheless refused to sign the release, and brought an application for a declaration that the clause requiring the execution of a general release was void and unenforceable.

The Ontario Superior Court of Justice agreed with the franchisees. It held that it could not read down the offending clause, because to hold otherwise would create a potential for abuse, where the franchisor could rely on an offending clause and “wait and see” if a complaint was raised, knowing that many franchisees would not assert their rights.

The franchisor appealed, arguing that the general release clause should be notionally severed such that it would be enforced only to the extent that there was no conflict with section 11 of the Act.

The Ontario Court of Appeal dismissed the appeal. Writing for the Court, van Rensburg J.A. relied on the Supreme Court of Canada’s decision in Transport North American Express Inc., which spoke to the factors relevant to determining if severance is possible. Two factors, in particular, were relevant in this case: (1) whether the policy goals of section 11 of the Act would be subverted by severance, and (2) whether the franchisee would receive an unjustified windfall if the clause were held to be unenforceable in its entirety.

The Court highlighted that the purpose of the Act is to protect franchisees from more sophisticated franchisors, and that applying notional severance in this case would invite franchisors to draft overly broad provisions in the hope that a franchisee would erroneously believe that it is not entitled to pursue any claims against the franchisor, including statutory claims. As such, to permit notional severance would subvert the policy and purpose of section 11 of the Act.

In assessing whether the franchisees would receive an unjustified windfall, the Court acknowledged that the franchisees would receive more protection by not signing the release than they would if the clause were notionally severed. However, it held that the legitimate interests of the franchisor in the context of the assignment would still be protected, since the purpose of the assignment clause as a whole is to ensure that the franchise agreement is assigned to a competent party, and the other conditions regarding the franchisor’s approval remain in place (including the franchisor’s ability to approve the assignee as a franchisee).

The Court of Appeal’s affirmation that the general release clause should not be notionally severed or read down should be of interest to franchisors in drafting franchise agreements, transfers, and renewals. Even if, in practice, the franchisor seeks only a release of non-statutory claims, courts are likely to strike down release clauses that are sufficiently broad to waive a franchisee’s statutory rights. As a result, such clauses must be considered and drafted carefully, to protect a franchisor’s interests without overreaching with respect to a franchisee’s rights under the Act.

April Engelberg