Published on March 5, 2011
Posted in: Blog
You will recall from an earlier edition of this Newsletter that the Ontario Court of Appeal in the Midas class action gave effect to Section 11 of the Arthur Wishart Act (Franchise Disclosure), 2000 to severely limit a franchisor’s ability to enforce a condition in a franchise agreement requiring a franchisee to deliver a release in favour of the franchisor as a condition of obtaining a renewal or extension. Section 11 states that any release or waiver by a franchisee of rights given by the Act are void.
As stated by the Court of Appeal, a provision in a franchise agreement requiring franchisees to give up potential future claims against the franchisor for purported breaches of the Act in order to renew the franchise agreement “unequivocally runs afoul of the Act”.
Despite the wording of Section 11, the courts have also made it clear that not all releases will automatically be void. Where a franchisee enters into a release with legal advice for the purpose of settling known and existing breaches of the Act and presumably where the settlement is reasonably obtained given the franchisor’s duty of fair dealing, the settling franchisee will not be able to subsequently resile from the release. The distinction is therefore made between releases which are forced upon a franchisee and settlement releases which are freely entered into by the franchisee for the purpose of settling known and existing breaches of the Act.
While it had been a common practice for franchisors to make a right of renewal or transfer conditional upon the franchisee providing the franchisor with a general release from any and all claims, the Midas decision marked a clear shift in how franchisors must conduct themselves, both in the drafting of franchise agreements and when considering any situation where they are seeking to obtain a release. The effects of this decision are not restricted to franchisees in Ontario, as the decision applies in situations where the governing law provision of the franchise agreement imports Ontario law into the contract wherever the franchise is situated.
Courts in the other provinces with similar legislative provisions can be expected to consider the Midas case and, as such, franchisors operating in those provinces are wise to treat the Midas decision as being equally applicable in those provinces.
The procuring and drafting of releases in the post-Midas era require special attention and care. It is critical that if the obtaining of a release is an important feature of any transaction, legal advice be sought to give yourself the best opportunity to obtain the benefit you are looking for.