Andy Seretis, Allan Dick and David Sterns
Published on September 25, 2010
Posted in: Blog
The Ontario Court of Appeal has clarified three important points under the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (“AWA”) which had been the subject of debate among the franchise law bar. It is now clear that:
- releases given by franchisees in renewing or assigning their franchise agreements are unenforceable in certain respects;
- the statutory right of association in the AWA includes the right to bring a class proceeding; and
- a franchise agreement that is governed by Ontario law entitles a non-Ontario franchisee to the benefit of the AWA after the contract is signed.
Midas franchisees commenced a class action against Midas, claiming Midas breached its statutory and common law duties when it outsourced product supply to a third-party supplier. After the certification of the class action, Midas attempted to obtain a release from the class representative as a condition for renewing the class representative’s franchise agreement. The requirement to execute a release was just one of the several conditions found in the renewal provisions contained in the franchise agreement.
The class representative was successful in obtaining an order that any provision contained in the Midas franchise agreement requiring franchisees to release Midas from liability as a condition for the renewal or transfer of their rights under the franchise agreement was unenforceable and void for the purposes of the class action proceeding. The decision was rooted in section 11 of the AWA which deems any waiver or release of a right under the AWA void and unenforceable. Midas appealed the decision to the Ontario Court of Appeal.
Renewal and Assignment Provisions Void under Section 11 of the AWA
The Court of Appeal considered an earlier case on section 11 of the AWA holding that section 11 did not apply to a release given by a franchisee, with the advice of counsel, in settlement of a dispute for existing and fully known breaches of the AWA that would otherwise have entitled the franchisee to a claim. However, the Court of Appeal held that on these facts where the franchisor attempted to obtain a release as a condition of renewal or transfer, where there was no settlement of the franchisees’ rights but rather, where the franchisees were trying to assert their rights, the release would be void.
In dismissing Midas’ appeal, the Court of Appeal held that requiring franchi- sees to give up any claims they might have against a franchisor for purported breaches of the Act in order to renew their franchise agreement “unequivocally runs afoul of the Act” and is “simply contrary to the spirit, intent and letter of the Act.”
Renewal and Assignment Provisions Void under Section 4(4) of the AWA
While releases of rights under the AWA may not always be enforced pursuant to section 11, requiring a franchisee to execute a release which has the effect of prohibiting participating in a class action violates the right of association under section 4 of the AWA. The Court of Appeal was clear that the statutory right of association includes the right to participate in a class action and that the right is concerned with more than a franchisee’s ability to associate socially or recreationally. For franchisors that try to restrict or preclude class actions by having franchisees execute individual releases of class action claims, the Court of Appeal decision is clear that such releases may be set aside when they interfere with the franchisee’s right to associate.
Applying the AWA to Franchise Agreements where the Businesses are Operated Outside of Ontario
The Midas franchise agreement used throughout Canada states that the laws of Ontario shall govern. While Ontario (and certain other provinces) provides statutory protection to franchisees, the non-regulated provinces do not. The Court of Appeal ruled that all franchisees across Canada, including franchisees in non-regulated provinces, are entitled to the protection of the AWA because Ontario law was designated as the law of the contract.
Midas Decision Provides Much Needed Clarity
Although the Court of Appeal decision was made in the class action context, the principles have wide-spread application to common-place franchise practices. Many franchise agreements require releases from franchisees at various stages of the franchise relationship. This decision means that franchisees can- not be forced to give up their statutory rights and releases given with that effect will not be upheld by the courts except in limited and well-defined circumstances. Further, franchise agreements that stipulate that the laws of a regulated province apply now mean that franchisees in non-regulated provinces have the same protection as those in regulated provinces. Finally, it is worth noting that once again the Court of Appeal has made it abundantly clear that the purpose of the AWA is to protect franchisees and that the provisions of the AWA are to be interpreted in that light. Sotos LLP represents the plaintiff class in the Midas class proceeding.