Ontario Franchisors Get New Guidance on Drafting Release-Clauses in Franchise Agreements

September 11th, 2015 by

By Ivan Merrow

According to the recent decision in 2176693 Ontario Ltd. v. Cora Franchise Group Inc., 2015 ONCA 152 the Ontario Court of Appeal (“ONCA“) ruled that blanket releases typical to franchise agreements may not be enforceable. The decision also provides guidance to franchisors on drafting release provisions that are compliant with Ontario’s Arthur Wishart Act (“AWA“).

Background

Two Cora-franchise owners (the “Franchisees”) and breakfast behemoth Cora Franchise Group Inc. (the “Franchisor“) were involved in ongoing litigation to resolve the Franchisor’s alleged breach of its duties under the AWA.

The Franchisees tried to stem their losses by selling their interests and assigning their franchise agreement rights . The franchise agreement required the Franchisees to get the Franchisor’s consent, which the Franchisor refused to provide. It relied on a term in the franchise agreement that required the Franchisees to provide a “general release… of any claims against the Franchisor” before assigning their franchise rights to a third party.

The Franchisees objected, pointing out that the term conflicted with the AWA’s s. 11, which protects franchisees from giving releases to rights provided under the AWA.

The Franchisor clarified that it was not asking to be released from AWA claims or claims made by the Franchisees in their ongoing litigation. It provided a draft release with those qualifications to one Franchisee, but he refused to sign.

The two Franchisees then brought an application before the Superior Court for an order that the contractual release terms were unenforceable by virtue of their conflict with the AWA s. 11.

The Superior Court held in favour of the Franchisees, ruling that the “general release” clause in the franchise agreement was void and unenforceable because it conflicted with s. 11 of the AWA. The Court also held that the term should not be “read down” or partially enforced to allow the Franchisor to be released from non-AWA claims. Among the Superior Court Judge’s reasons were that it violated the spirit of the AWA, which is to protect Franchisees who have less bargaining power than Franchisors.

The Appeal

On appeal, the ONCA rejected arguments raised by the Franchisor and dismissed the appeal. Additionally, the ONCA ruled differently on some points of law and provided some important insights, as follows:

  1. Franchisors should not attempt to include general releases from any claim in their franchise agreements.

The ONCA stated that rather than providing for “a ‘general release’ of all claims”, franchisors should  call for “a release of claims to the extent that applicable law would permit”. Using this language may avoid triggering s. 11 of the AWA and increase the chances that a contractual requirement for franchisees to sign a release is enforceable.

  1. Franchisors should draft franchise agreement terms in such a way that individual clauses can be grammatically severed.

In drafting franchise agreements, franchisors should draft terms at risk of infringing the AWA in a way that allows offending clauses to be struck out without rendering the provision meaningless.

Franchise agreements are lengthy legal documents that require a necessary skill and expertise to navigate. Whether you are a franchisor looking to protect your interests or a franchisee wanting to ensure your investment is sound, you need a lawyer who is familiar with franchise law.

If you have any questions about franchise agreements or what this decision means for your business, contact the Franchise Law lawyers at Devry Smith Frank LLP.


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