In 2176693 Ontario Ltd. v. The Cora Franchise Group Inc., the Ontario Superior Court of Justice recently reviewed a common provision in franchise agreements that requires a franchisee to provide a general release as a condition of the franchisor consenting to an assignment of the franchise.  The Court interpreted section 11 of the Arthur Wishart Act (Franchise Disclosure), 2000 (Ontario) (“Wishart”), which states that a release of a franchisee’s Wishart rights is void.  Since the requirement for a general release includes a release of the franchisee’s statutory rights under Wishart, the requirement was found to be void.

This decision is consistent with the previous decision in 405341 Ontario Ltd. v. Midas Canada Inc. from the Ontario Court of Appeal, which dealt with the requirement of a general release as a pre-condition to an assignment or renewal in the face of a class action by franchisees.

Section 11 of Wishart prevents franchisors from contracting out of the obligations imposed by Wishart, and its purpose is not, in my opinion, related to the purpose behind the release requirement.  The release requirement is, at important junctures of the franchise relationship, an opportunity for the franchisee to present any issues that it may have against the franchisor ahead of assigning or renewing the franchise agreement.  If the franchisee has particular issues, franchisors will commonly carve these out from the release so that the parties can look to resolve them, without paralyzing both parties’ ability to move on with the assignment or renewal, which would be consistent with section 11 of Wishart.

It may be that the Court was particularly bothered with the fact that, the franchisee had “live” issues in litigation with the franchisor – which included some alleged breaches of Wishart- that the franchisee was being forced to waive.  In addition, the Court specifically pointed out that the franchisor initially demanded that the franchisee provide a general release, and only after the franchisee refused to do so (with the benefit of competent legal counsel) did the franchisor suggest that the franchisee sign a “watered-down” release that excluded s. 11 Wishart rights.

The franchisor invited the Court to “read down” the general release requirement to a requirement that the franchisee be required to sign a general release that excluded Wishart rights.  The Court refused to do so.  As a result, franchise agreements that contain general release requirements that do not exclude s. 11 Wishart rights are likely unenforceable. 

It is also important to remember that the Court’s findings were applied to a situation where a general release was required in the course of the performance of the franchise agreement and not in the context of a settlement of known disputes.  A release by the Franchisee of its rights, including its Wishart rights, in the latter situation may still be enforceable.

This decision will impact how franchisors deal with releases, particularly in the face of renewals and assignments and will have a particularly significant impact on franchisors whose franchise agreements have not been updated to exclude Wishart claims in such required releases.  Franchisors should review their agreements with legal counsel to determine whether changes need to be made to their agreements and/or their processes in obtaining releases.

For more information on franchising, contact Derwin Wong phone at (416) 368-0600 or by email at dwong@businesslawyers.com.

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