The recent decision of the Ontario Superior Court of Justice in 405341 Ontario Limited v. Midas Canada Inc. (Midas) calls into question several common practices of franchisors in Canada. These practices are:
- Requiring Releases on Transfer or Renewal:
Many franchisors commonly require franchisees to provide a release
of the franchisor upon the renewal or transfer of a franchise
agreement. However, Midas brings into question the
enforceability of such releases, not only with respect to
franchisees operating in Ontario but – depending on the
governing law provision in the franchise agreement –
possibly in other provinces as well.
- Requiring Releases of Class Proceedings:
Releases used by franchisors are typically broad enough to capture
class proceedings. However, in Midas, the court found that
the franchisees' statutory right to associate includes the
right to engage in a class proceeding to enforce their rights under
the legislation or otherwise. Accordingly, such a release would not
only be unenforceable but could also give rise to an action for
- Using Ontario as the Governing Law: Franchisors whose franchise agreements set Ontario as the governing law for franchises operating in provinces outside of Ontario may be inadvertently subjecting themselves to the full application of the Arthur Wishart Act (Franchise Disclosure), 2000 (Act) in those other provinces, despite the fact that such franchises are not operated wholly or partly in Ontario. This could impose on franchisors the statutory disclosure obligations, and related rescission and misrepresentation risks for non-compliance, as well as the duty of good faith and fair dealing.
Each of the foregoing practices are discussed further below. Franchisors (and their counsel) should be familiar with both the findings made by the court in Midas as well as the reasoning behind those decisions that could apply to other aspects of the franchise relationship.
The plaintiff was a Midas franchisee involved in a class proceeding against Midas Canada Inc. (franchisor). The franchisor's standard-form franchise agreement required the plaintiff to execute a release agreement for the benefit of the franchisor upon any transfer or renewal of the franchise agreement. The plaintiff challenged the enforceability of this provision, both pursuant to Section 4 (right to associate) and Section 11 (no waiver) of the Act. The plaintiff also moved for a declaration that to the extent that the franchise agreements provided for such releases, the agreements are unenforceable with respect to some or all of the common issues in the class proceeding. The plaintiff and defendant had agreed that the enforceability of any releases granted since certification of the class would depend on the court's decision in the motion.
Requiring Releases on Renewal or Transfer
Relying on the court's earlier decision in Ontario Inc. v. Tutor Time Learning Centres LLC (Tutor Time), the franchisor argued that the plaintiff's release was valid and enforceable, despite the no-waiver provision in Section 11 of the Act. (For a discussion of the Tutor Time case, please see the October 2006 Osler Franchise Review.) The court disagreed, taking the position that only releases of an existing claim as part of a settlement should be enforceable. (In other words, the court was of the view that an actual "settlement" is a prerequisite to upholding the validity of the release). The court distinguished the facts in Tutor Time, in which the franchisee provided the release in furtherance of a settlement, from the facts in the current case, in which the release was a contractual prerequisite to the franchisee's objective of renewing its franchise agreement.
The court acknowledged that it may be difficult to identify cases where a plaintiff is "engaged in settling its claims" from other cases where a release is given for other reasons but the court does not provide any guidance or factors to consider. In any event, Midas clearly stands for the proposition that releases obtained as a matter of course on renewal or transfer of the franchise agreement will be prima facie void as they relate to any rights and remedies the franchisee has pursuant to the Act (e.g., a statutory duty of good faith, rescission, misrepresentation, etc.).
Requiring Releases of Class Proceeding Claims
The court also considered the impact of the release agreement on the franchisee's statutory right to associate with other franchisees. Section 4(1) of the Act provides that a franchisee can associate with other franchisees and may form or join an organisation of franchisees. Subsection 4(4) provides that any provision in a franchise agreement which interferes with the franchisee's exercise of this right is void.
Plaintiff's counsel asserted that the right to associate includes the right to join a class action to enforce the duties of good faith and fair dealing or the common-law requirements of good faith, fairness and honesty. Not only did the court agree, but it went on to state that the right to associate in Section 4(1) of the Act encompasses the right to participate in class proceedings for the purpose of enforcing a franchisee's rights against the franchisor "under the statute or otherwise (emphasis added)."
Whether a release is struck down due to Section 11 or Section 4 is not simply an academic distinction. While both Section 11 and Subsection 4(4) void the impugned waiver or provision, respectively, Subsection 4(5) goes on to provide a franchisee with a right of action for damages for attempting to interfere with the franchisee's right to associate. There is no right of action if a franchisor attempts to obtain a waiver or release from a franchisee that is prohibited pursuant to Section 11.
Franchisors must carefully consider the findings in Midas when considering both when to use release agreements and the content and wording of such release agreements.
Using Ontario as the Governing Law
In Midas, the franchisor's standard-form franchise agreement set Ontario as the governing law for franchisees in Ontario, Alberta, British Columbia, Manitoba, New Brunswick and Nova Scotia. The plaintiff argued that this meant that the Act, including Section 11 and Subsection 4(4), applied equally to franchise relationships outside Ontario.
The franchisor relied on Section 2 of the Act, which states that the legislation applies only to franchises operated wholly or partly in the province, for its claim that the Act clearly did not apply to franchises operated in other provinces. Therefore, if the releases and the provisions of the franchise agreement requiring the releases were unenforceable, that unenforceability should impact only those members of the class proceedings with franchises physically located in Ontario.
The court agreed with the franchisee, saying that the governing law provision showed that "the intention of the parties was that their rights and obligations [in other provinces] ... are to be the same as if the business of the franchise was operated in Ontario." Therefore, the court found that the impugned releases were governed by the Act, regardless of the location of the franchise.
While the court dealt only with the application of the Act in connection with Sections 4 and 11 of the legislation, the general statement that the "rights and obligations are to be the same as if the franchise was operated in Ontario" suggests a broader application beyond the enforceability of waivers and releases.
While franchisors can avoid this result in future relatively easily by amending the governing law provision in their standard-form franchise agreement, the challenge lies in managing this risk for franchise agreements for franchises located outside Ontario that have already been executed and that set Ontario as the governing law. Franchisors in such situations would be well advised to contact their counsel to discuss their options.
Midas is the latest in a series of recent decisions which appear to heavily favour franchisees. Indeed, the court in Midas stated that "it has been recognized judicially on a number of occasions that the provisions of the [Wishart Act] are intended to mitigate and alleviate the power imbalance that exists between franchisors and franchisees."
Additionally, Midas may well change the way franchisors handle releases (both when to use such releases and the claims covered by them) and the drafting of governing law provisions in franchise agreements. Further, franchisors and their counsel should be aware of the possible application of some of the reasoning behind the findings in Midas and how that reasoning could apply to other elements of the franchise agreement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.