Liability and Franchise Agreements: The Court of Appeal Protects Franchisee Rights in 2176693 Ontario Ltd v Cora Franchise Group Inc

In 2176693 Ontario Ltd v Cora Franchise Group Inc, 2015 ONCA 152, the Ontario Court of Appeal (“ONCA”) decided whether a clause of a franchise agreement, that required a franchisee to release the franchisor from all liability upon assignment of the agreement, was void and unenforceable. The ONCA decided that the clause in question was unenforceable.

Context

In this case, two franchisees began the process of assigning their franchise agreements to third parties.

According to their agreements, an assignment was only permissible if certain conditions precedent were satisfied. Section 22.6.4 was of particular importance. It explained that a franchisor would consent to an assignment only if the:

… Franchisee and its directors, officers and shareholders [signed and delivered] in favour of [the] Franchisor and its directors, officers, shareholders and employees, a general release in the form specified by [the] Franchisor of any claims against [the] Franchisor and its officers, directors, shareholders and employees (para 6).

Such a release was not an option from the perspective of the franchisees. They were attempting to sell their businesses to mitigate damages related to ongoing legal claims against the franchisor.

Fortunately for the franchisees, a specific statute appeared to prohibit the sort of release contemplated by s. 22.6.4. According to s. 11 of the Arthur Wishart Act (Franchise Disclosure), 2000, SO 2000 c 3 [AWA]:

Any purported waiver or release by a franchisee of a right given under this Act or of an obligation or requirement imposed on a franchisor or franchisor’s associate by or under this Act is void.

The franchisor conceded that claims made pursuant to the AWA would not fall under the scope of the release required by s. 22.6.4, and demanded a release regarding all other legal claims. The franchisees argued that the AWA invalidated the entire section, and accordingly, that no release was required.

Thus, the dispute centered on the validity of s. 22.6.4. There were several possible results:

• A court could find that s. 11 of the AWA made s. 22.6.4 of the franchise agreement void and unenforceable;
• A court could find that s. 22.6.4 was merely unenforceable with respect to a release of AWA claims, but otherwise enforceable; or
• A court found find that s. 22.6.4, while not void, was entirely unenforceable.

Judicial History

The lower court concluded that s. 22.6.4 was both void and unenforceable. The purpose of the AWA, according to the application judge, was to mitigate the inequality of bargaining power between the parties of a franchise agreement. Giving even partial meaning to the clause would undermine this purpose. Thus, the optimal result was to deem the provision void and unenforceable.

The Decision of the ONCA

Void or Unenforceable

The ONCA decided that s. 22.6.4 was not void; instead, s. 11 of the AWA made it unenforceable.

The Court of Appeal decided that s. 11 of the AWA, on a plain reading, merely voids the waiver itself. It does not invalidate the contractual provisions that require the provision of such a release. This was an important distinction. It meant that s. 11 could not operate “so as to void the impugned clause from the outset” (para 29). The AWA only invalidated the conduct mandated by the clause. This meant that the s. 22.6.4 was, at most, unenforceable.

This conclusion, however, did not resolve the dispute. It did not answer whether s. 22.6.4 was unenforceable only with regard to releases for AWA claims, or whether the provision was generally unenforceable, and thus could not compel the delivery of any release.

To answer this issue, the ONCA turned to the doctrine of severance.

Unenforceable in Total or in Part

The doctrine of severance allows the court, through two general mechanisms, to strike part of an offending provision from a contract.

The ONCA felt that it was impossible to apply “the blue pencil approach.” No particular phrase “could be struck to enable the clause to require a release of only non-AWA claims” (para 39).

The ONCA then considered whether the doctrine of “notional severance” could apply. This mode of severance involves “reading down a contractual provision so as to make it legal and enforceable” (para 36, citing Shafron v KRG Insurance Brokers (Western) Inc, [2009] 1 SCR 157 at para 2).

The doctrine of notional severance was deemed inapplicable. Allowing franchisors to require the release of some liabilities, but not AWA liabilities, would still unacceptably frustrate the purpose of the AWA. It would, in essence, allow franchisors to include overly broad waiver clauses into franchise agreements, using their superior bargaining power, “knowing courts would only find them unenforceable in part…” (para 62). This was an impermissible result in the eyes of the Court of Appeal.

The ONCA did recognize that, in this case, the franchisees received a windfall benefit from the unexpected ability to not release the franchisor’s liability. However, this did not outweigh the policy considerations discussed above. The windfall was “difficult to assess,” and the other franchisor protections, in the context of an assignment, remained valid (para 60-61).  Thus, the legitimate interests of the franchisor were respected.

On balance, the windfall this decision conferred did not outweigh the harm that would arise from reading down s. 22.6.4. The ONCA found the clause unenforceable.

Conclusion

This case stands for the principle that, in Ontario, overly broad waiver clauses, in franchise agreements, will not survive judicial scrutiny. The AWA makes them unenforceable.

The question remains whether the mere requirement of the release was offensive, or whether the ONCA was reacting to the exhaustive nature of the particular clause in issue. If the latter is the case, another question follows: would a release clause, that was more nuanced, withstand judicial scrutiny? While it is unclear whether other language would have made a difference in this case, there is some discussion in paragraphs 25-27 that supports such an interpretation. Further, the principle of freedom of contract weighs in favor of allowing parties to resolve, to some degree, who bears the risk if a dispute arises. This general notion, in combination with those comments, could support the legitimacy of a clause that required a narrower release.