Enforceability of Releases Executed by Franchisees, in Favour of Franchisors

By Tonya Mah

Can a Franchisee Waive their Rights or the Franchisor’s Obligations Contained in the AWA?

Generally, no.  Franchisees cannot waive rights contained in the AWA, but there are exceptions. 

Pursuant to section 11 of the  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.”

Is a Term Contained in a Franchise Agreement, Requiring a Franchisee to Provide a Release of AWA Rights Enforceable?

If a franchise agreement has a term requiring the franchisee sign a release of its AWA rights, as a condition of obtaining the franchisor’s consent to extend and/or assign the franchise agreement etc., such a term would be unenforceable.

In 405341 Ontario Limited v. Midas Canada Inc., 2010 ONCA 478, the Court of Appeal stated that “The language of s. 11 could not be clearer.  If you include a term in your franchise agreement that purports to be a waiver or release of any rights a franchisee has under the Act, it will be void.”

Further the Court stated “the purpose of the Act is to protect franchisees.  The provisions of the Act are to be interpreted in that light.  Requiring franchisees 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.”

Also, a release given as a condition to assignment or renewal of a franchise agreement is prima facie void pursuant to Section 11 and provisions in a franchise agreement requiring releases of any AWA claims as a condition to the franchisor’s consent to assignment or renewal are unenforceable. 

As a result of the Court’s decision in Midas, the longstanding practice of requiring a general release as a condition of renewal or assignment has been modified.  Franchisors may request releases of matters which are not protected by section 11 (i.e. common law claims) as a condition of consenting to an extension/assignment of the franchise agreement, but must be cautious in ensuring that such releases in no way release any rights of the franchisee or statutory obligations of the franchisor under the AWA.

Can a Contractual Term Requiring a General Release From a Franchisee be Severed or Read Down?

In 2176693 Ontario Ltd. v Cora Franchise Group Inc., 2015 ONCA 152, a franchisee was seeking the franchisor’s consent to assign the franchise agreement to a purchaser of their business.  A term of the franchise agreement required a franchisee seeking to assign its franchise agreement to another party, to sign a general release of any claims against the franchisor in the form specified by franchisor as a condition precedent to receiving the franchisor’s consent for the assignment.  The franchisor requested the franchisee comply with the assignment provisions contained in the franchise agreement.  The franchisee advised that a general release is contrary to section 11 of the AWA.  The franchisor then provided a draft release for the franchisee’s execution which clearly stated that the release was not applicable to any rights contained in the AWA.  The franchisee refused to sign the release provided by the franchisor.  An application was brought seeking a declaration that the section of the franchise agreement requiring a general release of claims against the franchisor, is void, unconscionable and unenforceable.

The Court of Appeal found that “the impugned clause was unenforceable, as enforcement would require the performance of something that would contravene s. 11 of the AWA. The application judge did not err when she held that the clause could not be severed or read down to permit the respondent to require a release of only non- AWA claims.  Doing so would subvert the purpose and policy of s. 11 of the AWA.  Severing clauses otherwise unenforceable under the AWA would invite franchisors to draft overly broad provisions with the prospect that the courts would only sever or read those provisions down and would provide no incentive to franchisors to ensure that their franchise agreements are in compliance with the AWA. It would also increase the risk that a franchisee -- having signed a waiver or release of all claims -- would erroneously believe it was not entitled to pursue any claims against the franchisor, including its AWA claims.”

Furthermore, the Court stated "”Reading down" contractual requirements that overreach would have a chilling effect on the exercise of franchisees' rights. Each of these possibilities suggests that notional severance would diminish the protection offered by s. 11 of the AWA against franchisors who might seek to have franchisees contract out of their AWA rights.”

Is a Term Contained in a Settlement Agreement, Requiring a Franchisee Provide a Release of AWA Rights Enforceable?

Certain releases executed by franchisees releasing their AWA rights are enforceable. 

In Trillium Motor World Ltd. v. General Motors of Canada Limited, 2017 ONCA 545, the Court discussed the Tutor Time Case “The settlement of a claim arising from and consequential to an existing statutory right of rescission is not in itself ‘a waiver or a release’ of that statutory right to rescission. It is a release of the claim arising from having exercised the right of rescission or being in the position to exercise the right of rescission. In my view, if a franchisee, as in the instant situation, with full knowledge of a breach of the franchisor’s obligations to disclose as required by the Act and regulations, and with the benefit of independent legal advice, chooses to affirm the franchise agreement as a term of a settlement of the claims that arise from the franchisor’s breach, then the franchisee can no longer rescind and make a claim to the remedies afforded by s. 6(6) of the Act.”

Whereas, the releases that are contrary to S 11 of the AWA and are not being enforced by the Courts, are often releases buried in a franchise agreement that was executed without the franchisee having knowledge that they had a claim against the franchisor for AWA breaches, without legal counsel and not forming part of a settlement.

Courts will enforce releases of franchisee’s AWA rights when:

1. the release is executed by the franchisee having full knowledge of their claims against the franchisor;
2. the release is executed by the franchisee as part of a settlement of franchisee’s claims that the franchisor breached the AWA; and
3. the franchisee has retained legal counsel and receives legal advice from counsel regarding the release.

If the Franchise Agreement is Terminated, what is the Impact on the Franchisee’s Rescission Right?

In Royal Bank of Canada v. Everest Group Inc., 2024 ONCA 577- the Court of Appeal upheld the trial judge’s findings and stated that the “franchisor’s termination of the franchise agreement because of a franchisee’s breach of the franchise agreement does not preclude the franchisee from exercising the statutory right to rescind the franchise agreement.  The Wishart Act does not make the exercise of the s. 6 right of rescission conditional on non-termination.  As a matter of principle, this makes sense. The lawful termination of a contract for breach, absolves the non-breaching party from performing future obligations under the contract, but it does not render the contract void ab initio: see e.g. Pickering Square Inc. v. Trillium College Inc., 2016 ONCA 179, 395 D.L.R. (4th) 679, at paras. 28-29. Where the franchisor fails to meet its disclosure obligations to the franchisee, the franchisee is entitled to rescind the franchise agreement pursuant to the Wishart Act. The franchisor cannot negate the franchisee’s statutory right to rescind by pre-emptively terminating the agreement, even where there has been a breach by the franchisee."

In the Paramount case  (Premium Host Inc. v. Paramount Franchise Group, 2023 ONSC 1507), the franchisor argued that the franchisee could not rescind the franchise agreement because the franchise agreement was already properly terminated as a result of breaches by the franchisee.   “According to Paramount, it is axiomatic that a party cannot rescind an agreement that is no longer in force, and that allowing a franchisee to rescind a franchise agreement after termination would create a dangerous precedent.  Paramount submits that it would be contrary to reasonable commercial standards to permit franchisees to disregard their obligations under a franchise agreement, have the agreement terminated, and then claim their rescission remedy.”

“The right to statutory rescission in the Act is different from equitable rescission and the principles of the latter do not apply to the former.  The consequences of the exercise of the statutory remedy of rescission are dictated by the Act, not by the common law.”

“While Paramount’s position is superficially attractive, I ultimately agree with Premium Host’s position.  Pursuant to section 11 of the Act, the termination provisions in the Premium Host Franchise Agreement cannot be interpreted as depriving Premium Host of its right to rescind the agreement.  Concluding otherwise would, in my view, run afoul of the purpose of the Act which is to protect franchisees: see 405341 Ontario Limited v. Midas Canada Inc., 2010 ONCA 478 at para. 30.  A few examples come to mind:

a.  A franchisee’s default under the franchise agreement which triggers the franchisor’s right to terminate the agreement may be the result, in whole or in part, of a lack of disclosure.  For instance, a franchisee may be having financial difficulties and not be able to make required payments under the franchise agreement because its financial planning was inadequate as a result of inadequate financial disclosure by the franchisor.  Denying the right to rescind in these circumstances would be unfair to the franchisee who is in a situation of default at least in part because of the franchisor’s failure to comply with its disclosure obligations.

b.  Allowing a termination to trump the right to rescind could trigger a race to termination on the part of a franchisor as soon as minor issues arise in order to avoid the consequences of a rescission.

c.  When a contract is terminated, the parties are discharged from future obligations, but rights and obligations that have already matured are not extinguished: see Guarantee Co. of North America v. Gordon Capital Corp., 1999 CanLII 664 (SCC), 1999 3 S.C.R. 423 at para. 40.  Thus, a franchisor terminating a franchise agreement can sue the former franchisee for damages for past breaches of the franchise agreement.  It would be unfair for a franchisee who has a valid right to rescind not to be able to exercise its right in such circumstances just because it was not the first to terminate the relationship.

As can be seen in above referenced cases, the Courts will, in limited situations, enforce releases entered into by franchisees in favour of franchisors of rights/obligations pursuant to the AWA.  There is a lot to consider when determining if a release of franchisees’ rights/franchisor’s obligations is enforceable.  Please contact Tonya Mah (tmah@sorbarlaw.com) should you have any questions or wish to obtain legal advice.

The content contained in this post is for informational purposes only and does not constitute legal or professional advice.