Drafting General Release Clauses in Franchise Agreements: A Cautionary Tale from the Ontario Superior Court of Justice

The Ontario Superior Court of Justice recently struck down a general release clause in a franchise agreement, even though the franchisor only sought a release with respect to non-statutory claims. The case provides important guidance regarding how to draft a release that will withstand scrutiny under section 11 of the Arthur Wishart Act (Franchise Disclosure) (Act) and the parallel provisions in the franchise legislation in Alberta, Manitoba, New Brunswick and P.E.I.

In 2176693 Ontario Ltd. v. Cora Franchise Group Inc. (Cora Franchise) the Franchisee commenced an action for non-disclosure against the Franchisor. Meanwhile, to mitigate its losses, the Franchisee attempted to find a buyer for the franchise. The franchise agreement permitted assignments, but required the Franchisee to execute a "general release," releasing the Franchisor from "any claims" as a condition of assignment.

On July 23, 2013, the Franchisee entered into an asset purchase agreement with a third party for its Niagara franchise. The Franchisee made the Franchisor aware of the proposed assignment, but informed the Franchisor that it would not execute the general release, on the basis that a requirement for a general release was contrary to section 11 of the Act. This section provides that any purported waiver or release of a right given under the Act is void.

In response, the Franchisor provided the Franchisee with a release that excluded statutory rights (but included common law claims), in an attempt to make the release compliant with section 11. The Franchisee refused to sign the new release and brought an application before the Superior Court. At issue was whether the general release was entirely void and unenforceable due to section 11 of the Act (as argued by the Franchisee), or whether the general release could be "read down" to release only non-statutory rights (as argued by the Franchisor).

The Court refused to read down the provision, finding that contractual severance was unavailable. According to the Court, to permit franchisors to read down offending clauses would fail to protect franchisees and would not be in keeping with the scheme and objectives of the Act. The Court found that the result was not unfair to the Franchisor, since the Franchisor "imposed the offending term" and should not be allowed to benefit from it.

This case provides important guidance to franchisors. It is common for franchisors to impose the requirement of a general release as a condition of the transfer and/or renewal of a franchise agreement. Cora Franchise strongly suggests that any contractual requirement of a release should clearly and expressly exempt statutory claims. If statutory claims are expressly excluded, the Court will not be asked to "read down" the provision. While such a provision has not yet been tested in the courts, the reasoning in Cora Franchise suggests that such provisions would not run afoul of section 11 of the Act.