Releases from Canadian Midas Franchisees Found Unenforceable

A recent decision from the Ontario Superior Court of Justice in 405341 Ontario Limited v. Midas Canada Inc. (“Midas“; 64 B.L.R. (4th) 251 (Ont. S.J.)) calls
into question the following common practices of franchisors in Canada:

Requiring Releases on Transfer or Renewal: Midas brings into question the enforceability of such releases under the Arthur Wishart Act (Franchise Disclosure), 2000 (the “Wishart Act”), 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: The court found that the franchisees' statutory right to associate under section 4 of the Wishart Act includes the right to engage in a class proceeding in order to enforce their rights under the legislation or otherwise. Accordingly, not only would a release of class proceedings be unenforceable, it could give rise to an action for damages.

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 Wishart Act in those other provinces despite the fact that such franchises are not operated wholly or partly in Ontario.

The Facts

The plaintiff was a franchisee involved in a class proceeding against Midas Canada Inc. (“Midas”). The action was certified as a class proceeding on March 26, 2009 (Landsbridge Auto Corp. V. Midas Canada Inc. (2009), 73 C.P.C. (6th) 10 (Ont. S.C.J.). Midas's standard form franchise agreement required the plaintiff to execute a release agreement for the benefit of Midas upon any transfer or renewal of the agreement. The plaintiff challenged the enforceability of this provision, both pursuant to section 4 (right to associate) and section 11 (no waiver) of the Wishart Act. The plaintiff 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 Midas 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

Midas relied on the earlier case of 1518628 Ontario Inc. v. Tutor Time Learning Centres LLC (“Tutor Time“; [2006] O.J. No. 3011 (Ont. S.J.); upheld at [2006] O.J. No. 4992 (Div. Ct.)) for its position that the plaintiff's release was valid and enforceable despite the no-waiver provision in the Wishart Act. The court disagreed, taking the position that only releases of an existing claim as part of a settlement are enforceable and 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 Wishart Act. The court acknowledged that it may be difficult to identify cases where a plaintiff is “engaged in settling its claims” from other cases where the release is given for other reasons, but did not provide any guidance or factors to consider.

Requiring Releases of Class Proceeding Claims

The court also considered the impact of the release on the franchisee's statutory right to associate with other franchisees. Section 4(1) of the Wishart Act provides that a franchisee can associate with other franchisees and may form or join an organization 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, it went on to state that the right to associate in section 4(1) 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)

Using Ontario as the Governing Law

Midas'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 Wishart Act, including section 11 and subsection 4(4), applied equally to franchise relationships outside Ontario.

Midas relied on section 2 of the Wishart Act, which states that the legislation applies only to franchises operated wholly or partly in the province, for its defense that the Wishart 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, then that should affect 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 Wishart Act, regardless of the location of the franchise.

While franchisors can avoid this result in the 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 outside Ontario that have already been executed and that set Ontario as the governing law.

Grounds for Appeal

Midas appealed the decision on the basis of the following five alleged errors of law:

1. Interpreting section 11 of the Wishart Act as prohibiting Midas from requiring a release of claims as a condition of assigning the agreement or renewing the franchise agreement. In support of its appeal, Midas emphasized that section 11 only prohibits any purported waiver or release by a franchisee of a right given under the Wishart Act and not a claim, and that a release of a claim under the Wishart Act is not equivalent to a release of a right under the Wishart Act. Midas submitted that parties to a franchise agreement must be able to settle claims (class or individual) under the Wishart Act or conclude transfers or renewals without either applying to the court for a declaration that the release is not void or risking that the release will be subjected to challenge at a later date.

2. Concluding that Midas's request for a release as a condition of transfer or renewal interfered with a franchisee's right to associate under section 4 of the Wishart Act. Midas submitted that section 4 neither mentions class proceedings nor contains any prohibition on restricting a franchisee's right to commence or participate in a class proceeding. Midas contrasted the Wishart Act to Ontario's Consumer Protection Act (S.O. 2002, c. 30, Sch. A), subsection 8(1), which expressly provides that parties to a consumer agreement may not by agreement prevent a consumer from participating in a class proceeding. Further, Midas argued that it had never taken the position that the plaintiff or any other class member was prevented from commencing a class proceeding and that the franchise agreement did not contain any term or acknowledgment preventing participation in a class proceeding.

3. Holding that the Wishart Act applied to franchisees in the class, whether or not their businesses operated in Ontario. Midas submitted that, although the Wishart Act forms part of the “laws of the Province of Ontario,” section 2 of the Wishart Act is clear that the statute only applies to a franchise if its business is operated in Ontario. Midas argued that franchises operated in Alberta, Prince Edward Island and New Brunswick are governed by applicable franchise legislation in these provinces (See the Franchises Act, R.S.A. 2000, c. F-23 (the “Alberta Franchises Act”), the Franchises Act, R.S.P.E.I. 1988, c. F-14.1 and the Franchises Act, S.N.B. 2007, F-23.5) and not by the Wishart Act. As for franchises operated in provinces without franchise legislation, according to Midas, these franchises were not subject to the Wishart Act.

4. Declaring that the contractual provisions were void in respect of all class members after considering the circumstances of only two franchisees; and

5. Granting substantive relief on a procedural motion. Midas submitted that Ontario's Class Proceedings Act, 1992 (S.O. 1992, c. 6) is a procedural statute that does not modify or create substantive rights and should not have been used to abrogate Midas's contractual rights under the franchise agreement.

Hearing of Appeal

The Ontario Court of Appeal heard the appeal on April 12, 2010 and reserved. The panel of three judges only called on the respondent to make submissions in regard to the first two grounds of appeal, which typically means that the appeal will not be allowed on the last three grounds of appeal.

Regarding section 11 of the Wishart Act, the respondent argued that the release was unenforceable because it precluded the respondent and any of the franchisees who signed it from exercising their right of action for damages under subsection 3(2) of the Wishart Act for breach of the duty of fair dealing. Further, the respondent argued that this statutory cause of action could not be defeated by private agreement and that the whole point of section 11 is to override the parties' freedom of contract. According to the respondent, the express right to sue conferred in subsection 3(2) is protected under section 11 and cannot be waived or released. The respondent argued that Tutor Time was readily distinguishable on the basis that the release in favor of Midas was not required for the purpose of settlement and rather was a pre-condition for renewal.

As for section 4 of the Wishart Act and the right of association, the respondent submitted that Justice Cullity correctly found that it included the right to participate in a class action relating to systemic breaches. The respondent argued by analogy to the freedom to associate under the Canadian Charter of Rights and Freedoms which has been interpreted to include the right to bring a class action. According to the respondent, a reading of the right to associate which does not include a right to bring a collective or class action would render the provision meaningless.

Conclusion

If the last three grounds of the Midas appeal are not allowed, a conflict of laws with respect to Midas franchises operating in Alberta will have been created. The Alberta Franchises Act expressly states that it applies to Alberta franchises and voids any provision restricting its application. How can a Midas franchisee in Alberta be subject to the Alberta Franchises Act and the Wishart Act? In any event, the Midas case will likely affect the approach to governing law provisions in franchise agreements.

In addition, the appellate court's ultimate findings in relation to the non-waiver provision in section 11 and the enforceability of releases of claims and rights under the Wishart Act may well change the way franchisors handle releases, both in terms of when to require such releases and the claims covered by them.

The respondent's line of argument regarding section 4 is, quite simply, unsupported by the plain language of the statute, as well as its legislative history and purpose, and goes far beyond the objectives of the Wishart Act of achieving balance in the franchise relationship. If section 4 is intended to ensure that a franchisee has a right to participate in a class action, it is surprising that the section contains no language to this effect. Further, there is nothing in the Wishart Act that gives its provisions quasi-constitutional effect. Section 4 was enacted in response to the practice of certain franchisors of including prohibitions in franchise agreements against the formation of franchise associations and in some cases, prohibitions against franchisees consulting amongst each other regarding elements of the franchise system (Ontario Ministry of Consumer and Commercial Relations, “Ontario Franchise Disclosure Legislation: A Consultation Paper” (June 1998) at pp. 4 and 7). Section 4 was intended to have the limited purpose of ensuring that franchisors did not include prohibitions in franchise agreements that would preclude franchisees from forming an association in order to pool resources and gain greater negotiating power. Such a franchise association might retain counsel to advise its members on issues affecting them collectively. Interpreting section 4 to have the scope contended by the plaintiff's counsel in Midas goes well beyond the purpose of the Wishart Act of preserving a balance in the franchise relationship; it tips the balance too far in the other direction, to the detriment and prejudice of franchisors.

The Canadian franchise bar and industry await with great interest the Ontario Court of Appeal's judgment in Midas, which will hopefully clarify for franchisors and franchisees alike the circumstances, if any, when franchisees may release any of their rights under the Wishart Act in favor of franchisors.

A recent decision from the Ontario Superior Court of Justice in 405341 Ontario Limited v. Midas Canada Inc. (“Midas“; 64 B.L.R. (4th) 251 (Ont. S.J.)) calls
into question the following common practices of franchisors in Canada:

Requiring Releases on Transfer or Renewal: Midas brings into question the enforceability of such releases under the Arthur Wishart Act (Franchise Disclosure), 2000 (the “Wishart Act”), 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: The court found that the franchisees' statutory right to associate under section 4 of the Wishart Act includes the right to engage in a class proceeding in order to enforce their rights under the legislation or otherwise. Accordingly, not only would a release of class proceedings be unenforceable, it could give rise to an action for damages.

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 Wishart Act in those other provinces despite the fact that such franchises are not operated wholly or partly in Ontario.

The Facts

The plaintiff was a franchisee involved in a class proceeding against Midas Canada Inc. (“Midas”). The action was certified as a class proceeding on March 26, 2009 (Landsbridge Auto Corp. V. Midas Canada Inc. (2009), 73 C.P.C. (6th) 10 (Ont. S.C.J.). Midas's standard form franchise agreement required the plaintiff to execute a release agreement for the benefit of Midas upon any transfer or renewal of the agreement. The plaintiff challenged the enforceability of this provision, both pursuant to section 4 (right to associate) and section 11 (no waiver) of the Wishart Act. The plaintiff 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 Midas 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

Midas relied on the earlier case of 1518628 Ontario Inc. v. Tutor Time Learning Centres LLC (“Tutor Time“; [2006] O.J. No. 3011 (Ont. S.J.); upheld at [2006] O.J. No. 4992 (Div. Ct.)) for its position that the plaintiff's release was valid and enforceable despite the no-waiver provision in the Wishart Act. The court disagreed, taking the position that only releases of an existing claim as part of a settlement are enforceable and 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 Wishart Act. The court acknowledged that it may be difficult to identify cases where a plaintiff is “engaged in settling its claims” from other cases where the release is given for other reasons, but did not provide any guidance or factors to consider.

Requiring Releases of Class Proceeding Claims

The court also considered the impact of the release on the franchisee's statutory right to associate with other franchisees. Section 4(1) of the Wishart Act provides that a franchisee can associate with other franchisees and may form or join an organization 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, it went on to state that the right to associate in section 4(1) 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)

Using Ontario as the Governing Law

Midas'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 Wishart Act, including section 11 and subsection 4(4), applied equally to franchise relationships outside Ontario.

Midas relied on section 2 of the Wishart Act, which states that the legislation applies only to franchises operated wholly or partly in the province, for its defense that the Wishart 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, then that should affect 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 Wishart Act, regardless of the location of the franchise.

While franchisors can avoid this result in the 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 outside Ontario that have already been executed and that set Ontario as the governing law.

Grounds for Appeal

Midas appealed the decision on the basis of the following five alleged errors of law:

1. Interpreting section 11 of the Wishart Act as prohibiting Midas from requiring a release of claims as a condition of assigning the agreement or renewing the franchise agreement. In support of its appeal, Midas emphasized that section 11 only prohibits any purported waiver or release by a franchisee of a right given under the Wishart Act and not a claim, and that a release of a claim under the Wishart Act is not equivalent to a release of a right under the Wishart Act. Midas submitted that parties to a franchise agreement must be able to settle claims (class or individual) under the Wishart Act or conclude transfers or renewals without either applying to the court for a declaration that the release is not void or risking that the release will be subjected to challenge at a later date.

2. Concluding that Midas's request for a release as a condition of transfer or renewal interfered with a franchisee's right to associate under section 4 of the Wishart Act. Midas submitted that section 4 neither mentions class proceedings nor contains any prohibition on restricting a franchisee's right to commence or participate in a class proceeding. Midas contrasted the Wishart Act to Ontario's Consumer Protection Act (S.O. 2002, c. 30, Sch. A), subsection 8(1), which expressly provides that parties to a consumer agreement may not by agreement prevent a consumer from participating in a class proceeding. Further, Midas argued that it had never taken the position that the plaintiff or any other class member was prevented from commencing a class proceeding and that the franchise agreement did not contain any term or acknowledgment preventing participation in a class proceeding.

3. Holding that the Wishart Act applied to franchisees in the class, whether or not their businesses operated in Ontario. Midas submitted that, although the Wishart Act forms part of the “laws of the Province of Ontario,” section 2 of the Wishart Act is clear that the statute only applies to a franchise if its business is operated in Ontario. Midas argued that franchises operated in Alberta, Prince Edward Island and New Brunswick are governed by applicable franchise legislation in these provinces (See the Franchises Act, R.S.A. 2000, c. F-23 (the “Alberta Franchises Act”), the Franchises Act, R.S.P.E.I. 1988, c. F-14.1 and the Franchises Act, S.N.B. 2007, F-23.5) and not by the Wishart Act. As for franchises operated in provinces without franchise legislation, according to Midas, these franchises were not subject to the Wishart Act.

4. Declaring that the contractual provisions were void in respect of all class members after considering the circumstances of only two franchisees; and

5. Granting substantive relief on a procedural motion. Midas submitted that Ontario's Class Proceedings Act, 1992 (S.O. 1992, c. 6) is a procedural statute that does not modify or create substantive rights and should not have been used to abrogate Midas's contractual rights under the franchise agreement.

Hearing of Appeal

The Ontario Court of Appeal heard the appeal on April 12, 2010 and reserved. The panel of three judges only called on the respondent to make submissions in regard to the first two grounds of appeal, which typically means that the appeal will not be allowed on the last three grounds of appeal.

Regarding section 11 of the Wishart Act, the respondent argued that the release was unenforceable because it precluded the respondent and any of the franchisees who signed it from exercising their right of action for damages under subsection 3(2) of the Wishart Act for breach of the duty of fair dealing. Further, the respondent argued that this statutory cause of action could not be defeated by private agreement and that the whole point of section 11 is to override the parties' freedom of contract. According to the respondent, the express right to sue conferred in subsection 3(2) is protected under section 11 and cannot be waived or released. The respondent argued that Tutor Time was readily distinguishable on the basis that the release in favor of Midas was not required for the purpose of settlement and rather was a pre-condition for renewal.

As for section 4 of the Wishart Act and the right of association, the respondent submitted that Justice Cullity correctly found that it included the right to participate in a class action relating to systemic breaches. The respondent argued by analogy to the freedom to associate under the Canadian Charter of Rights and Freedoms which has been interpreted to include the right to bring a class action. According to the respondent, a reading of the right to associate which does not include a right to bring a collective or class action would render the provision meaningless.

Conclusion

If the last three grounds of the Midas appeal are not allowed, a conflict of laws with respect to Midas franchises operating in Alberta will have been created. The Alberta Franchises Act expressly states that it applies to Alberta franchises and voids any provision restricting its application. How can a Midas franchisee in Alberta be subject to the Alberta Franchises Act and the Wishart Act? In any event, the Midas case will likely affect the approach to governing law provisions in franchise agreements.

In addition, the appellate court's ultimate findings in relation to the non-waiver provision in section 11 and the enforceability of releases of claims and rights under the Wishart Act may well change the way franchisors handle releases, both in terms of when to require such releases and the claims covered by them.

The respondent's line of argument regarding section 4 is, quite simply, unsupported by the plain language of the statute, as well as its legislative history and purpose, and goes far beyond the objectives of the Wishart Act of achieving balance in the franchise relationship. If section 4 is intended to ensure that a franchisee has a right to participate in a class action, it is surprising that the section contains no language to this effect. Further, there is nothing in the Wishart Act that gives its provisions quasi-constitutional effect. Section 4 was enacted in response to the practice of certain franchisors of including prohibitions in franchise agreements against the formation of franchise associations and in some cases, prohibitions against franchisees consulting amongst each other regarding elements of the franchise system (Ontario Ministry of Consumer and Commercial Relations, “Ontario Franchise Disclosure Legislation: A Consultation Paper” (June 1998) at pp. 4 and 7). Section 4 was intended to have the limited purpose of ensuring that franchisors did not include prohibitions in franchise agreements that would preclude franchisees from forming an association in order to pool resources and gain greater negotiating power. Such a franchise association might retain counsel to advise its members on issues affecting them collectively. Interpreting section 4 to have the scope contended by the plaintiff's counsel in Midas goes well beyond the purpose of the Wishart Act of preserving a balance in the franchise relationship; it tips the balance too far in the other direction, to the detriment and prejudice of franchisors.

The Canadian franchise bar and industry await with great interest the Ontario Court of Appeal's judgment in Midas, which will hopefully clarify for franchisors and franchisees alike the circumstances, if any, when franchisees may release any of their rights under the Wishart Act in favor of franchisors.