Mar 16, 2015

[Epstein, van Rensburg and Benotto JJ.A.]

G. B. Shaw and D. Ronde, for the appellant
D. Smith, for the respondents

Keywords: Franchise Law, Contract Law, Unenforceable Term, Severance, Partial Enforcement

Facts: The appellant is the franchisor of Cora restaurants. The respondents are two corporate franchisees that operate Cora restaurants.

Both respondents commenced separate legal actions against the appellant, asserting a number of claims under the Arthur Wishart Act (Franchise Disclosure), 2000 (“AWA”), including breaches of the duty of fair dealing in the performance and enforcement of their franchise agreements under section 3 of the AWA, as well as common law claims of breaches of contract, negligence and misrepresentation.

In an effort to mitigate their damages, the respondents subsequently decided to sell their franchise businesses and assign their rights under the franchise agreements to third parties. Each agreement required the franchisor’s consent prior to any assignment of rights. The agreements spelled out conditions precedent to the franchisor’s consent to assignment, one of which was the requirement that the franchisee execute a release of claims against the franchisor.

The franchisees sought a declaration that the release provisions were void, unconscionable and unenforceable under section 11 of the AWA. The application judge found that the provision at issue attempted to release all claims, including those under the AWA. The application judge rejected the franchisor’s argument that its offer to the franchisee to agree to a narrower release of only the common law claims took the provision outside of section 11.

In the result, the application judge issued a declaration that the release provision was void and unenforceable.

Issue: The main issue on this appeal was whether the impugned clause in the franchise agreements, while unenforceable with respect to AWA claims, should nonetheless be enforced in part with respect to the requirement to provide the franchisor with a release from other claims.

Holding: Appeal dismissed.

Reasoning: The standard of appellate review here is one of palpable and overriding error due to questions of mixed fact and law. The application judge’s decision was both correct and devoid of any palpable and overriding error. The entire obligation to provide a release in exchange for the consent to the assignment of the franchises was unenforceable. The court could not and should not sever the requirement to provide a release of AWA claims only but to uphold the requirement to release other claims.

Section 11 is Engaged

Section 11 of the AWA is clearly engaged. The impugned clause requires the franchisee, as a condition of transfer, to provide a general release, which would include AWA claims.

The Release Provision is Unenforceable, but not Void

Section 11 of the AWA merely voids the release or waiver itself, and not the provisions of a contract requiring such a release to be provided. The release provision is not itself a release of a right under the AWA – it simply requires that such a release be provided in the event of an assignment of the franchise by the franchisee.

Section 11, therefore, does not operate so as to void the impugned clause from the outset. Rather, the clause is unenforceable vis-à-vis the requirement to release AWA claims, as it requires the performance of something that would contravene section 11 of the AWA.

Availability of Partial Enforcement and the Doctrine of Severance

The application judge did not err when she held that the clause could not be severed and enforced only to the extent it was not in conflict with s. 11 of the AWA.

Severance lies along a spectrum of remedies available when a provision of a contract is illegal, including voiding the contract in whole or in part. There are two kinds of severance: “blue pencil” and notional. The appropriate remedy will depend on the particular context. Courts will consider the context of the contract at issue and any relevant policy considerations when assessing whether and how to sever provisions.

Courts are generally reluctant to sever contractual provisions because severance alters the terms of the original agreement between the parties. Severance engages policy concerns to a certain degree beyond protecting the parties’ intentions, because the court is being asked to assist one party to enforce an otherwise unenforceable provision.

In this context, franchise agreements are contracts of adhesion and often give the franchisor a significant degree of control over the franchisee’s business. Courts have expressed concern over the inequality of bargaining power in the franchise context, and franchise agreements have been interpreted by our courts with this policy consideration in mind.

Applying notional severance to the provision so that it can be saved is contrary to the purpose of the AWA, which is to protect franchisees. It would give no incentive to franchisors to ensure their agreements are compliant with the AWA. It would also increase the risk that a franchisee, having signed a release of all claims, would erroneously believe it is not entitled to pursue any claims against the franchisor, including its AWA claims.

The potential for windfall to the respondents in this particular case does not outweigh the potential for abuse and subversion of the purposes of section 11 of the AWA if the remedy of severance were applied.

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