BEWARE - Release & Waiver Clause in Franchise Agreements May Be Void

Author: fzaid@frankzaid.com

Date: JUL 1st, 2014

Topic: Industry Experts

For many years it was common practice for franchisors to insist that franchisees waive any claims they may have against the franchisor when renewing or assigning their franchise agreements. The reasoning was simple - no franchisor wanted to carry on with a franchisee that may be suing or threatening to sue the franchisor, and no franchisor wanted to allow a franchisee to transfer or sell a franchise and then sue or threaten to sue the franchisor. All provincial franchise laws (Prince Edward Island, New Brunswick, Ontario, Manitoba, Alberta and soon British Columbia) contain a provisions that states that any waiver or release of by a franchisee of a right given under the legislation or of an obligation or requirement imposed on a franchisor under the legislation is void. The problem with this provision is that it refers only to rights and obligations under the legislation and not to other rights or obligations under franchise agreements or under common law generally.

In a recent case heard by the Ontario Superior Court of Justice, a franchisee wanted to assign the franchise agreement but the agreement required a comprehensive general release in the form to be specified by the franchisor of of any claims against the franchisor as a condition of the franchisor consenting to the assignment. The franchisee asked the court to declare the clause void and unenforceable.

The court did exactly that. It stated that a general release includes rights under the legislation. The franchisor had offered to qualify the release by excluding rights under the statute, but the court stated that this qualification was not in the franchise agreement and therefore it was too late to narrow the clause. To do so would be allowing for abuse in that a franchisor could "wait and see" if an objection was raised by the franchisee. Also, the court stated that the words "in the form specified by the franchisor" do not take the clause outside of the legislation. These words relate to the form of release, not the substance.M

The court also confirmed that the legislation is very broad, and does not contemplate that a clause in a franchise agreement which offends the non-waiver provision can be void or unenforceable only in part. The entire clause will be void and unenforceable.

The court did make reference to previous cases in which it has been determined that a general release or a release of rights or obligations under the legislation will not be considered to be void if made in the context of a settlement of a claim where the there is a known, existing breach of the legislation and the franchisee has the advice of legal counsel.

However, what was not determined in the case is whether a carefully crafted release which does not include a waiver or release of claims under the legislation (i.e., may actually except such claims) will be enforceable if the form of release is specifically agreed to in and as part of the franchise agreement. This issue was not raised in the case, and in one previous case where it was raised a final determination of the point was not made by a court on a full hearing of the point.

So it is still open for franchisors to try to obtain releases or waivers of contractual or equitable rights under common law. But if such a claim is mixed with a claim, for example, for breach of the duty of fair dealing under franchise legislation, the issue will become overlapping and complicated, and will need to be determined by a court.

In the meantime, franchisees can rest easy that any clause in a franchise agreement waiving or releasing their rights or a franchisor's obligations under franchise legislation, directly or indirectly, will likely be held void and unenforceable by a court. And remember - all franchise legislation considers a franchise agreement to include any other agreement entered into in furtherance of a franchise agreement. Therefore, similar clauses in leases, subleases, guarantees, security agreements, software licenses, and other agreements or contracts entered into as part of the franchise arrangement will also likely be void and unenforceable.

Franchise laws are being considered by the courts strictly and in accordance with the intent of legislation: "to mitigate and alleviate the power imbalance that exists between franchisors and franchisees", as stated by the Ontario Superior Court and other courts in this and earlier cases. Franchisees need to be aware of their rights - and to beware of offensive clauses in franchise documents.