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Fundamentally altering the terms of existing franchise agreements: 405341 Ontario Limited v. Midas Canada Inc.

Most Franchise Agreements (FA’s) require that a Franchisee execute a release in favour of a Franchisor on the renewal or assignment of the FA; as well, most have designated Ontario law as governing not expecting that the Arthur Wishart Act (Franchise Disclosure) 2000 (the “Act”) would apply extra-territorially to those franchises operating outside of Ontario.  The decision of the Court of Appeal in Midas (2010 ONCA 478 (CanLII) — 2010-07-06) has now fundamentally altered the terms of existing FA’s in respect of these two issues. 
405341 Ontario Limited (“405”) was part of a class proceeding against Midas Canada Inc. (“Midas”).  The claims included, inter alia, damages arising from Midas’s breach of the statutory duty of fair dealing under Section 3 of the Act.  Members of the class included franchises operating across various provinces in Canada. 

When 405 sought to renew its FA, Midas required that 405 release all of the claims 405 had against Midas including the class proceeding, as a condition of the renewal.  405 refused and sought an order that Midas was prohibited from requiring that 405 execute a release as a condition of the renewal of its FA.  405 argued that the requirement to execute a release contravened: A) Section 11 of the Act which states, inter alia, that any release by a Franchisee of a right given under this Act is void; and B) Section 4(4) of the Act which states that any provision in a FA which purports to interfere with, prohibit or restrict a Franchisee from exercising any right under Section 4 of the Act is void. 

As well, three other issues were raised:  1) on behalf of another class member who had under protest provided a release as a condition of Midas granting its consent to an assignment of an FA; 2) whether, since all of Midas’ FA’s stated that Ontario law was to govern, the Act applied to class members who were operating franchises outside of Ontario; and 3) whether the Court’s decision in respect of a single Franchisee could bind Midas’ conduct vis-a-vis other franchisees, assuming the same subject matter. 

The Court of Appeal upheld the lower Court decision on every ground of appeal holding that:

1.    those provisions of the Midas FA requiring that a Franchisee deliver a release as a condition of the renewal or assignment of the franchise are, prima facie, void under Section 11 of the Act; 

2.    those provisions of the Midas FA requiring that a Franchisee deliver a release as a condition of the renewal or assignment of the franchise contravened a Franchisee’s right to associate pursuant to Section 4 of the Act;

3.    where the FA specifies that Ontario law is to govern, the Act applies to Franchisees operating outside of Ontario; and

4.    a Court decision in respect of a single Franchisee can bind a Franchisor with respect to its conduct vis-a-vis other Franchisees, assuming the same subject matter. 

Lawyers’ should consider which provincial laws will govern the parties i.e. Ontario law or the laws of the Province in which the Franchisee operates the franchise.    In respect of the release issue, consideration should be given to determining whether the Franchisee has any claims against the Franchisor for a breach of the Act.  If not, then the Franchisee can release the Franchisor from all claims.  If yes, then the claims under the Act can be specified and the Franchisee can release from all other claims.  Alternatively, a Franchisor could as consideration for obtaining a release, provide a release of all claims that the Franchisor has against the Franchisee.  This is something that should be the subject of negotiation outside of the FA, and hence not a “contractual obligation” under the FA.

By David Kornhauser (BA, MBA, LLB), Corporate Counsel, Macdonald Sager Manis, LLP

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