Ontario Court Upholds Validity of Franchise Release in a Settlement

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Author: Anthony Pugh, Law Works
Editor: Ben Hanuka, Law Works

In New Vision Renaissance MX Ltd. v. The Symposium Café Inc., the Ontario Superior Court held that a release that the plaintiff franchisees signed was enforceable.  The court relied on the ‘Tutor Time’ exemption to section 11 of the Arthur Wishart Act (Franchise Disclosure), 2000, which prohibits waivers by a franchisee of statutory rights.  The court held that the release was a complete defence to the franchisees’ rescission claim.

Section 11 of the Act normally provides that a franchisee cannot release its rights under the Act (including its right to rescind for no disclosure).  However, the courts have judicially developed an exception to this section (known as the “Tutor Time” exception) for releases given in the settlement of a dispute.

 Key facts

The franchisees, a married couple from Mexico and their company, purchased a Symposium Café franchise in Stouffville from the franchisor, The Symposium Café Inc.  They signed the franchise agreement in February 2015, and retained a franchise lawyer to advise them in the purchase.

Shortly after signing the franchise agreement, the franchisees started having cash flow problems due to, among other things, a relative kidnapped in Mexico.  Nevertheless, until shortly before the closing date, the franchisees wished to press forward with closing, despite Symposium offering to delay it.  About a week before closing, the franchisees informed Symposium they would not have the funds necessary to close the transaction and asked to pay the balance over time.

One of the franchisees met with Symposium’s representatives, and lawyers for both sides reviewed the draft documents.  The franchisees eventually signed a Franchise Amending Agreement, under which the outstanding amount was treated as a loan.

In return, the franchisees released Symposium from any claims under the Act.

The parties finalized the transaction, and the restaurant opened.  About a year later, the franchisees attempted to sell their franchise.  Soon after that, they delivered a notice of rescission to Symposium, and requested that it take over the operation of the franchise.  Symposium terminated the franchise agreement and sublease, and took over the operation of the franchise.

The franchisees sued Symposium for rescission under section 6(2) of the Act on the basis of alleged deficiencies in Symposium’s disclosure, including failure to provide a properly signed certificate.  Symposium denied the alleged disclosure deficiencies and counterclaimed against the franchisees for breach of the franchise agreement.  It relied on the release signed by the plaintiffs.  Both parties moved for summary judgment and agreed to bifurcate the issue of damages to be determined on a reference.

The disclosure document was deficient

The court held that the disclosure document was deficient because someone other than Symposium’s directors and officers certified it.  The court did not accept Symposium’s argument that the person who signed the disclosure document did so in the capacity of agent for Symposium’s directors and officers.  The court also found that, even though Symposium failed to provide a single disclosure document, the franchisees did not show how it impaired their ability to make an informed investment decision.

The release fell under the Tutor Time exception and was valid and enforceable

The case turned on whether the release was valid.  Such releases of a franchisor’s statutory obligations are usually prohibited by section 11 of the Act.  However, a release is enforceable if a franchisee gives it as part of a settlement, with full knowledge of its claims under the Act and with the benefit of legal counsel.

• The release was given in the context of a settlement of a potential dispute

The court held that the loan agreement served as a settlement of a potential dispute between the parties – the consequences of the franchisee’s inability to close.  The loan also served as consideration for the franchisees’ release of the franchisor from any claims under the Act.

The franchisees argued that the release had to be connected to the dispute, and that the release should therefore be limited to disclosure obligations associated with the loan.  The court rejected this argument, holding that it would be inequitable to allow the franchisees to resile from their release, when they enjoyed the benefit of being able to open their restaurant on the closing date and of the loan. 

• The release was of existing breaches

 The court found that the franchisees had knowledge of the potential disclosure-related claims.  The release applied only to the disclosure that Symposium provided before the parties signed the Franchise Amending Agreement and the release – disclosure that the franchisees had already reviewed.

It was not necessary for the franchisees to have had subjective knowledge of a claim or those have already made it.  Further, their lawyer had tried to carve disclosure claims out of the scope of the release, which reinforced the court’s finding that the claims were known or capable of being known at the time. 

• The franchisees had the benefit of legal advice when executing the agreement

 The court held that the franchisees had sufficient legal advice in their dealings with Symposium.  They hired a franchise lawyer to review and comment on the disclosure document and franchise agreement.  The franchisees also retained him for the completion of the transaction.  He was actively involved on behalf of the franchisees in the negotiation of the amending agreement that contained the loan and release provisions.  It was not necessary for the franchisees to obtain a certificate of independent legal advice.

• The release was not unconscionable, and was not obtained through duress

The court rejected the franchisees’ argument that the release was unconscionable, signed because of duress, or amounted to a breach of Symposium’s duty of good faith.

About unconscionability, the Franchise Amending Agreement was not a contract of adhesion unilaterally imposed on the weaker party.  About duress, the franchisees were the masters of their own downfall by waiting a week before closing to disclose that they did not have the funds.

The franchisees also argued that Symposium breached its duty of fair dealing by learning about possible problems with its disclosure from another franchisee and by obtaining the release without disclosing those issues.  The court disagreed, holding that this was speculative and that there was no requirement for the franchisor to disclose potential claims to franchisees.