2176693 Ontario Ltd. et al. v. The Cora Franchise Group Inc.

[Indexed as: 2176693 Ontario Ltd. v. Cora Franchise Group Inc.]

Ontario Reports

Court of Appeal for Ontario,

G.J. Epstein, van Rensburg and Benotto JJ.A.

March 12, 2015

124 O.R. (3d) 776 | 2015 ONCA 152

Case Summary

Contracts — Franchise agreement — Clause in franchise agreement requiring franchisee to provide franchisor with general release of any claims against franchisor as condition precedent to franchisor consenting to assignment of franchise agreement to third party — Franchisor asking franchisee to sign release of claims not covered by Arthur Wishart Act (Franchise Disclosure) — Release clause in agreement unenforceable as it was contrary to s. 11 of Act — Severance or reading down of clause to apply only to common law claims not appropriate remedy as it would undermine purpose of Act — Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3, s. 11.

The applicant franchisees were parties to franchise agreements with the respondent. In each case, a clause in the franchise agreement required the franchisee to provide the franchisor with a general release of any claims against the franchisor, in the form specified by the franchisor, as a condition precedent to the franchisor consenting to the assignment of the franchise agreement. Section 11 of the Arthur Wishart Act (Franchise Disclosure), 2000 (the "AWA") provides that any purported waiver or release by a franchisee of a right given under the Act is void. The respondent asked the applicants to sign a release of claims other than claims covered by the AWA. The applicants refused to do so and applied successfully for a declaration that the clause was void and unenforceable. The respondent appealed.

Held, the appeal should be dismissed.

The words "in the form specified by the franchisor" in the impugned clause did not expressly allow the respondent to determine the scope of the release, thereby making it compliant with s. 11 of the AWA. The clause required a "general release", not a release of whatever claims the respondent might specify.

The application judge erred in finding that the impugned clause was void. Section 11 of the AWA did not render the impugned clause void, as it operated to void [page777] the release itself, not the provisions of a contract requiring such a release to be provided. However, the impugned clause was unenforceable, as enforcement would require the performance of something that would contravene s. 11 of the AWA. The application judge did not err when she held that the clause could not be severed or read down to permit the respondent to require a release of only non-AWA claims. Doing so would subvert the purpose and policy of s. 11 of the AWA. Severing clauses otherwise unenforceable under the AWA would invite franchisors to draft overly broad provisions with the prospect that the courts would only sever or read those provisions down and would provide no incentive to franchisors to ensure that their franchise agreements are in compliance with the AWA. It would also increase the risk that a franchisee -- having signed a waiver or release of all claims -- would erroneously believe it was not entitled to pursue any claims against the franchisor, including its AWA claims. To the extent that the applicants would no longer be required to release their common law claims, they would receive a greater protection than to which they would have been entitled. However, the extent of that windfall was hard to assess, since there is significant overlap between the common law and AWA claims of a franchisee alleging misrepresentation. In any event, the legitimate interests of the respondent, in the context of an assignment, were protected even without the requirement of providing a release. The purpose of the assignment provision was to ensure that the franchise agreement was assigned to a competent party. All of the other conditions precedent to the respondent's approval of an assignment remained in place. In particular, the respondent did not lose its ability to approve the assignee as a franchisee.

Seidel v. Telus Communications Inc., [2011] 1 S.C.R. 531, [2011] S.C.J. No. 15, 2011 SCC 15, 301 B.C.A.C. 1, 412 N.R. 195, 2011EXP-936, J.E. 2011-498, EYB 2011-187826, 329 D.L.R. (4th) 577, [2011] 6 W.W.R. 229, 16 B.C.L.R. (5th) 1, 82 B.L.R. (4th) 1, 1 C.P.C. (7th) 221, 199 A.C.W.S. (3d) 1064, distd

405341 Ontario Ltd. v. Midas Canada Inc., [2010] O.J. No. 2845, 2010 ONCA 478, 264 O.A.C. 111, 70 B.L.R. (4th) 1, 322 D.L.R. (4th) 177, 191 A.C.W.S. (3d) 113, consd

Other cases referred to

Sattva Capital Corp. v. Creston Moly Corp., [2014] 2 S.C.R. 633, [2014] S.C.J. No. 53, 2014 SCC 53, 2014EXP-2369, J.E. 2014-1345, 373 D.L.R. (4th) 393, [2014] 9 W.W.R. 427, 59 B.C.L.R. (5th) 1, 461 N.R. 335, 25 B.L.R. (5th) 1, 358 B.C.A.C. 1, 614 W.A.C. 1, 242 A.C.W.S. (3d) 266; Shafron v. KRG Insurance Brokers (Western) Inc., [2009] 1 S.C.R. 157, [2009] S.C.J. No. 6, 2009 SCC 6, 52 B.L.R. (4th) 165, [2009] 3 W.W.R. 577, 301 D.L.R. (4th) 522, 87 B.C.L.R. (4th) 1, 68 C.C.L.I. (4th) 161, 70 C.C.E.L. (3d) 157, 265 B.C.A.C. 1, EYB 2009-153214, J.E. 2009-241, [2009] CLLC Â210-010, 383 N.R. 217, 173 A.C.W.S. (3d) 151; Shelanu Inc. v. Print Three Franchising Corp. (2003), 2003 CanLII 52151 (ON CA), 64 O.R. (3d) 533, [2003] O.J. No. 1919, 226 D.L.R. (4th) 577, 172 O.A.C. 78, 38 B.L.R. (3d) 42, 123 A.C.W.S. (3d) 267 (C.A.); Transport North American Express Inc. v. New Solutions Financial Corp., [2004] 1 S.C.R. 249, [2004] S.C.J. No. 9, 2004 SCC 7, 235 D.L.R. (4th) 385, 316 N.R. 84, J.E. 2004-446, 183 O.A.C. 342, 40 B.L.R. (3d) 18, 18 C.R. (6th) 1, 17 R.P.R. (4th) 1, REJB 2004-53611, 128 A.C.W.S. (3d) 1002, 60 W.C.B. (2d) 90

Statutes referred to

Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3, ss. 3, 11

Business Practices and Consumer Protection Act, S.B.C. 2004, c. 2, ss. 3, 172 [page778]

Authorities referred to

Hall, Geoff R., Canadian Contractual Interpretation Law, 2nd ed. (Markham, Ont.: LexisNexis Canada, 2012)

APPEAL from the order of Matheson J. (2014), 119 O.R. (3d) 100, [2014] O.J. No. 550, 2014 ONSC 600 (S.C.J.) declaring clauses in a franchise agreement void and unenforceable.

Geoffrey B. Shaw and Derek Ronde, for appellant.

Darren Smith, for respondents.

The judgment of the court was delivered by

[1] VAN RENSBURG J.A.: — This appeal engages the interpretation of the rights and obligations of franchisors and franchisees under the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (the "AWA"), in the context of the franchisor's consent to an assignment of a franchise agreement to a third party.

[2] The appeal is from an order granted on application by the respondents, declaring void and unenforceable clauses in two franchise agreements requiring delivery of a release as a condition of the respondents' assignment of their franchise agreements. For the reasons that follow, I would dismiss the appeal.

A. Facts

[3] The appellant is the franchisor of "Cora" restaurants. The respondents are two corporate franchisees with common control that operate Cora restaurants in Ancaster and Niagara Falls, Ontario. Each franchisee entered into a franchise agreement with the appellant, the Ancaster franchisee in 2007 and the Niagara Falls franchisee in 2008.

[4] In 2011 and 2012, the respondents commenced legal actions in the Superior Court against the appellant. In their actions, the respondents assert a number of AWA claims, including breach of the duty of fair dealing in the performance and enforcement of their franchise agreements under s. 3, as well as common law claims of breach of contract, negligence and misrepresentation.

[5] In 2013, in an effort to mitigate their damages, the franchisees decided to sell the franchise businesses, and to assign their franchise agreements to third parties.

[6] Pursuant to s. 22.4 of each franchise agreement, the franchisor's consent is required before the franchisee is able to assign its rights under the franchise agreement. Sections 22.4 and 22.6 set out a number of conditions precedent to the franchisor's consent, including the provision of detailed information [page779] about the proposed assignee in order to permit the franchisor to decide whether the assignee would be a suitable franchisee and operator and a requirement that the assignee complete training programs and demonstrate its fitness as a franchisee. Section 22.6 also requires the franchisee seeking to assign its rights to provide a general release of any claims against the franchisor. The section provides specifically that the franchisor, as a condition precedent to the granting of its consent, will require:

22.6.4 Franchisee and its directors, officers and shareholders signing and delivering in favour of Franchisor and its directors, officers, shareholders and employees, a general release in the form specified by Franchisor of any claims against Franchisor and its officers, directors, shareholders and employees.

[7] The Niagara franchisee entered an agreement with a third party for the sale of the franchise on July 23, 2013, subject to the appellant's consent. Communications between the parties followed, which included an exchange with respect to the requirement that the franchisee provide a release. The franchisor's counsel requested that the franchisee comply with the conditions for consent set out in the franchise agreement. The franchisee responded that it would not be executing a general release pursuant to s. 22.6.4. The franchisor wrote back, stressing that it expected strict compliance with the assignment provisions, including the requirement for a general release. The franchisee's counsel expressed its position that such a release was contrary to s. 11 of the AWA. That section provides as follows:

11. Any purported waiver or release by a franchisee of a right given under this Act or of an obligation or requirement imposed on a franchisor or franchisor's associate by or under this Act is void.

[8] The franchisor's counsel responded that it was not seeking the release of claims covered by the AWA, and thereafter provided the Niagara franchisee with a draft release. The release stated explicitly that it would not constitute a waiver of any rights prescribed by the AWA or claims made thereunder in the pending Superior Court action.

[9] The Niagara franchisee refused to sign the release, and the two respondents brought an application to the Superior Court seeking a declaration that s. 22.6.4 of each franchise agreement was void, unconscionable and unenforceable.

B. Decision on the Application

[10] The application judge identified the overarching issue in the application as whether s. 22.6.4 of the two franchise agreements was void by virtue of s. 11 of the AWA. A related issue was [page780] whether the impugned release conditions could be read down to be compliant or otherwise be enforceable in part.

[11] The application judge first interpreted s. 22.6.4. She considered [at para. 13] the ordinary meaning of the requirement to provide a "general release . . . of any claims", as including a release of rights under the AWA. The words "in the form specified by Franchisor" did not take the release provision outside of s. 11 of the AWA, as they related to form, and did not narrow the substantive requirement for a general release.

[12] The application judge held that accepting the appellant's argument that its offer to agree to a narrower release after the issue was raised protected the clause from s. 11 would create a potential for abuse. A franchisor could "wait and see" if a complaint was raised. If not, it could obtain full releases from franchisees who did not assert their rights.

[13] The application judge next considered whether the effect of s. 11 was to void the whole of s. 22.6.4 of the franchise agreement or whether that section could be read down or partially enforced to permit the franchisor to require, as a condition of its consent to an assignment, a release of non- AWA claims.

[14] The application judge held that s. 11 of the AWA should be interpreted according to the AWA's purpose of mitigating the inequality of bargaining power between franchisors and franchisees. She referred to 405341 Ontario Ltd. v. Midas Canada Inc., [2010] O.J. No. 2845, 2010 ONCA 478, 322 D.L.R. (4th) 177, where this court held that terms in a franchise agreement calling for a general release were unenforceable. She noted that the court in that case neither found the clauses partly enforceable nor "read them down".

[15] The application judge then reviewed and distinguished several cases, including Seidel v. Telus Communications Inc., [2011] 1 S.C.R. 531, [2011] S.C.J. No. 15, 2011 SCC 15, where the Supreme Court concluded that a provision in a cellphone contract that required all claims to be arbitrated did not apply to statutory claims that could be litigated in court under the Business Practices and Consumer Protection Act, S.B.C. 2004, c. 2 ("BPCPA"). The provision did apply to require the plaintiff's other claims against the defendant to be arbitrated. The application judge distinguished Seidel on the grounds that (i) the policy considerations in the statutes at issue were different, and (ii) Seidel involved access to justice and arbitration rather than the release of substantive claims.

[16] The application judge preferred to analogize the case at hand to Shafron v. KRG Insurance Brokers (Western) Inc., [2009] 1 S.C.R. 157, [2009] S.C.J. No. 6, 2009 SCC 6, where the [page781] Supreme Court held that the "reading down" or notional severance of offensive employment contract provisions would invite employers to draft overly broad covenants in the hope that either employees would not assert their rights or that a court would sever or read down only the unreasonable parts of the covenant. She found that the policy considerations at issue in this case were similar.

[17] The application judge determined that the wording of s. 11 is broad and does not contemplate that a provision of an agreement can be struck down only in part. Section 22.6.4 explicitly contemplates a "general release", and partial enforcement would raise the same potential for abuse as discussed above. Also, since many AWA rights are codifications of the common law, reading down offending provisions to exclude non-statutory rights would create debate and confusion about the status of overlapping claims. A purposive interpretation supported rendering the provision void rather than allowing the appellant to essentially rewrite it.

[18] The application judge accordingly issued a declaration that s. 22.6.4 of the two franchise agreements is void and unenforceable.

C. Issues on Appeal

[19] The appellant contends that the application judge erred

by failing to give effect to the ability of the franchisor to choose the form of release and therefore to tender an AWA-compliant release;

by disregarding the fact that the release sought as a condition of the proposed transfer did not in any way affect the respondents' AWA rights;

in failing to follow the authority of Seidel v. Telus Communications Inc., and refusing to sever the illegal parts of the impugned clause; and

-- in applying incorrect policy considerations.

D. Analysis

[20] The main issue on this appeal is whether the impugned clause in the franchise agreements, while unenforceable with respect to AWA claims, should nonetheless be enforced in part. In my view, in the circumstances here, the clause cannot be severed to require only a release of non-AWA claims as a condition of consent to the proposed assignment. I will deal briefly first with the standard of review and the appellant's preliminary arguments [page782] respecting the interpretation of the contract and its actions in seeking only an AWA-compliant release. I will then consider the effect of s. 11 of the AWA on s. 22.6.4 of the franchise agreements and whether this court should sever or "read down" this provision. I will also address the Seidel decision, which in my view does not provide the appropriate analytical framework for the resolution of the issues engaged in this appeal.

(1) Standard of review

[21] This appeal involves the interpretation of a contract in light of a statutory provision. Unless there is an extricable question of law, the interpretation of a contract is a question of mixed fact and law: Sattva Capital Corp. v. Creston Moly Corp., [2014] 2 S.C.R. 633, [2014] S.C.J. No. 53, 2014 SCC 53, 373 D.L.R. (4th) 393, at paras. 50-53. The correctness standard applies if the legal aspect of the issue is readily extricable, otherwise deference is warranted.

[22] In my view, both the interpretation of s. 22.6.4 and the issue of whether that section of the contract is entirely unenforceable, or can be severed, raise questions of mixed fact and law. They involve an assessment of the words of the contract, considered in light of the context and the broader policy objectives of the AWA. The decision of the application judge is therefore reviewable on the standard of palpable and overriding error. That said, the result of this appeal does not turn on the standard of review. The decision below, in my view, was correct and devoid of any palpable and overriding error.

(2) The appellant's preliminary arguments: Whether s. 22.6.4 engages [s. 11](https://www.canlii.org/en/on/laws/stat/so-2000-c-3/latest/so-2000-c-3.html) of the [AWA](https://www.canlii.org/en/on/laws/stat/so-2000-c-3/latest/so-2000-c-3.html)

[23] The appellant asserts that the application judge erred in concluding that s. 22.6.4 of the franchise agreements contravenes s. 11 of the AWA, and is therefore unenforceable.

[24] First, the appellant argues the application judge ignored language in the clause permitting it to require the respondents to provide a release "in the form specified by the Franchisor". Second, the appellant submits that, because the draft release it provided in fact required only a release of common law claims, s. 11 was not engaged at all.

[25] I would reject the appellant's argument that the words "in the form specified by the Franchisor" expressly allow the franchisor to determine the scope of the release, including to make it compliant with the AWA, and therefore save the clause from being contrary to s. 11 of the AWA. As the application judge stated [at para. 15], "based upon an ordinary interpretation of [page783] those words, they relate to form, not substance". The clause requires a "general release" of "any claims against [the] Franchisor", and not a release of whatever claims the franchisor might specify. The section does not call for a release of claims to the extent that applicable law would permit (which would import flexibility into the substance of the obligation to provide a release); the only flexibility is with respect to form, which does not detract from or qualify the obligation to provide a "general" release of all claims.

[26] I would similarly reject the appellant's argument that, as it required only a release of common law claims from the respondents, s. 11 was not engaged. The clause clearly anticipates that, as a condition of the franchisor's consent to an assignment, the franchisee will provide a general release of all claims. Such a release would include AWA claims, and that would violate s. 11.

[27] Accordingly, the impugned clause, by its terms, requires the franchisee, as a condition of transfer, to provide a general release, which would include AWA claims. The appellant, by its conduct, could not alter the contractual obligation by seeking to obtain something less, something that would be compliant with the AWA. Section 11 of the AWA is clearly engaged.

(3) Section 22.6.4 is not void; it is unenforceable

[28] The application judge concluded that the requirement to provide a general release was both void and unenforceable. As I explain below, s. 11 of the AWA does not render the impugned clause of the franchise agreement void; rather, the obligation imposed by the clause, and that the appellant seeks to enforce, is unenforceable as enforcement would be contrary to statute.

[29] Section 11 of the AWA provides that "[a]ny purported waiver or release by a franchisee of a right given under this Act . . . is void". On its plain language, this provision operates to void the release or waiver itself, and not the provisions of a contract requiring such a release to be provided. Section 22.6.4 of the franchise agreement 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. A void provision would result where, as in Seidel, for example, the contract contains an explicit waiver of rights where the waiver is prohibited by statute.

[30] The issue here, then, is whether the clause of the franchise agreement that requires the provision of a general release of all claims is unenforceable as contrary to statute. [page784]

[31] Once it is recognized that s. 22.6.4 requires the franchisee, in order to exercise certain rights under the franchise agreement, to provide a general release of all claims (and not just such claims as the franchisor may specify), then it is unenforceable as requiring the performance of something that would contravene s. 11 of the AWA. It is acknowledged that the clause cannot not be enforced to require a release of AWA claims. The question is then whether the court should read down the requirement to compel only the performance of something that would be legal, i.e., a release, but not of AWA claims. This engages the doctrine of severance.

(4) Section 22.6.4 cannot be severed and enforced to the extent it is not in conflict with [s. 11](https://www.canlii.org/en/on/laws/stat/so-2000-c-3/latest/so-2000-c-3.html) of the [AWA](https://www.canlii.org/en/on/laws/stat/so-2000-c-3/latest/so-2000-c-3.html)

[32] The appellant argues that if s. 11 of the AWA is engaged by s. 22.6.4, the application judge erred by failing to sever or read down the clause to require a release of non- AWA claims only, and that she relied on inappropriate policy considerations in doing so. The appellant submits that this court should find the clause unenforceable only in part, and require the respondents to provide a release of non- AWA claims.

[33] The appellant asserts that the practical effect of the application judge's decision is that the appellant will be deprived of its contractual right, bargained for in good faith, to obtain a release as a condition of providing its consent to an assignment. The appellant argues that it is not necessary in order to promote the policy behind the AWA to find the section of the contract completely unenforceable; rather, it should be read down to permit the franchisor to tender a release that does not purport to release AWA claims.

[34] I conclude that the application judge did not err when she held that the clause could not be severed or read down and enforced only to the extent it was not in conflict with s. 11 of the AWA.

(a) General principles of severance

[35] Where part of a contract is unenforceable because enforcement would be contrary to statute or the common law, rather than setting aside the entire contract, courts may sever the offending provisions while leaving the remainder of the contract intact. 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. The appropriate remedy will depend on the particular context: Transport North American Express Inc. v. New Solutions Financial Corp., [2004] 1 S.C.R. 249, [2004] S.C.J. No. 9, 2004 SCC 7, at para. 6. [page785] Courts are generally reluctant to sever contractual provisions because severance alters the terms of the original agreement between the parties: Shafron, at para. 32.

[36] Severance takes two forms: "blue-pencil" and "notional". Blue-pencil severance involves removing part of a contract, as if by drawing a line through it. Notional severance "involves reading down a contractual provision so as to make it legal and enforceable": Shafron, at para. 2. Where severance is appropriate, courts choose the technique that "in light of the particular contractual context involved, would most appropriately cure the illegality while remaining otherwise as close as possible to the intentions of the parties expressed in the agreement": Transport North American Express Inc., at para. 32.

[37] Courts will consider the context of the contract at issue and any relevant policy considerations when assessing whether and how to sever provisions: see, for example, Shafron. 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.

[38] The context here is a business relationship carried out through the vehicle of a franchise. Franchise agreements are contracts of adhesion, frequently in standard form with the "main provisions . . . presented on a 'take it or leave it basis'": Shelanu Inc. v. Print Three Franchising Corp. (2003), 2003 CanLII 52151 (ON CA), 64 O.R. (3d) 533, [2003] O.J. No. 1919 (C.A.), at para. 58. These contracts often give the franchisor a significant degree of control over the franchisee's business. In interpreting franchise agreements, courts have applied "policy goals in addition to accuracy in giving effect to the parties' intentions" and have expressed "concern about inequality of power within the contractual relationship, and the resultant need to protect the more vulnerable contracting party from abuse at the hands of the more powerful party": Geoff R. Hall, Canadian Contractual Interpretation Law, 2nd ed. (Markham, Ont.: LexisNexis Canada, 2012), at p. 194.

[39] For the reasons outlined below, in my view, s. 22.6.4 should not be read down to permit the appellant to require a release of only non-AWA claims. The blue pencil approach does not apply in the circumstances, because there is no phrase in s. 22.6.4 that could be struck to enable the clause to require a release of only non-AWA claims. The clause should not be notionally severed given that severance would undermine the purposes of the AWA. [page786]

(b) The clauses should not be notionally severed

[40] In my view, notional severance is not an appropriate remedy in the circumstances, as it could undermine the purpose of s. 11 of the AWA. This court's decision in Midas Canada Inc. is not determinative of whether clauses in a franchise agreement purporting to require a release can be severed. However, the reasoning in that decision informs the analysis and supports the view that notionally severing or reading down clauses calling for a broad release would not be in line with the purposes of the AWA. Before continuing with the severance analysis, I pause to consider the Midas decision.

(i) The Midas case is helpful but not determinative

[41] In the Midas case, this court considered whether a franchisor could require a general release of claims by a franchisee as a condition of the renewal or assignment of a franchise agreement.

[42] The case arose in the context of a class proceeding. The claims were asserted under both the common law and the AWA. While the class proceeding was pending, the representative plaintiff's franchise agreement expired. As a condition of renewal, the standard form agreement included a provision requiring a general release of any and all claims and causes of action against the franchisor.

[43] The franchisor tendered a draft general release in its proposed renewal agreement that purported to release all claims of any nature. The franchisee moved for an order preventing the franchisor from requiring it to execute a release from the claims certified in the class action as a condition of the renewal or transfer of its rights under the franchise agreement. It sought a declaration that any provision requiring class members to release the franchisor from liability as a condition of the renewal or transfer of their rights under the agreement was unenforceable to the extent of some or all of the common issues in the proceeding.

[44] This court concluded that the renewal and assignment provisions of the franchise agreement requiring a general release were unenforceable and that a release in accordance with those provisions would be void.

[45] MacFarland J.A. stated, at para. 26, "[t]he language of s. 11 could not be clearer. If you include a term in your franchise agreement that purports to be a waiver or release of any rights a franchisee has under the Act, it will be void". After observing that the claims by the franchisees in the class proceedings were [page787] both under the AWA and common law, she noted, at paras. 29 and 30:

To permit the appellant to require the class members to release any claims they might have against the appellant in order to take advantage of any other rights they might have under the Agreement, in my view, is simply contrary to the spirit, intent and letter of the Act. Where a franchisor insists upon such waiver or release, s. 11 makes it clear that any such waiver or release will be void.

The purpose of the Act is to protect franchisees. The provisions of the Act are to be interpreted in that light. Requiring franchisees to give up any claims they might have against a franchisor for purported breaches of the Act in order to renew their franchise agreement, unequivocally runs afoul of the Act.

[46] Here, the application judge relied on Midas to conclude that s. 22.6.4 of the franchise agreement could not be enforced in part. She noted that MacFarland J.A. did not find the clauses in Midas enforceable in part. However, Midas does not establish that clauses requiring a release can never be severed or read down. The court concluded that the relevant provisions were unenforceable. The issue of severance was not considered in Midas, as there was no indication that the franchisor had offered or was prepared to accept anything less than a full release of claims.

[47] While the Midas decision is therefore not determinative, the views expressed in that case can nevertheless inform this court's consideration of the severance issue, as noted later in these reasons.

(ii) Relevant factors for notional severance

[48] In Transport North American Express Inc., at para. 42, a case dealing with a contract providing for an illegal rate of interest, the Supreme Court adopted several factors to assess the appropriateness of notional severance or partial enforcement as a remedy in the face of an illegal provision in a contract. When reworded to apply to the franchise context, the factors would read as follows: (1) whether the purpose or the policy of s. 11 of the AWA would be subverted by severance; (2) whether the parties entered into the agreement for an illegal purpose; (3) the relative bargaining positions of the parties and their conduct in reaching the agreement; and (4) the potential for the franchisee to enjoy an unjustified windfall. Although not in a statutory context, the Supreme Court relied on similar considerations in Shafron to conclude that, as a general rule, notional severance should not be available in the case of restrictive covenants in employment contracts (at paras. 37-41). [page788]

[49] While the context is different, some of the factors identified are useful in this case. Indeed, in Midas, MacFarland J.A. considered the first factor -- the policies of the AWA -- in concluding that the clauses at issue there were unenforceable. Here, the application judge considered similar factors as well. Considering these factors is also consistent with the court's general approach to the interpretation of franchise agreements as discussed above, which takes into account policy goals and is concerned with the inequality of bargaining power between franchisors and franchisees.

[50] In my view, the illegal purpose factor, while appropriate in the illegal interest rate context, is not helpful when considering the terms of a franchise agreement. Franchise agreements are entered into for legal and legitimate business purposes, as was the case here. Even when considering a particular problematic clause, it will be rare that parties have an illegal purpose.

[51] Similarly, the factor looking at the positions of the parties and their conduct in reaching the agreement may be of limited assistance in the franchise context. Unlike a loan on which an illegal rate of interest is charged, a franchise agreement covers a wide range of subjects and is often in standard form. As such, the parties' conduct in reaching the agreement may not provide much insight into whether severance of a particular clause would be appropriate. However, I note that the relative bargaining positions of the parties may be relevant, especially given the concern about inequality of bargaining power in the franchise context.

[52] In the circumstances of this case, there are limited factual findings on which to assess the parties' positions and conduct in forming the agreement, so this factor is of little assistance.

[53] Accordingly, I consider only the first and fourth factors: whether the purpose or policy of s. 11 of the AWA would be subverted by the mode of severance suggested by the appellant, and whether the franchisee would receive an unjustified windfall if the clause is held to be unenforceable in its entirety.

(iii) The purpose and policy of [s. 11](https://www.canlii.org/en/on/laws/stat/so-2000-c-3/latest/so-2000-c-3.html) of the [AWA](https://www.canlii.org/en/on/laws/stat/so-2000-c-3/latest/so-2000-c-3.html) would be subverted by severance

[54] As MacFarland J.A. held in Midas, the purpose of the AWA is to protect franchisees (at para. 30). Section 11, in particular, aims to protect franchisees against more sophisticated franchisors who might seek to have franchisees contract out of their AWA rights. As the application judge noted, enforcing in part a clause calling for a general release raises the potential for abuse by franchisors. [page789]

[55] In the context of restrictive covenants in employment contracts, the Supreme Court cited similar concerns about abuse in holding that notional severance was not available as a remedy. The court in Shafron concluded that permitting notional severance would "[invite] employers to draft overly broad restrictive covenants with the prospect that the courts will only sever the unreasonable parts or read down the covenant to what the courts consider reasonable" (at para. 33). Applying the doctrine of notional severance would also "[provide] no inducement to an employer to ensure the reasonableness of the covenant and inappropriately [increase] the risk that the employee will be forced to abide by an unreasonable covenant" (at para. 41).

[56] As this court said in Shelanu Inc. v. Print Three Franchising Corp., at para. 66, the franchise context is similar to the employment context. Like employees, franchisees generally do not have equal bargaining power to the franchisor and are unable to negotiate more favourable terms (because franchise agreements are contracts of adhesion). Their relationship with the franchisor continues to be affected by a power imbalance because the franchisee must submit to inspections and audits and is often required to purchase items from the franchisor (Shelanu, at para. 66).

[57] Applying notional severance to clauses otherwise unenforceable under the AWA would similarly invite franchisors "to draft overly broad [provisions] with the prospect that the courts will only sever . . . or read [those provisions] down". It would provide no incentive to franchisors to ensure their franchise agreements are in compliance with the AWA. It would also increase the risk that a franchisee -- having signed a waiver or release of all claims -- would erroneously believe it is not entitled to pursue any claims against the franchisor, including its AWA claims. "Reading down" contractual requirements that overreach would have a chilling effect on the exercise of franchisees' rights. Each of these possibilities suggests that notional severance would diminish the protection offered by s. 11 of the AWA against franchisors who might seek to have franchisees contract out of their AWA rights.

[58] In my view, therefore, permitting notional severance of the overbroad clause in this case could subvert the policy and purpose of s. 11 of the AWA.

(iv) The franchisees would receive a windfall to some degree

[59] The issue here is whether there is a potential for the respondents to receive an unjustified windfall if the clause is [page790] struck in its entirety rather than read down to require a release of non-AWA claims alone. The appellant argues in effect that the respondents would receive a windfall: they bargained to provide a release of all claims in exchange for the appellant's consent to a transfer of their rights under the franchise agreement, and if the clauses are severed in their entirety, they will not have to provide any release at all. The appellant contends that the application judge's decision has the effect of giving franchisees more than they are entitled to and eroding the franchisor's contractual rights beyond what is required to give effect to the protections under the AWA.

[60] To the extent that the respondents would no longer be required to release their common law claims, the appellant is correct that the respondents receive a greater protection than what they would have been entitled to. However, the extent of the windfall is difficult to assess, since there is significant overlap between the common law and AWA claims of a franchisee alleging misrepresentation. Of course, there is no "windfall" to the respondents by not requiring them to release their AWA claims as such a release would not be enforceable.

[61] In any event, the legitimate interests of the franchisor, in the context of an assignment, are protected even without the requirement of providing a release. As the appellant notes in its factum, "the purpose of Cora's assignment provision is to ensure that the franchise agreement is assigned to a party that will be a competent franchisee able to operate the franchise in accordance with Cora's standards". All of the other conditions precedent to the franchisor's approval of an assignment remain in place. In particular, the appellant does not lose its ability to approve the assignee as a franchisee.

(v) Conclusion on notional severance

[62] The potential for some windfall to the respondents in this particular case does not outweigh the potential for abuse and subversion of the purposes of s. 11 of the AWA. Having regard to the relevant considerations, I conclude that the clause should not be notionally severed or read down to require only a release of non-AWA claims. Allowing franchisors to include such clauses in franchise agreements, knowing courts would only find them unenforceable in part, could serve to undermine the purposes of the AWA.

(c) Seidel is distinguishable

[63] The appellant contends that the application judge ought to have applied the analysis from the Supreme Court's decision [page791] in Seidel v. Telus Communications Inc. to conclude that the requirement to provide a release would be void only to the extent that the franchisor seeks the release of AWA claims. The application judge distinguished Seidel on the basis that it involved different policy considerations and dealt with access to justice and arbitration rather than the release of substantive claims. I would distinguish Seidel but for different reasons that have to do with how the question in each case came before the court. As I will explain, the analytical framework in Seidel simply does not apply here.

[64] It is apparent that the court in Seidel did not use the enforceability and severance analysis that I have followed in this decision. The issue arose in a different way and required a different framework of analysis. As I have indicated, the question in this case is the enforceability of a contractual provision that would require an act to be performed that is contrary to statute. The question in Seidel was whether (or to what extent) an impugned provision in the contract itself was void.

[65] In Seidel, the representative plaintiff commenced a court action in relation to a cellphone contract, asserting both common law rights and claims under the British Columbia BPCPA. The defendant sought to stay the court proceedings, relying on a clause in the contract providing for any claims to be referred to mediation and thereafter, if unresolved, to "private, confidential and binding arbitration" (the "arbitration clause"). Under s. 172 of the BPCPA, persons affected by a consumer transaction were entitled to bring actions under the BPCPA in the Supreme Court to enforce the statute's consumer protection standards. Section 3 of the BPCPA (like s. 11 here) stated that any agreement that waived statutory rights was "void".

[66] The question was, then, the effect of the statutory provision on the arbitration clause. The contractual term itself purported to waive rights, including those under the BPCPA. The arbitration clause was not unenforceable as requiring an act contrary to the BPCPA; rather, the Supreme Court applied s. 3 so as to void the arbitration clause to the extent it would require BPCPA claims to be arbitrated. In other words, the arbitration clause was void to the extent that it would restrict the exercise of the BPCPA rights.

[67] Section 11 of the AWA, like s. 3 of the BPCPA, provides that any agreement that would waive or release rights under the AWA is void. However, as we have seen, the franchise agreement requires the delivery of a general release that would include AWA claims. It is not the franchise agreement itself that waives or releases rights; accordingly, unlike in Seidel, the question is not [page792] whether the contractual term itself is already void, or void in part by virtue of a statutory provision (as would be the case if the franchise agreement, for example, contained a release of rights).

[68] This distinction is more than merely technical.

[69] The enforceability and severance analysis requires an extra step. The appellant is seeking to enforce a contractual obligation, an obligation that by its terms is too broad and incapable of being enforced without violating s. 11 of the AWA. The appellant needs the assistance of the court to permit it to call for something less, something that will be in accordance with the statute.

[70] This extra dimension invokes policy concerns that do not arise where the court is asked to interpret a statutory provision to determine whether and to what extent it renders provisions in an agreement void. In the latter case, the legislature has spoken. In the former, while the holding that a provision is unenforceable results from statute, the degree to which the court is willing to sever the impugned clause requires a different analytical framework. Taking Seidel as an example, the only assistance the plaintiff could reasonably expect of the court was to be given the benefits of the rights under the BPCPA. The court in that case was asked only to extend the applicable statutory protections. Here, the appellant requires the court's assistance to render its overbroad provision compliant with statute. And it follows that, as in Midas, Shafron and Transport North American Express Inc., the court must consider the broader implications of providing that assistance.

E. Conclusion

[71] Accordingly, I would conclude that the impugned clause in the franchise agreement is not voided by s. 11 of the AWA, but rather it is unenforceable, as enforcement would result in a release which would be void by virtue of s. 11. In all the circumstances of this case and in light of the purpose of s. 11 and the other provisions of the AWA, the impugned clause should not be notionally severed and enforced in part to require the delivery of a release of non-AWA claims by the franchisee as a condition of the franchisor's consent to an assignment. I would therefore dismiss the appeal.

[72] I would award the respondent its costs of this appeal in the agreed-upon amount of $12,500, inclusive of disbursements and applicable taxes.

Appeal dismissed.

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