Release agreements are an important and routine tool in all forms of legal transactions, whether business or personal. Legal agreements frequently require that at the end of the relationship, the parties exchange a full release to bring certainty and finality for both parties. But, is this certainty always reliable?
This edition of The Battlefront continues to look at cases where courts have declined to enforce agreements which on their face appear to reasonable and entered into between parties in the ordinary course of their business.
Obligation to Give the Release must be enforceable
In the case of 2176693 Ontario Ltd. v. Cora Franchise Group Inc. (2015 Ontario Court of Appeal), the franchisee wished to assign its existing franchise agreement to a prospective buyer. The franchise agreement required the franchisee to provide a general release of any claim before the franchisor would consent to such an assignment. The franchise agreement was quite explicit in requiring the franchisee to release “any claim” against the franchisor.
When the franchisee requested consent, the franchisor delivered a carefully crafted release for signature. The agreement would release the franchisor from all claims except claims under Ontario franchise law. This carefully worded release was designed to comply with Ontario franchise law which voids any attempt to get a franchisee to release its statutory claims. Ontario law does not permit a franchisee to give up those rights. The release presented by the franchisor would have complied with this legal requirement.
However, as the franchisee wished to pursue statutory claims against the franchisor, the franchisee refused to sign the release. The franchisor then refused to consent to the assignment and the proposed transaction was not completed. The franchisee sued.
The court conducted a formalistic analysis of the franchise agreement which required the franchisee to provide a release of any claim. The franchise agreement did not exclude claims pursuant to Ontario franchise law. On the face of the franchise agreement, the franchisee was required to release its rights under Ontario franchise law. The court determined that the obligation to give a general release was a contravention of Ontario franchise law. As a result, the contractual obligation to give the release was unenforceable and the franchisee was successful in its claim against the franchisor.
So, even though the release itself complied with Ontario franchise law, the franchisee was not obligated to give the release. The franchisor did not receive the certainty of obtaining a release.
Court declined to cure technical problem
In this case, the franchise agreement included language that the release would be “in the form specified by the Franchisor”. The franchisor argued that while the franchise agreement required a release of any claim, the form specified by the franchisor excluded claims under Ontario franchise law. The court was asked to interpret the franchise agreement in a manner that would support a limited release rather that discarding the requirement entirely. However, the court declined such interpretation as it would create a risk where franchisors could take advantage of franchisees who were not aware of their statutory rights under Ontario franchise law.
While this court case was about the franchisor-franchisee relationship, the legal principles and formalistic approach has been referred to in other court cases involving other areas of the law. Courts are frequently balancing the intentions of the parties on one hand, and technical compliance on the other. Giving force to parties’ intentions is an important policy objective for the stability of business relationships and reliance on legal agreements. However, the courts are also mindful of the important public policy of discouraging stronger parties from infringing on the statutory rights of vulnerable parties. In striving to find the balance between these two policy objectives, courts have frequently referred to “dis-incentivizing” parties from using excessive contractual terms that may restrict or limit rights under the law.
Thoughts to Take Away
Technical compliance is important! The law is continually evolving with courts striving to find the balance between contractual certainty and limitations on legal rights. Courts may “read down” or interpret a provision in a manner to comply with the technical requirements of the law, but are not obligated to do so. Subsequent actions by the parties may also be possible to cure a technical issue, but may not be acceptable to a court.
Standard-form agreements may be a good starting point in many cases, but parties must carefully review each situation to ensure each legal agreement is appropriate to fit each new situation. One size may not fit all! Some time and attention prior to the start of the legal relationship can be a worthwhile investment to provide the desired certainty and reliability in a legal agreement. Attempting to fix a technical defect during, or after, a legal relationship may not be possible and certainly will be more expensive than being proactive on the front end.
A business arrangement may be reasonable at the outset, but a technical deficiency in the written agreement may prevent one of the parties obtaining the certainty that was intended. Any subsequent attempts to cure technical issues must be carefully considered and carried out. Remember, business relationships are a critical asset of a business, and so are the legal agreements!
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About The Battlefront
This article contains general information only. The Battlefront is a brief canvasing of the topic presented and should not be relied upon as professional advice in making any personal or business decisions. Always consult with a licenced legal professional before making any decisions regarding your own personal or business needs. The author takes no responsibility to update any of the information presented in this article. All rights reserved. © Loopstra Nixon LLP 2017