Signed, Sealed…Still Debatable: The Enforceability of Entire Agreement Clauses in Franchise Disputes

Franchise agreements commonly include so-called “entire agreement” clauses. These are contractual provisions that seek to exclude any statements, representations, and agreements that were made outside of the written franchise agreement. The intent behind entire agreement clauses is to limit the parties’ rights and obligations to those contained in the written agreement and, in practice, to prohibit the parties from attempting to rely on a statement made outside of the written contract.

This article identifies the principles the courts rely upon when interpreting and applying entire agreement clauses in franchise disputes, identifies the key cases considering this issue, and offers practical advice for counsel engaged in disputes concerning entire agreement clauses.

1. The Role of Entire Agreement Clauses in Franchise Disputes

Franchise disputes concerning claims for misrepresentation or breach of contract often require of the court to consider the enforceability of an entire agreement clause. Such disputes typically involve a franchisee that seeks to rely on an extra-contractual representation or promise allegedly made to it in order to advance a claim for misrepresentation or breach of contract (or, less frequently, in order to defend against a claim for breach of contract by the franchisor). On the other side, the franchisor commonly seeks to rely on the presence of an entire agreement clause to exclude any such extra-contractual representation or promise.

2. The Fairness Analysis

The courts have not developed a rigid test or set of criteria to determine the enforceability of entire agreement clauses in franchise disputes. To the contrary, one commentator has lamented that the interpretation of entire agreement clauses is “one of the most confusing areas of the law of contractual interpretation in Canada” as “there appears to be no overarching theory of how the courts should approach such provisions”.[1]  Overall, the courts appear to engage in what might be called a “fairness” analysis, in which the courts consider the equities of enforcing the clause in the specific circumstances of the case.

In many cases, although not universally, the courts have framed the fairness analysis in terms of the doctrine of unconscionability.

Like any other contractual provision, entire agreement provisions can be struck as unconscionable on the basis of the two-part conjunctive test that was set out by the Supreme Court of Canada in Uber v Heller.[2] In that case, the court held that any agreement could be set aside where (i) it was the product of an inequality of bargaining power as between the contracting parties (a common feature of franchise relationships) and (ii) it gave rise to an improvident bargain.[3]  

In Ontario, there is appellate authority for striking an entire agreement clause “where one party to the contract has abused its negotiating power to take undue advantage of the other.”[4] This may simply be a different formulation of the same test set out in Uber.  

However the test might be formulated, it requires the court to consider the fairness of the result of enforcing the entire agreement clause.

3. Indicia of Unfairness

The courts have demonstrated a willingness to ignore entire agreement clauses in franchise disputes when certain hallmarks of unfairness are present.

Perhaps the most common factor warranting a disregard for the entire agreement clause is the presence of an actual extra-contractual representation on which the other contracting party was intended to rely. For instance:

• In TRC Enterprises v Tobmar Newstands Inc et al, 2010 MBQB 112, the court found that it would be “unconscionable, unfair and unreasonable” to enforce an entire agreement clause preventing the franchisee from relying on the franchisor’s false representations about the exclusivity rights that would attach to the franchisee’s use of the franchised premises.[5] The court also concluded from the fact that binding representations were made in the accompanying lease meant that the parties could not have intended that the entire agreement clause in the franchise agreement would govern them: “If the entire agreement clauses are applied, the lease would be excluded and the franchise agreement would not have any meaning”.[6]
• In Machias v Mr. Submarine Ltd, 2002 CanLII 49643 (ON SC), the court cited a number of cases in which entire agreement clauses (or similar “exclusion clauses”) were not enforced in circumstances where “[s]pecific misrepresentations were made to a potential franchisee with respect to projected earnings and/or expenses of the franchise. The result was a distorted, overly optimistic financial projection that did not accord with reality”.[7] The court noted that inequality of bargaining power was a common theme in such cases.[8] The court went on to find that it would be unconscionable to enforce the entire agreement clause in the face of evidence that the franchisor had materially overstated the franchisee’s projected return on investment.
• In Atlas Supply Co of Canada v Yarmouth Equipment Ltd, (NSCA), [1991] NSJ No 178, a majority of the court found that it would be unconscionable to enforce an entire agreement clause that would have prevented an unsophisticated franchisee from advancing a claim based on misleading financial projections given to him by a sophisticated franchisor, who used them to induce the franchisee into entering the agreement.

4. Indicia of Fairness

By corollary, the court’s focus on fairness means that the courts have upheld entire agreement clauses when satisfied that no unfairness would result from their enforcement. The courts have shown a willingness to uphold such clauses in the face of one or more of the following factors:

• Evidence of the franchisee’s sophistication. The courts have shown a willingness to enforce entire agreement clauses in circumstances when the franchisee was shown to have a measure of sophistication. The underlying reason appears to be that a bargain struck by sophisticated parties is unlikely to be improvident, such that the court’s concerns about unfairness are less likely to be engaged. For instance:
  • In 2364562 Ontario Ltd v Yogurtworld Enterprises Inc, 2021 ONSC 5112, the court found that it was not unconscionable to enforce an entire agreement clause in circumstances where the franchisee had had the benefit of legal advice in pre-contractual discussions and had indeed visited a number of the franchisor’s locations.[9] The court reasoned that the franchisee was well-equipped to evaluate any representations that may have been made to it by the franchisor and to understand the practical ramifications of the entire agreement clause.
  • In Butera et al Mitsubishi Motors et al, 2012 ONSC 4980, YESCO Franchising LLC v 2261116 Ontario Inc, 2017 ONSC 4273, and Khagen v 710497 Ontario Ltd, [1999] OJ No. 2152, the courts upheld entire agreement clauses after finding that the respective franchisees were sophisticated (in Butera, the franchisee was a lawyer[10]; in YESCO, the franchisee was “a sophisticated businessman who had entered into numerous commercial transactions and had access to professional and legal advice”[11]; in Khagen, the franchisee was represented by independent counsel when he signed the franchise agreement[12]).
• Lack of fraudulent intent on the part of the franchisor: The courts have been willing to enforce entire agreement clauses when the extra-contractual representation was shown not to have been made fraudulently or with intent to mislead. For example:
  • In Yogurtworld, the court upheld the entire agreement clause after finding that the franchisor’s pre-contractual marketing statements were in the nature of “mere puffery” and were not a “trap” for unwary franchisees.[13]
  • In Khagen, the court upheld the subject entire agreement clause because there was no basis to draw an inference of fraudulent intent on the part of the respective franchisors; the franchisor had provided the franchisee with pre-contractual financial forecasts that the court characterized as pro forma financial forecasts that were not a clear representation of fact[14].
• Sufficient visibility of the clause: The courts have been prepared to enforce entire agreement clauses when provided with evidence that the presence of the clause was sufficiently drawn to the franchisee’s attention. By way of example:
  • In Zippy Print Enterprises Ltd v Pawliuk, 1994 CanLII 1756 (BC CA), the court held that an entire agreement clause in a contract of adhesion could “override” a specific representation on a point of substance, even if that representation was intended to induce the making of the franchise agreement, if the franchisor explicitly identifies the clause and its intended effect to the franchisee.[15]

5. Special Treatment of Franchise Agreements?

Some courts appear to have given entire agreement clauses special scrutiny on the basis that franchise agreements are typically contracts of adhesion, marked by an inequality of bargaining power between the parties. When viewing these clauses through the prism of adhesion, the courts have interpreted them strictly. For instance:

• In Landsbridge Auto Corp v Midas Canada Inc, 2009 CanLII 13628 (ON SC), the court interpreted an entire agreement “in light of contextual circumstances”. The court held:

Aspects of the context that have special relevance to the issues of contractual interpretation, and that arise in this case, are that the Franchise Agreements are contracts of adhesion in a standard form and, as such, they are to be construed contra proferentem. Another matter of some relevance is that in Franchise arrangements there is ordinarily a marked inequality of bargaining power between the parties... This can be particularly important when reliance is placed by a franchisor on an "entire agreement" clause such as that in section 10.9 of the Franchise Agreement. Such clauses are to be construed strictly and even where they would, as a matter of construction, apply, their enforcement will be subject to the principles relating to unconscionable bargains that are applied to "exclusion clauses" purporting to limit liability for damages… Entire agreement clauses are not, in my opinion, to be considered as licences to make – and subsequently resile from – pre-contractual representations and undertakings with complete impunity.[16] [citations omitted]

• In Shelanu Inc v Print Three Franchising Corp, 2003 CanLII 52151 (ON CA), the appellate court agreed with the lower court that an entire agreement clause that was present in the subject franchise agreement should not be enforced. The court held:

I would also note that the agreement that we are dealing with is a franchise agreement. A franchise agreement is a type of contract of adhesion, that is, a type of contract whose main provisions are presented on a “take it or leave it basis”. In such situations, the case for holding that an exclusion clause represents the intention of the signer and that the signer should be bound by it is weaker because there is usually an inherent inequality of bargaining power between the parties.[17]

Not every court has similarly scrutinized entire agreement clauses in franchise agreements. Some courts appear simply to have accepted ­uncritically that the presence of an entire agreement clause is a full answer to a franchisee’s misrepresentation claim. See, for instance, Vision Renaissance MX Ltd v The Symposium Café Inc, 2020 ONSC 1119 at paras 133-134, citing Mr. Lube Canada Limited Partnership v 2070778 Ontario Ltd, 2016 ONSC 7707 at paras 51-52).  

6. Conclusions

A review of the jurisprudence discloses that (i) there is no universal methodology by which the courts have considered the enforceability of entire agreement clauses in franchise agreements; but (ii) a judicial assessment of fairness is not uncommon. Where the courts have scrutinized the fairness of the entire agreement clause, that analysis has been a highly fact-specific inquiry into the nature of the extra-contractual representation or agreement made, the relative sophistication of the parties, and the visibility of the clause.

Counsel dealing with entire agreement clauses in franchise agreements would be well-advised to pay special attention to, and thoroughly understand the underlying factual matrix of, their case. Unlike in some other types of contractual interpretation cases, the facts in an entire agreement clause case may be more likely to drive the result.  Careful analysis and presentation of the parties’ relative positions, qualities, and interactions may be critical in achieving the result your client is seeking.