National franchising rules are in the works

“If you scratch a franchisor, you’ll find that underneath there’s absolutely no interest in any legislation at all.”

National Post
February 16, 1996

National franchising rules are in the works
David Thomas

Recent legislative reform of Alberta’s franchise laws may have opened the door to creating a common set of national franchising rules, according to the industry’s legal experts.

The province’s new Franchises Act has loosened up Alberta’s stiff regulatory regime and will probably serve as a model to other provinces that have contemplated but not yet introduced franchise legislation, they say.

“I think there’s a good possibility of duplicating it elsewhere,” says Daniel Zalmanowitz, a lawyer specializing in franchising law with the Edmonton law firm of Witten Binder. “It’s the kind of thing that can be done uniformly across Canada.”

For now, Alberta continues to be the only province to have its franchise rules enshrined in legislation. Before the new act came into effect last November, the previous legislation had been in place for about 20 years after being “more or less imported” from California in the early 1970s, Zalmanowitz says.

While other provinces have looked seriously at enacting franchise legislation over the years, Alberta’s strict rules have been held up as an example of how not to proceed, he explains. Now that the rules have been relaxed, a major stumbling block to new legislative initiatives may have been removed.

Under the old act, franchisors were required to meet the Alberta Securities Commission’s full disclosure requirements and to publish fully audited financial statements. Many, if not most, franchisors found the vetting process stifling and costly. And they resented having their full financial books open to viewing by competitors.

“The terms of disclosure amounted to a pretty blunt and thorough expose of a company’s finances and operations,” points out Douglas Gray, author of the Complete Canadian Franchise Guide. “A lot of companies have decided to bypass Alberta entirely for that very reason.”

Under the new act, franchisors are still obligated to file full disclosure, but the Securities Commission is completely out of the picture. Franchisees lose the watchdog support of the commission but gain new options to punish franchisors in the courts if the disclosure proves inaccurate or misleading.

“If they don’t get disclosure they can walk away from a deal and sue the franchisor for expenses,” says Zalmanowitz. “And if the disclosure document is not complete, then the franchisee can also sue.”

Previously, the franchisee had limited ability to bring some disputes to legal action, notes Ned Levitt, a lawyer with Levitt, Beber in Toronto. “While they now get a little less information in terms of disclosure, at least they get the right to sue.”

Now that Alberta has reformed its rules with the new act, the next major initiative is expected to come from Mike Harris and the Ontario Progressive Conservative government, Levitt says. “Other provinces are either looking at similar changes or are at least predisposed to do so,” he says. “But my reading of the situation is that they are waiting to see what happens in Ontario first.”

Convened under Bob Rae’s New Democrats, an Ontario franchise task force last year endorsed Alberta’s new legislation, with some suggested amendments. Levitt, who works with both franchisors and franchisees, took part on the committee and hopes to see changes made quickly. But he isn’t holding his breath.

“Ontario has a long history of looking at franchise reform and then never doing anything about it,” he says. ‘With any luck, the government could jump into action as early as this spring – but don’t bet on it, he adds.

Much of the drive behind the proposed reforms continues to come from the franchisees, rather than the franchisors who favor fewer rules, Levitt argues. “If you scratch a franchisor, you’ll find that underneath there’s absolutely no interest in any legislation at all.”

The Canadian Franchise Association, which represents about 250 franchise groups, is not lobbying for new franchise legislation, according to its chairman Don Schafer. “But if a province decides legislation is wanted, we suggest that they use Alberta’s act as a model.”

As other provinces start introducing new franchise laws, the worst-case scenario would be to have them enact conflicting legislation, Schafer warns. “There are 25 different types of franchise legislation in the U.S.” he says. “We want to avoid that – it’s a nightmare.”

Levitt agrees and says he expects there to be much consultation between the provinces. “There is a lot of interest in avoiding creating of new trade barriers, so they’ll certainly be looking at acting together.”

Legislation in Alberta is just a few months old, but so far, both sides seem to have reason to applaud it, Levitt says. “The franchisors are happier, since it is now easier and cheaper to do business. And it’s also easier for the franchisee to call the franchisor on the facts. After that, there is the right of action if you’ve been wronged.”

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