Ontario proposals hit sore point with franchisors

In any case, the CFA is not an impartial body; it’s a franchisors organization. While the Ontario government is in no position to take on the regulatory task itself, it is concerned about fair representation. “An industry council would have to be representative of all the players,” says Mr. Daniels, the assistant deputy minister.

The Globe and Mail
November 25, 1996

Ontario proposals hit sore point with franchisors
John Southerst


'There's no question the franchisee group is militant.' says Don Schafer, former chairman of the Canadian Franchise Association. Lan Tomlinson/The Globe and Mail

The Ontario government has given notice to the province’s franchisors that it plans to bring in legislation to regulate them by next spring – and the law will probably propose an independent policing body to oversee franchising disputes.

At a minimum, Ontario’s law will follow Alberta’s example and require franchisors to make moderate disclosure to potential franchisees. It is also likely to include Alberta’s controversial and as yet undefined duty of “fair dealing”.

But what’s really got the attention of franchisors is the province’s intention to go further by proposing an independent regulator or ombudsman to rule on disputes.

“Alberta is a good benchmark for legislation,” says Art Daniels, an assistant deputy minister in charge of Ontario’s Ministry of Consumer and Commercial Relations’ business affairs branch. “But I think we’ll want to add to it.”

Regulation is a sore point with many franchisors, who maintain that franchise agreements are contracts that shouldn’t be subject to external interference. It may seem trite, but they know that with a regulator comes regulations – either explicit written ones or interpretations of “fair dealings.” They fear detailed rules that will outlaw some common franchising practices such as unlimited rights to use advertising funds and to set supply prices.

Aware that other provinces are poised to follow Ontario, franchisors charge that it appears the government is being goaded into action by disgruntled franchisees – especially those from the Ontario Franchisee Coalition, an alliance of 12 groups representing about 4,000 franchisees.

“There’s no question the franchisee group is militant,” says Don Schafer, president of Comac Food Group Inc. of Calgary, and chairman until three weeks ago of the Canadian Franchise Association (CFA), an organization representing 285 of about 800 franchisors in Canada. “No matter what we say, it’s wrong.”

The difference of opinion partly concerns the target of regulation. Alberta’s law sets moderate standards of disclosure, imposes the nebulous duty of “fair dealing” and leaves franchisees to file civil suits if they feel they’ve been wronged. Franchisors say they can live with that.

But Toronto lawyer John Sotos, who represents the franchisee coalition, says disclosure “is only a 10-per-cent solution. It gets rid of some of the blatant crooks. But the nasty business of franchising takes place after the marriage.”

What franchisees want, he says, is relationship regulation. “Disclosure requirements end the moment the [franchise] agreement is signed, “ Mr. Sotos says. “We need regulations that will apply to conduct during the relationship. Jacking up prices when you’re the sole supplier, raising the levels of supplier rebates retained, discriminatory action against franchisees, misuse of advertising funds, that sort of thing.”

These are fighting words for franchisors used to doing what they please, backed often by what some franchisees argue are one-sided agreements signed in the glow of first embrace.

“Franchisees really want to go back to the old Alberta act and regulations,” Mr. Schafer says.

What he’s referring to is a previous law where franchisors needed approval from the Alberta Securities Commission to offer franchises, which demanded high levels of financial disclosure and sometimes became entangled in clause-by-clause debate over franchise agreements.

“[Franchisees are] asking for escrow of advertising funds as trusts held on behalf of franchisees, the right to pass the franchise perpetuity, that sort of thing,” Mr. Schafer says.

But that’s not all. “You’re facing regulations that could impinge on your rights under the Landlord and Tennant Act,” says Bill Hood, executive vice-president of Golden Griddle Corp. “They want to limit what you could and could not do as a franchisor in terms of termination and eviction. It’s unacceptable.”

Mr. Schafer and other franchisors still hope Ontario will reject relationship regulation and stick with the new Alberta law. While that is still up in the air, Ontario won’t budge on the issue of an independent overseer.

Alberta’s act permits the government to name an independent regulatory body to handle disputes, but so far there has been no action. Ontario ministry officials have informed franchisors that they want a regulator, perhaps an ombudsman, to put teeth in the regulations because few franchisees have the financial power to carry through with civil litigation.

“They’re even seriously looking at a system where franchisors must register with the Ontario government,” Mr. Schafer says. “We don’t see the point of that.”

But the association hasn’t made a strong case against it either. Last year, the CFA imposed a weak but mandatory disclosure document on its members – and a code of ethics – as it tried to lay the groundwork for franchisors to police themselves. But franchisees don’t trust franchisors to regulate themselves and the CFA has no way of telling whether members are towing the line.

“There’s nothing we can give to the government to say all our members are using our disclosure document,” Mr. Schafer says.

And on ethical issues such as the requirement to use arbitration and mediation before resorting to litigation, he admits that not only is the CFA unsure whether its members are complying, he suspects some are not.

For now, the CFA doesn’t feel it has the resources to monitor its members. This leaves the group in a quandary over what to do next.

In any case, the CFA is not an impartial body; it’s a franchisors organization. While the Ontario government is in no position to take on the regulatory task itself, it is concerned about fair representation. “An industry council would have to be representative of all the players,” says Mr. Daniels, the assistant deputy minister.

He hints that he likes the idea of a franchise ombudsman responsible to a board composed of equal numbers of franchisors and franchisees. But the decision rests with Consumer and Commercial Relations Minister David Tsubouchi and the Ontario cabinet.

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Risks: Appropriate franchise law, Ministry of Consumer and Commerical Services, Ministry of Consumer and Business Services, Ministry of Government and Consumer Services, Ministry of Government Services, Ontario, Ombudsman, Advertising fund use disagreements, Gouging on rent and equipment, Gouging on supplies, Canadian Franchise Association, CFA, Lease controlled by franchisor, Justice only for the rich, Arbitration, Code of ethics, almost never enforced, Affordable, early and non-legal dispute resolution mechanism, Disclosure laws: 10 per cent solution, National Franchise Council of Canada, Canada, 19961125 Ontario proposals

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