Legislation could resolve disputes within industry

The Canadian Franchise Association’s position is that legislation is not needed in Ontario, says Patricia Phelan, CFA chairwoman. But if legislation goes ahead, CFA wants to vet it.

National Post
February 14, 1997

Legislation could resolve disputes within industry
Susan Noakes

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After years on a back burner, franchise legislation may be rolled out in several Canadian provinces.

Although Alberta has revamped a long-standing franchise law, other provinces are looking to Ontario to set the pace. Ontario plans new legislation this spring, and the provinces are waiting to see the extent and wording of the Ontario law before adopting similar legislation, possibly over the next two years, says Daniel Zalmanowicz, a lawyer with Witten Binder in Edmonton.

Legislation may stem the rising tide of litigation over franchising issues, he says.

Franchising has grown in the ‘90s, and with it friction between franchisees and franchisors, he says. Franchising suits have risen in the U.S.

In Canada, current laws are inadequate to deal with most of these disputes, he says. Many involve disclosure of information by franchisor to franchisee, and “relationship issues” between the two parties.

Alberta was the only province to have franchise legislation throughout the 1980s. Based on a California law, the Alberta act demanded a high level of disclosure from franchisors, with a prospectus to be vetted by the Alberta Securities Commission.

This hurdle proved too high for many franchisors, Zalmanowicz says. They avoided the Alberta market because they didn’t want the expense of filing with the ASC. Nor did they want their business secrets revealed to competitors through public filing.

In November 1995, Alberta changed its law. The new law emphasizes the need for full disclosure on terms such as franchise fees, territory exclusive to a franchisee and expected earnings from a franchise. It also demands that franchisors act “fairly” toward franchisees.

But Alberta removed the requirement to file a prospectus with the ASC, making the process less onerous and less costly. Franchisors no longer face jail terms for infringing the law, but franchisees do have a right of civil action.

The result has been more franchisors moving into Alberta in 1996, Zalmanowicz says. The law is untried so far, he says, as the two-year limit for franchisors to disclose information to franchisees has not expired.

Alberta has drafted a provision that would allow the industry to set up some kind of self-regulation, but it has not put it into practice. It is believed to be waiting for Ontario to enact its law, he says.

The 1995 Pizza Pizza dispute may have whetted Ontario interest in franchise legislation, says Ned Levitt, a lawyer with Levitt, Berber in Toronto.

Disputes between franchisees and franchisors will rise over the next few years, as they have in the U.S., he says. “There’s just so much more volume of franchising, it’s time for a big growth in franchise disputes.”

Encroachment, or how close another franchise outlet can be to an existing outlet, is a troublesome area. With consolidation in the industry, outlets once in competition will end up too close together, he says.

The NDP government struck a committee to look at Alberta law and make recommendations for Ontario, says Jane Courtemanche, who co-ordinates the franchise project for Ontario’s Ministry of Consumer and Commercial Relations.

This committee recommended a requirement for disclosure similar to the Alberta law. The Harris government took an interest in the committee findings and is writing legislation now, she says.

Although the Ontario law is not yet written, Courtemanche, described it as “Alberta plus,” meaning it could go further than the Alberta law in some areas.

One new area might be creation of a self-regulating body to deal with “relationship issues” between franchisee and franchisor, she says. This probably would be a panel with representatives of both groups that would mediate in disputes to keep them out of the courts.

The courts are poor arbiters in franchise disputes, partly because contract law does not cover the situations properly, partly because franchisees may run out of money before they get justice.

Mechanisms such as an ombudsman or independent panel to mediate disputes have been discussed, but Ontario is unlikely to adopt anything paid for out of the public purse, Levitt says.

Previous Ontario franchising legislation died before it became law, but Levitt believes the Harris government will follow through. “They have constituents who are franchisees,” he says.

The Canadian Franchise Association’s position is that legislation is not needed in Ontario, says Patricia Phelan, CFA chairwoman. But if legislation goes ahead, CFA wants to vet it.

CFA has mandatory disclosure requirements based on the Alberta law. These rules require CFA members to disclose to franchisees information on background of principals, earnings projections, required investment, closing of outlets and experience of other franchisees.

There is interest in standardizing commercial law across Canada, and provided commerce ministers will discuss franchising in their spring meeting, Courtemanche says.

Harmonization is important to CFA members, who view with horror the U.S. situation of 17 different franchise laws in 17 different states.


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