Proposed franchising offers little protection, lawyer says

…the very best solution would be to spell out in detail in legislation how franchisors can and cannot act when it comes to contentious issues such as contract termination. But that is likely pie in the sky for franchisees who have been pointing to problem in the industry for decades. “Given it has taken 27 years to come this far, I think I would be a lunatic to recommend it,” says Sotos.

The Toronto Star
June 17, 1998

Proposed franchising legislation offers little protection, lawyer says
Valerie Lawton

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Don’t look to a government proposal for franchise-disclosure legislation to do much to help protect you from problems, says a layer who specializes in franchising.

“It’s a start, but it’s a very poor start,” says John Sotos, who has represented both franchisees and franchisors and is well-known in the industry for his work with the Ontario Franchisee Coalition.

“This is really much ado about nothing,” Sotos says.

Ontario’s Ministry of Consumer and Commercial Relations released its discussion paper on franchising legislation this week.

It proposes franchisors be required to disclose certain information – including the company’s litigation and financial history – to would-be franchisees.

That’s fine, says Sotos. But good franchisors already provide the information the province is looking at putting on a mandatory disclosure list.

He argues the proposed legislation doesn’t deal at all with the area where the bulk of problems crop up between franchisors and franchisees.

And that’s their ongoing relationship.

The power imbalance in that relationship can leave a franchisee at the mercy of the franchisor, says Sotos.

“It’s sort of like marriage 300 years ago and the woman’s role in the relationship.”

He describes the franchise relationship this way: “It’s a special partnership where someone trusts their money and their livelihood on somebody else to guide them through and give them support and act in good faith.”

The unequal relationship has led to various problems for franchisees. For example, some have complained of franchisors who refuse to supply them with a hot product or terminate a contract without just cause.

When things go badly wrong, it can be a nightmare for franchisees who have poured their life savings into a franchise.

Some 5,000 civil cases involving franchisee-franchisor disputes are filed in Ontario each year.

The government’s franchising papers say disclosure requirements “may be very helpful in reducing potential conflicts.”

But what Sotos says the province should be looking at is a clause in the legislation simply stating that franchisors “must act in a commercially reasonable way.”

That, he says, would set a standard of behaviour.

Alberta franchising legislation, for example, includes a “fair dealing” duty.

Ontario officials, however, say defining what “fair dealing” means is left to the courts and is “problematic and costly.”

PIE IN THE SKY
They say industry groups such as the Canadian Franchise Association are “well placed to develop codes of practice for members that would promote fair dealing in a meaningful way.”

Sotos argues the very best solution would be to spell out in detail in legislation how franchisors can and cannot act when it comes to contentious issues such as contract termination.

But that is likely pie in the sky for franchisees who have been pointing to problems in the industry for decades.

“Given it has taken 27 years to come this far, I think I would be a lunatic to recommend it,” says Sotos.

That’s how long it has been since a provincial government committee called for some control on “evils” in franchising.

Successive governments have talked about the issues but not acted.

Problems in the industry in the mid ‘90s, including a major dispute between Pizza Pizza Ltd., and its franchisees, led to the formation of an industry working team to come up with proposals for change and ultimately the government document released this week.

The discussion paper is expected to form the framework of legislation to be introduced in the Ontario Legislature this fall.

The province has asked people in the industry for comments.

It’s bound to get plenty of attention.

Franchising has become big business. Consider these facts and figures:

  • A new franchise opens in North America every 16 minutes, according to the International Franchise Association.
  • Franchise businesses are estimated to account for almost $90 billion in Canadian sales.

In Ontario alone, it’s estimated they make up $45 billion to $50 billion of annual sales – or 40 cents of every retail dollar.

  • There are about 500 franchisors and 40,000 franchisees in the province.
  • Many franchise outlets employ 10 to 15 people. Franchise employees make up a significant proportion of Ontario’s work force.

KEY POINTS IN PROVINCE’S PLAN
Highlights of a government discussion paper:

  • Business background of franchisor and its directors and officers.
  • Litigation history of franchisor and its directors and officers.
  • Bankruptcy or insolvency information.
  • Financial history, including audited financial statements.

The franchise offer would have to include information about:

  • Costs such as initial deposit or franchise fee and whether it’s refundable, and costs for initial inventory.
  • Restrictions such as limitations on suppliers or goods or services to be offered.
  • Policies on territory, for example, exclusivity of territory and proximity in which a new franchise may be established.
  • Training and other assistance programs and any advertising fund.
  • A list of current and former franchisees as well as a statement encouraging would-be franchisees to seek legal or other advice and to freely contact other franchisees.
  • If earnings potential claims are included, there must be a reasonable basis for the amount and a notice of where substantiating information can be inspected.

A contract that does not have such disclosure wouldn’t be binding on the franchisee and any money received from the franchisee would have to be refunded.

Lawton


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