Ontario flirts with franchise law

He regrets the decision to omit a dispute resolution mechanism. “If I hadn’t worked on the team, I’d think it was a big step forward. But it didn’t come up to my expectations.”

The Globe and Mail
July 14, 1998

Ontario flirts with franchise law
Analysis. The province released a working paper that seems to fall short of expectations.
John Southerst

CFARichardCunningham.jpg

Canadian Franchise Association president Richard Cunningham

Ontario is finally taking a crack at franchise legislation. But its new proposals seem to fall short of what’s necessary to bring harmony to franchise relationships and clear up the legal gridlock.

There’s a lot at stake in the province’s recently released “consultation paper” – chains and their franchisees are often at each other’s throats. Although Alberta has a workable franchising law, Ontario doesn’t, and it’s the country’s most important market for franchisees.

The paper comes after years of assurances that legislation is on the way. In 1971, an Ontario commission proposed that franchisors be registered and be required to provided full-scale financial disclosure.

Three years ago, an industry working committee endorsed financial disclosure, the right of franchises to form associations, and a provision for a dispute resolution apart from the courts – in effect, an ombudsman.

How does the new paper build on these earlier attempts at reform? Here is what’s proposed:

What’s in it

Investors: The paper refers to franchisees as “small business investors” making “an investment decision.” That’s a good start. In the securities industry, asking for funds from the public involves serious obligations with respect to disclosure, fairness in the selling process and complaint resolution through the securities commissions.

Disclosure: Franchisors would have to meet strict disclosure requirements. They would reveal the business experience of owners, executives and directors, plus the company’s history of civil litigation. Principals’ past insolvencies would also be exposed.

One bone of contention is Ontario’s intention to ask for audited financial statements. The Alberta franchising law requires statements prepared by an accountant using a cheaper review process. Franchisors maintain that should be enough.

“What a franchisee needs to know is whether a company can meet its financial obligations, “ says Richard Cunningham, president of the Canadian Franchise Association (CFA), which represents 350 of the 1,200 Canadian franchisors. “Most people wouldn’t understand an audited statement anyway.”

Cooling off: Franchisors would have to give investors a chance to consider the deal. Full information about costs, territories, advertising funds, restrictions on suppliers and so on would be revealed in a disclosure document two weeks before signing. Franchisees given less time to consider could unilaterally rescind the deal within 60 days of signing.

Sources of information. Consultants repeatedly advise prospective franchisees to talk to others in the chain before signing agreements. But the problem is credibility of sources. Franchisors usually provide lists of their most successful store owners, who tell the most positive stories. Cold-calling other franchisees may not reveal much more, as they might fear franchisor retaliation.

Ontario’s proposals help on this score, suggesting franchisors be required to reveal names of past franchisees as well as existing ones.

Projections: If franchisors forecast earning for an outlet, they would now have to explain how they arrived at the numbers, including all assumptions. Substantiating information must be made available.

Right to associate: Franchisors would not be permitted to penalize or threaten consequences for franchisees who are in franchisee groups.

What’s not in it

Fair dealing: Alberta’s law confers a duty of “fair dealing” on both sides. While it’s up to Alberta courts to interpret the full meaning of this phrase, U.S. courts have used fair dealing to protect franchisees in some circumstances not covered by the franchise agreement.

Ontario has argued against this provision, saying the term’s meaning is uncertain and that it will be costly for franchisees to litigate to figure it out. While this is true, it ignores the fact that franchisees will have to litigate to enforce all elements of the proposed law because it establishes no enforcement body or ombudsman.

Dispute resolution: The government turned down recommendations that all civil actions involving franchise disputes should have to first go to mediation or arbitration. But the consultation paper offers no alternatives to the courts.

“There’s nothing to set the tone for alternative dispute resolution,” says Toronto franchise lawyer Ned Levitt, who participated in the franchise review in 1995. “There needs to be at least some statement that it’s good franchising practice to pursue ADR, especially mediation.”

In the same vein, the paper contains no provision for a specific dispute resolution body. Mr. Levitt recommends an ombudsman to investigate conflicts and to use moral suasion and publicity to resolve them. Ontario’s intention to leave franchisees to pursue deep-pocketed franchisors in court offers little relief from the problem of settling disputes.

Registration: Ontario ignored recommendations to force franchisors to register with the province or an organization such as the CFA. Instead, it plans to change the Corporations Information Act, the Business Names Act and the Limited Partnerships Act to gather franchising statistics.

This may identify the number of franchisors, but it will probably not gather much information about their operations, such as “churn” within their system, critics say.

“In [the government’s] caution not to create red tape for small business, it is somewhat underestimating the value of statistics for franchising and the ease with which they can be collected,” Mr. Cunningham says.

How it’s viewed

Reviews in the franchising community range from lukewarm approval to outright dismissal. “I was a little disappointed,” say Tony McCartney, a Color Your World franchisee in Niagara Falls, Ont., who sat on the 1995 committee.

He regrets the decision to omit a dispute resolution mechanism. “If I hadn’t worked on the team, I’d think it was a big step forward. But it didn’t come up to my expectations.”

Toronto franchise lawyer Paul Jones believes the proposals weakness reflects a constitutional issue. Franchise agreements are actually trademark licence agreements, and trademarks are federal jurisdiction.

But provinces can regulate the quality of wares and services. Therefore, Mr. Jones says, Ontario will regulate disclosure – which helps verify that franchisees get what they expect – and avoid regulating franchising’s inner workings.

This way, the legislation “won’t catch too many bullets on the way through, and it stays within provincial jurisdiction. “

After the unwarranted delay in producing this document, many echo Mr. McCartney in saying they’ll accept any forward progress.

John Southerst is a Toronto-area writer on franchising issues. He can be reached at ac.ratsi|htuosj#ac.ratsi|htuosj.


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