Jury still out on Alberta law

In the last decade, Ontario has witnessed an escalation in sensational franchise battles, coupled with a costly explosion in franchisee-franchisor litigation – estimated to be as high as 5,000 new cases a year…But Mr. Zalmanowitz is skeptical about whether the fair dealing clause will bring significant change to franchising. “The impact is going to be an extra paragraph in everyone’s statement of claim.”

The Globe and Mail
October 22, 1998

Jury still out on Alberta law
While some say the three-year-old legislation has encouraged franchise expansion in the province, others are skeptical about its effectiveness until decisions regarding related lawsuits are on the books.
John Lorinc

In the second of a two-part series on the changing state of franchise legislation in Canada, the Enterprise page looks at the Alberta experience.

Entrepreneurs don’t usually rave about commercial regulation, but Tony Sansotta has only good things to say about Alberta’s three-year only-franchise law.

The president of Calgary’s Practicar Systems Inc., which runs the 80-outlet Rent-a-Wreck chain, says the act has encouraged many franchisors to expand their operations into the province for the first time. Some, including Molly Maid of Oakville, Ont., have returned after abandoning Alberta because of red tape.

The province requires franchisors to provide prospective investors with detailed disclosure documents 15 days before closing a sale, or risk the threat of civil litigation from a disgruntled franchisee. (The Alberta government doesn’t actively monitor compliance with the act.)

This replaced the previous system that had forced franchisors to obtain approval from provincial securities regulators before setting up in Alberta – a time-consuming process that costs tens of thousands of dollars in filing fees.

“It’s improved the industry as a whole immensely,” says Mr. Sansotta, the Prairie representative on the board of the Canadian Franchise Association.

But Edmonton franchisee lawyer John Stainton paints a far less cheery picture. “I don’t see any significant change,” he says. “The act is being ignored.”

Under the old system, franchisor had to file disclosure documents with the Alberta Securities Commission; today, there’s no such requirement. Mr. Stainton says he sees “many cases” of companies selling franchises without providing investors with suitable disclosure documents – akin to peddling stocks without circulating a prospectus.

While some of these franchisors are being sued, there is still no decided case on the books because the act is so new. Mr. Stainton feels the legislation needs more teeth to be effective in deterring these kinds of operators.

Mr. Sansotta, for his part, feels there should be no tolerance for this practice. “Our position is that the book should be thrown at those people. The courts should come down heavily.”

The issue of this law’s effectiveness is timely because Ontario is planning to introduce franchise legislation closely modelled on Alberta’s act.

Ontario has outlined preliminary plans to create a law requiring franchisors to provide investors with disclosure documents or face civil penalties. The documents would include the franchisor’s financial status, business background and litigation history, as well as information on the franchise such as territories, earnings potential and up-front costs. Like Alberta, Ontario doesn’t want to get involved in policing the act.

In the last decade, Ontario has witnessed an escalation in sensational franchise battles, coupled with a costly explosion in franchisee-franchisor litigation – estimated to be as high as 5,000 new cases a year.

But the proposed law may not reduce the legal wrangling. Mr. Stainton and Mr. Sansotta agree that since Alberta reformed its franchise laws, the number of lawsuits there between franchisors and franchisees seems to have increased.

“I’ve noticed an increase in litigation,” adds franchise lawyer Daniel Zalmanowitz, a partner with Witten Binder in Edmonton. “Franchisees seem to be more prepared to take a stand.”

But evidence is anecdotal, and Mr. Sansotta points out that the jump in lawsuits may simply reflect that there are more franchises operating in the province.

But another factor may relate to the key difference between the Alberta law and what the Ontario government has proposed. Alberta’s rules include the concept of “fair dealing,” which means that franchisors and franchisees must generally behave in a commercially reasonable way with one another.

However, Alberta didn’t bother to define fair dealing, leaving it up to the courts to decide.

Lawyers say that fair dealing involves some of the most contentious aspects of a franchisee-franchisor relationship, such as the right to terminate a contract or to change the locks on a franchisee’s outlet. Because the language in franchise agreements tends to be open-ended, some franchisors use these contracts to push out a franchisee without justification.

Proponents of the fair dealing provision believe that franchisor conduct, especially among fly-by-night operators, can be reined in with a statutory provision that requires the two sides to deal in good faith.

Opponents argue that there are enough common law precedents that judges presiding over civil cases will usually find in favour of hard-done-by franchisees.

The jury on fair dealing is still out as the courts have yet to hand down a decision setting out just what the term means.

But Mr. Zalmanowitz is skeptical about whether the fair dealing clause will bring significant change to franchising. “The impact is going to be an extra paragraph in everyone’s statement of claim.”


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