Ontario table franchise legislation

Draft legislation tabled yesterday at Queen’s Park would require franchisors to disclose certain business details to prospective franchisees before they sign on the dotted line. But it includes several changes to try to deal with the storm of controversy that arose from a government consultation paper released during the summer.

The Globe and Mail
December 4, 1998

Ontario table franchise legislation
Margot Gibb-Clark

Ontario has become the second province to introduce legislation to regulate the franchise industry.

Draft legislation tabled yesterday at Queen’s Park would require franchisors to disclose certain business details to prospective franchisees before they sign on the dotted line.

But it includes several changes to try to deal with the storm of controversy that arose from a government consultation paper released during the summer.

Groups representing both franchisors and franchisees seemed cautiously optimistic about the changes yesterday, though neither side is totally satisfied.

For one thing, the bill would not require franchisors to disclose audited financial statements, as the white paper had proposed. Franchise chains had opposed that measure, arguing that it would require private companies to reveal proprietary information.

But the bill adds a provision for so-called “fair dealing,” a concept that comes from contract law. This provision would require both franchisor and franchisee to carry out their obligations toward each another in a fair manner. Ultimately, the concept would be interpreted by the courts.

The legislation also includes a clause giving franchisees the right to associate with one another. Contracts with many chains have prevented people who buy franchises from forming dealer associations, explained Terry Irwin, a senior policy adviser at the Ministry of Consumer and Corporate Affairs.

But the bill is silent on how disputes should be resolved. Some franchisee advocates and the New Democratic Party opposition had sought a clause requiring mandatory mediation. Taking disputes through the courts is too expensive for many franchise owners, NDP small business critic Tony Martin said in an interview.

Les Stewart, founder of the Canadian Association of Franchise Operators, said the bill is a step in the right direction. It begins to correct the imbalance of power that has tilted in favour of franchisors, he said.

But like Mr. Martin, he wanted to see a dispute resolution mechanism written into the law. Franchising is a complex part of commercial law, he said, and the courts have not always recognized its uniqueness.

Richard Cunningham, president of the Canadian Franchise Association, said he supports the bill. Its suggested disclosures are very similar to what his association already requires of members, he said. The association represents about a third of franchisors across Canada.

Sixty per cent of franchisors are based in Ontario, Mr. Cunningham said, so the disclosure requirements will be a major advance in the industry.

He said he is somewhat concerned that fair dealing is not defined in the law. This is a gray area, he said, and won’t be settled until there are legal rulings.

The bill is similar to three-year old law in Alberta, the only other Canadian province to have introduced franchise legislation.

The Ontario bill, however, differs from Alberta’s in its provision for sophisticated-investor exemption. Similar to provisions in securities law, it means franchisors would be able to give less detail to large investors, on the assumption they are sophisticated business people capable of doing due diligence on their own.

The summer’s consultation paper proposed defining a sophisticated investor as someone who was putting $5-million into a franchise, but the final level will be set in regulations.

On the other hand, Ontario’s proposed law is slightly more stringent on what it requires “mature franchisors” to reveal. The assumption is that if a franchisor has been in business for several years, with a certain number of outlets and a certain level of investment, the company can be considered bona fide and therefore exempt from releasing certain financial detail.

For an Ontario franchisor to fit into that category, it will also have to have been “decision-free,” or free of legal judgments, for five years. This is another change from the white paper.

The bill is based partly on recommendations from a working group of franchisees and franchisors. The government has committed to continuing discussions with the parties as the bill works its way through the legislature and during the preparation of regulations.


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