It’s time for Ontario to pass legislation on franchisees

Groups advocating for franchisees (purchasers of franchised businesses are characterized as small-business owners) say the legislation is long overdue, but probably does not go far enough to protect franchisees from capricious franchisors…Proposals for substantive changes would probably significantly delay passage of Bill 33, and may in fact kill any chance for it to pass at all.

The Globe and Mail
February 3, 2000

It’s time for Ontario to pass legislation on franchises
Franchisees would be better protected if neglected bill becomes law
Larry Weinberg

Health care, education and squeegee people. All three have attracted much attention from the media and provincial government in Ontario. At least two of the three deserve this, if not a lot more, attention. But while these items preoccupy the minds of the public and provincial politicians, other issues remain on the back burner, and little happens for a long time.

Such is the case with Ontario’s proposed legislation to regulate the sale of franchises and protect prospective franchisees. The legislation, the Franchise Disclosure Act 1999, was introduced in the Ontario Legislature on Dec. 14 for the third time as Bill 33. On two previous occasions, the same legislation did not pass, presumably because it was not a priority of the government. The most recent occasion was immediately before the Tories’ re-election last June when the bill died with the election call.

Most people involved in franchising, including the Canadian Franchise Association, which represents Franchisors, hope that this time the moon and stars align, and the legislation is passed quickly. In their view, Bill 33 is important because franchising as a method of doing business continues to grow and drive much of the retail economy. Ontarians have had to suffer through talk of such legislation for more than 20 years. Similar laws exist in the United States, both at the federal level and in a number of states. In Canada, only Alberta has comparable legislation.

Groups advocating for franchisees (purchasers of franchised businesses are characterized as small-business owners) say the legislation is long overdue, but probably does not go far enough to protect franchisees from capricious franchisors.

There has long been a perceived need in the marketplace for the government to step in and provide some balance between the interests of franchisors and franchisees. The major concerns are that franchisees are assumed to lack bargaining power, sufficient information to make informed decisions about purchasing a franchise and resources to match those of the franchisors.

While the proposed Ontario legislation is not perfect, it was drafted with input from an Ontario government and industry task force, with much input from stakeholders, including franchisees.

For those who see the legislation as a reasonable step, and in keeping with the trends in other jurisdictions, it is time for stakeholders to pull together and press the government to pass Bill 33. Doing so will end uncertainty in the franchisor community, and can help ensure that prospective franchisees are more educated about the franchises in which they are about to invest.

The legislation is designed to protect franchisees, but it would also be good for franchisors. It would remove the uncertainty that has been hanging over the industry during consultation, and the review of the legislation will help to promote the advantages of franchising (whose image has been tarnished over the past number of years by a number of high-profile scandals), and will bring only a minimal intrusion and added cost to their operations.

This law would also reward franchisors that are doing a good job, as one of the key requirements of the disclosure process is that franchisors reveal how many outlets have been closed.

Modeled after the Alberta Franchises Act, the Ontario legislation sets out three objectives.

Bill 33 provides that every franchise agreement must impose a duty of “fair dealing” on each of the parties, with respect to both performance and enforcement. The intention behind this duty is to curb the behaviour of franchisors who abuse their discretionary powers.

The bill also gives franchisees the right to associate with each other, and to join or form franchisee organizations, without restriction from franchisors.

And perhaps most importantly, Bill 33 imposes comprehensive disclosure obligations upon franchisors. Subject to certain exemptions, franchisors are required to provide each prospective franchisee with a disclosure document containing all material facts, financial statements and copies of agreements to be signed.

Franchisors would be required to disclose all information that would reasonably be expected to have a significant impact on the value of the franchise or the franchisee’s decision to invest.

In addition, franchisees would have 14 days between receiving disclosure and signing a deal to think about their decision.

A franchise would be entitled to rescind the franchise agreement within 60 days of receiving the disclosure document if the disclosure document was delivered late, or if the disclosure document failed to meet the requirements. If the required disclosure was not provided, Bill 33 allows the franchisee to rescind the agreement within two years of signing the agreement.

Once a franchisee has exercised his or her right to rescind, the franchisor would be required to repay the franchisee all amounts invested in the franchise. Bill 33 also gives franchisees a right to sue for damages if the disclosure document contains a misrepresentation or if the franchisor otherwise fails to comply with the disclosure requirements.

The Ontario government has scheduled and advertised public hearings to be held in four cities across the province over four days in March. While they will probably not garner much attention from the media, they are sure to elicit interest from franchisor and franchisee groups, probably on opposite sides of the debate.

Proposals for substantive changes would probably significantly delay passage of Bill 33, and may in fact kill any chance for it to pass at all.

Regardless of the views expressed during the hearings, the government should resolve to pass Bill 33.

Larry Weinberg is a partner in the Toronto law firm of Cassels Brock & Blackwell LLP, where he practices franchising, intellectual property and information technology law.

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