Canadian Federation of Independent Business Public Hearing Testimony

But there seem to have been enough cases where franchises are terminated with very little notice, really with not sufficient provision for the business person to get compensation, or for reasons which perhaps wouldn't be just cause that we think there need to be at least some basic rules around that.

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Legislative Assembly of Ontario
March 6, 2000

Public Hearing Testimony
Toronto, Ontario, Canada
Canadian Federation of Independent Business, CFIB

Standing Committee on Regulations and Private Bills
1st session, 37th Parliament

FRANCHISE DISCLOSURE ACT, 1999
Consideration of Bill 33, An Act to require fair dealing between parties to franchise agreements, to ensure that franchisees have the right to associate and to impose disclosure obligations on franchisors

CANADIAN FEDERATION OF INDEPENDENT BUSINESS, CFIB

The Acting Chair (Mr George Smitherman): I'd like to call on the next presenter, Judith Andrew from the Canadian Federation of Independent Business. Welcome to the committee.

Ms Judith Andrew: I'm Judith Andrew, vice-president in Ontario for the Canadian Federation of Independent Business. The CFIB, on behalf of our 40,000 Ontario small and medium-sized member firms, appreciates the opportunity afforded by the standing committee on regulations and private bills to comment on the Ontario government's proposed franchise legislation.

You have kits before you that contain this statement as well as a number of other pieces which are the research that we've conducted over the years with our members on franchise operations.

We are pleased to count among our Ontario membership some 1,500 independently owned franchise operations. Our member concerns and issues, which come to us via letters, calls, e-mails and in person during our personal visit at the member's place of business, are the basis for our research on public policy issues. As early as 1981, CFIB was conducting an in-person survey on the impact of the franchise phenomenon on our members' businesses. In a 1984 mandate vote—and this is the vehicle that sets policy for the organization-34% of our member respondents favoured legislation protecting franchise dealers, while 57% opposed such legislation. Over a decade later, in 1995, it remained at one third of members favouring the Ontario government passing legislation to protect franchisees, but the opposition was less pronounced, at 48%, with the remainder undecided or having no interest.

In 1995, we conducted a survey on retail and service firm issues-it's in your kits-entitled New Signs on Main Street. Inside the page you'll see a large section on franchises, which identified the advantages of franchises, the level of satisfaction with franchise arrangements among the respondents and also the problems encountered with franchise contracts.

Among the leading advantages were: advertising, buying-group discounts and consulting advice. As at April 1995, 17% of the respondents to this survey indicated dissatisfaction, including 5% who were very dissatisfied with their franchise arrangements. The most-identified problems included the high cost of continued services, the contract being too one-sided and the lack of marketing support.

CFIB is pleased to contribute to the current debate data from our 1999 CFIB Focus on Ontario survey, and the survey questionnaire is in your kit. This survey explored small and medium-sized business support for various possible elements to be included in the Ontario government's franchise legislation.

Figure 1 in the statement shows the main results from some 2,700 business respondents across the province. Also, broken out separately, are results for the 160 or so franchise operations which responded to this survey.

It's important that you note that at this point only one quarter of the respondents marked "none of the above," which we see as a measure of those who continue to believe that no legislation is necessary. So there has been an evolution over time from over half thinking no legislation is necessary, now down to just a quarter of small businesses in the province that think that is the case.

Our Ontario members indicated strongest support for legislated fair dealing between franchisors and franchisees; also for advance disclosure of facts and documents bolstered with heavy penalties for violation of disclosure rules and for misrepresentation; as well as for the legal right of franchisees to associate with each other without penalty.

Among the franchise respondents, you can see from figure 1, support is even stronger for the duty to deal fairly and for strong, upfront disclosure provisions and an ability to freely associate with other franchisees. Franchise respondents, being more sensitized to the down-the-road issues, also indicated support for legal blocks to franchisor termination.

CFIB has learned of impediments put up by certain large national franchisors to independent business franchisees associating or speaking out on issues of major concern in their industry. One tactic is to centrally control franchisees' payments, preventing independents from financially supporting associations of their choice.

Another concern which has come to our attention is where so-called mature fanchisors no longer need the franchisees to expand their market presence, and their real agenda is to reduce the number of franchisees or eliminate them altogether and replace them with their own corporate operations. Our franchise members also gauge this to be a problem, according to their 50% support of legal blocks to franchisor termination of the contract.

Our three recommendations:

(1) CFIB recommends that the Ontario government proceed with legislation which includes the favoured elements of duty of fair dealing, required disclosure bolstered by penalties and the right of franchisees to associate.

(2) We oppose any broad-based exemption provision for franchisors from the terms of the legislation. There is one exemption provision that is proposed.

(3) Given concerns about non-renewal or termination of franchise agreements, CFIB urges the government to establish in legislation a fair framework to handle these circumstances - to include such things as a notice period and fair compensation as well as just cause - and a timely, low-cost method of resolving those disputes.

That would be an addition to the legislation as proposed.

We appreciate the opportunity and would be delighted to attempt to answer your questions.

The Acting Chair: We've got quite a bit of time for them. We'll start with the parliamentary
assistant, please.

**Questions

Mr O'Toole**: I'll share time with Mr Gilchrist.

Thank you very much for appearing before the committee. I'm very interested in that a couple of previous presenters indicated there are very few accumulated statistics on the success or failure of small business start-ups and/or franchises. You might want to comment on that.

In figure 1, I was very pleased that the top four responses there seem to be, at least at this point, satisfied by Bill 33; that is the fair dealing aspect, disclosure and the association right.

Would you like to respond? You think that it's difficult to find a balance, as you've said here, but in your view and in the view of your membership, is this a piece of legislation that will satisfy some of the balance that's required in this growing sector of our economy?

Ms Andrew: I would say yes. The legislation certainly responds to the four elements that draw the strongest support from our members in terms of their views about what ought to be included in it. The votes we've had over the years, of course, argue on the other side, that franchise agreements are private business deals and so forth, and that if there was consultation with legal and other advisers, some of the problems can be solved.

Yet our members are now feeling that this is a special category of business. Unlike another kind of business where you might go and purchase a business operation without any special protections like this, our members are now supporting there being legislation directed at the franchise sector. That is a definite change over the years, and the four elements are very definitely there.

Some of the horror stories and the heart-rending stories that have come up suggest perhaps, in addition, things like termination of contracts without notice or fair value applied are something worth having a serious look at.

Mr O'Toole: Just to conclude, we've heard from three or four presenters about the imbalance in the relationship from the starting point, and you would see that. Is there anything in this that we could provide to level the playing field in some ways, recognizing that the franchisor obviously has the secret recipe and the other person is going to be a millionaire in two weeks? There's an imbalance of expectations. Is there anything we can do, or does the disclosure portion address most of that?

Ms Andrew: I think disclosure is a big part of it in making sure that people are given the hard facts before they sign rather than finding them out the most difficult way afterwards. Also the right to associate, if there were associations of franchisees-I was listening to some of the previous presenters and some of the heart-rending cases there. One would think, if there were associations of those people, that they also would be able to forewarn others and perhaps the kinds of practices we've heard about wouldn't be a feature of the system.

Mr Gilchrist: Thank you, Judith. It's good to see you again. You are a consistent presenter, and I always appreciate the detail that goes into your submissions. They're anything but anecdotal.

Along that line, do you have any thoughts as to why such a small percentage of your franchisees actually sent in a response? In your handout you say that 28% of your members are franchisees, but they only supplied 6% of your responses. Should we take that as a good sign, that they are not troubled and did not think it worthy?

Interjection: Too busy.

Mr Gilchrist: Or are they too busy? Exactly.

Ms Andrew: This particular survey which, due to a set of circumstances, went out in mid-July 1999, was a pretty heavy-duty survey, as you can see from your kit, and included 17 questions and some fairly difficult ones on the hard matters of property tax and the Workplace Safety and Insurance Board and so forth. We did lose some response because people didn't slog through all of those in the dog days of July. I suspect that's what happens sometimes. We get good responses from our members and we check regularly to make sure it's not the same members responding all the time. To be honest, independent business people are very busy with their businesses and often pressed in vacation time, so our timing wasn't great on this one and that accounts for the smaller response. But still, 160 franchise operations is a substantial number.

Mr Gilchrist: Our biggest conundrum right now is the distinction you would make between the disclosure-related issues to allow a purchaser absolute certainty that what they're getting into is a known commodity, versus those things that would be considered relationship. I look at your third recommendation and I would appreciate it if you could elaborate a little bit on just how far down the road you thought the government should intervene in things such as termination of contracts. Would it not be more consistent with traditional contract law to just make sure that all of the parameters around which a franchisor could ever terminate your contract are spelled out in advance in extraordinary detail, including any penalties or any claim the franchisee might have for frivolous termination? Would that not be better than the government trying to micromanage a myriad of different businesses via regulation or legislation?

Ms Andrew: We weren't really thinking of government micromanaging this. You've probably noted from the survey that our members don't favour government registration, nor do the franchise respondents to the survey favour that kind of heavy-duty legislation. But there seem to have been enough cases where franchises are terminated with very little notice, really with not sufficient provision for the business person to get compensation, or for reasons which perhaps wouldn't be just cause that we think there need to be at least some basic rules around that.

Mr Gilchrist: But again, should the rules be laid out up front? If before I sign the contract I know the franchisor has the ability to terminate under the following five conditions, and that is one of the five conditions they do terminate me on, would you not agree that is quite consistent with the sort of contract law that is best left to the courts to enforce and interpret?

Ms Andrew: This obviously bears more thinking, and it's excellent that the committee is looking at this bill at first reading stage, because it does give you some time to consider provisions. But if it were at least included in the contract that the contracts must address these things or some minimum parameters around them, perhaps that would suffice. There are others here who deal with these kinds of situations probably more frequently than we do, who could give you very detailed advice on that. But we think there needs to be something that addresses this. Otherwise, if you are cited for a minor health violation in the city of Toronto and suddenly that's a reason for the franchisor to terminate your contract, there needs to be some protection on that front.

Mr Gilchrist: Fair enough. Thank you.

Mr Martin: Thank you for coming. This is indeed an important piece of work that we are all involved in. You're right: It's opportune that it is after first reading, so we can look at the bigger context within which this all unfolds and perhaps do something in the end that might work better.

We had a presentation this morning from somebody who is an expert in the American experience, who talked about some of what is in this bill as what they introduced 30 years ago. They have evolved since then to have legislation in place that actually deals with the question of termination, as you have suggested, and calls, in many jurisdictions, for some registration of the franchisor/franchisee and of the disclosure document, so there is some control over the question: Is it complete, is it correct, and whether, even with the disclosure, there is still misrepresentation going on.

That gets us to the end point, where in some instances we have terminations taking place, or a change in the contract that puts undue pressure on the franchisee and requires the franchisee to expend even more money to hire a lawyer, go to court and fight that kind of battle. Many franchisees just don't have that kind of money available to them. As well, of course, it interferes with their ability to carry on business if they are preoccupied with that kind of thing.

With that in mind I ask you, would the provision for termination, where you are calling for some basic rules, be the same thing we are referring to, some kind of dispute resolution mechanism? There were three small businesses in my own community of Sault Ste Marie-that's the reason I'm involved in this-who brought me to the table to share with me the very difficult circumstances they were facing, and they ultimately lost their business. They weren't bad business people; they were actually very successful, good corporate citizens. But at the end of the day, they are not in their stores any more. They were saying to me that if there were a table they could go to where arbitration or mediation could happen, so that the stories of each side could be told and a judgment made so that everybody could get on with their life-they were convinced they were doing all the right things, and they were asking for a dispute resolution mechanism. Is that in keeping with what you are thinking about, in this instance, regarding a termination clause?

Ms Andrew: Certainly the CFIB has supported the notion of mediation. In fact, when former Attorney General Charles Harnick brought his mandatory mediation thrust forward, that was something we did support for those very reasons: that many small businesses can't afford the time and the cost of long-drawn-out court proceedings, and hopefully it would be better to resolve disputes as early as possible, possibly through mediation. So we think mediation is a good idea in a whole variety of areas, probably including this one.

In terms of heavy-duty provisions in this area, I think the general tenor of these responses is that our members believe there should be strong, upfront disclosure. I don't think they are quite ready for a highly regulated environment with registration. Certainly registration is not supported. In fact one very thoughtful respondent answered yes to many of these things and said, "Of course we will be paying for all this government regulation." Quite clearly, it is true that the more oversight there is of these kinds of dealings-you know, more government costs, more tax dollars and so forth. We are in support of some clear parameters under which franchises are operated, but at this point we certainly cannot go for the really heavy-duty kinds of proposals with a highly regulated system in this province.

Mr Martin: Could I suggest to you, ever so respectfully, that you might want to take a look at some of the material Susan Kezios presented this morning. You may already have read some of the material her organization is putting out, which suggests that even in the States, where the regulation is much further developed and helpful, in the end it's still not enough because you're still before Congress looking for better legislation to regulate it. She figures that what is on the table in Ontario is what they put on the table 30 years ago. I guess I'm saying, should we be playing catch-up that far behind and should we be, as I suggested and she suggested this morning, maybe 10 or 20 years from now looking at what they are looking at right now? Do we always have to be so far behind, even in this instance, where the US is concerned and even in the regulation of business-

The Acting Chair: I think I heard a question there, Mr Martin. I'm going to need to-

Mr Martin: Actually you didn't hear a question. I'm going to share with you-I have been inundating the committee today with all kinds of research that I have been doing. I think you're right: This affords us a unique opportunity after first reading to do a fulsome study of this whole issue.

Gillian Hadfield, who will appear before us-

The Acting Chair: Question, please, Mr Martin. It's that plane to Sault Ste Marie I'm worried about.

Mr Martin: Yes. Gillian Hadfield will appear before us in Ottawa on Thursday and will be making some interesting presentations. I suggest you might want to take a look at that too. Here are two papers she has put together that I think would be good reading. I'm going to share them with the rest of the committee. One is Problematic Relations: Franchising and the Law of Incomplete Contracts, and the other is in the area of how the market for lawyers distorts the justice system. Franchisees, in many instances, just cannot afford the legal fees to fight the battles that they need to fight.

The Acting Chair: Ms Andrew, if you heard a question there, you are welcome to try and respond to it. Otherwise your time has expired.

Ms Andrew: Just a quick comment. Franchise operations are, of course, one way to conduct business in Ontario. There are many other business people who start businesses, who buy businesses, who put a lot of effort into researching what they are doing and making sure they have done their due diligence and so forth. I think it would be unwise to go for a disproportionate, heavy-duty regulatory environment around the one way of doing business, that is, the franchise side of it, because there are many other small business people in Ontario who put their homes and everything else on the line in terms of their investment in business. They have to choose who they deal with carefully, just as you do in a franchise operation.

The Acting Chair: Thank you very much for your presentation today.

This document is a verbatim copy of this witness’ oral testimony. To review the original transcript: http://www.ontla.on.ca/web/committee-proceedings/committee_transcripts_details.do?locale=en&Date=2000-03-06&ParlCommID=1&BillID=740&Business=&DocumentID=19737#P689_260953

Copyright (c) 2000
Office of the Legislative Assembly of Ontario
Toronto, Ontario, Canada


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