Mike Colle Opposition Statement

I wonder whether the dispute resolution mechanisms in this bill are strong enough… What started off as a very successful entrepreneurial exercise ended up being a disaster for this individual through no fault of their own…I'm sure the contracts cover every potential loophole etc. I just wonder whether the franchisee can afford that kind of legal expertise on the other side, because those contracts can't be altered.

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Legislative Assembly of Ontario
March 6, 2000

Opposition Statement
Toronto, Ontario, Canada
Mr. Mike Colle, MPP, LIB, Critic

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

MIKE COLLE, MPP

The Acting Chair (Mr George Smitherman): Thank you very much, Mr Martin. We will resume opposition statements with Mike Colle.

Mr Mike Colle (Eglinton-Lawrence): Thank you, Mr Chair and members of the committee, for being here today. I know you all have a great interest in this new legislation, as have a lot of stakeholders. I think it is an opportunity, really, to do the right thing. I look at this piece of legislation as an opportunity, in essence, to set down a set of rules that will govern this growing, I might call it, industry, and I hope we take this opportunity to do it right. We may not be able to visit it again, and that is why I think we have to look at all possible aspects of the new legislation to ensure, obviously, that it protects both parties.

As you know, one trend that is most disturbing is the amount of litigation that takes place. I don't think that either side, the franchisee or the franchisor, wants to make the franchise industry essentially a pension or annuity plan for lawyers. I think they can do well without the franchisee or franchisor contributing to their pension funds. That is why it is important to look at this legislation and try to find ways to avoid litigation as much as possible. If we can do that, we're going to save literally tens of millions of dollars in legal fees, not to mention the personal and family, and in some cases corporate, agony that takes place as a result of the litigation that seems to be the growing trend in resolving disputes. That's why this is an opportunity.

I know there have been a number of recommendations. Basically the legislation puts down some precepts which are quite sound. What we have to do, though, is to ensure that it is strengthened, that both sides are protected. Especially in this case, as we know, the most vulnerable are obviously the franchisees, because we're dealing with immense corporate clout in some cases and an individual who puts their life's savings into a small business and tries to make a living. We as legislators need to make sure we protect the franchisee from undue costs that would result in some kind of dispute.

I wonder whether the dispute resolution mechanisms in this bill are strong enough. The one recommendation that I would hope to see come out of this, if possible - I think it would solve a lot of problems - is perhaps having a franchise ombudsman. A person could be in place to handle these disputes at a certain level, with a time frame where resolutions could at least be brought to this ombudsman and he or she could be of assistance to avoid immediately going into litigation. That would really help in putting forth some protections in this bill. At this point in time, the dispute resolution mechanism seems to be not sufficient to avoid costly litigation.

I've been talking to people who have franchises, and some of them are quite happy, they're doing quite well financially. I know of one case in particular, a family friend who has done quite well with his franchise. I've been checking with him. He's a young person who is doing quite well. He's very satisfied with the company he's dealing with.

On the other hand, in this last month there was a documentary on television about a couple of cases of franchisees. In one case, they were in the coffee business. They had a very successful business and were doing quite well. The franchisor, who in the small print of the contract was responsible for the leasing agreement, made the decision that the landlord wanted too high a price for the lease. Therefore, where the franchisee would have gone ahead and signed the agreement with the landlord and thought he could still do well, the franchisor decided it was basically too expensive, despite the financial projections which showed he could probably handle the increased rent. Subsequently the operation was shut down, because it made the agreement null and void. That individual who was running a successful franchise operation had to close down. The operation was gone, and the years that he spent growing the business were gone, flushed down the toilet. He lost that business opportunity, and it wasn't because he was negligent. By the way, within months of closing that operation a new franchisor came in and signed a leasing agreement with another coffee company and opened up in the same location.

Obviously there is a lot of onus on the prospective franchisee to read the fine print. The cooling-off period helps in that regard but, as you know, the tendency is for small business persons to be so anxious to start this business that sometimes they overlook the potential pitfalls in the agreement they sign. I don't know what we can do as legislators to try and protect people from their own anxiety about getting into something they feel has great prospects. It's very difficult to control that, but there should almost be a warning label on every agreement signed "caveat emptor." There is this great urge, because one of the successes of franchising has been based on this whole concept of branding. People want to buy the brand so they're willing to expend obviously what are extra dollars to buy into the brand. There was a book just published by Naomi Klein here in Toronto talking about the power and influence of branding. The prospective franchisees are so anxious to be part of this brand that they sometimes overlook the financial obligations, the long-term implications of what they're getting into.

In that same documentary on television they talked about a doughnut operation. I don't know if this legislation - I have to look again through the fine print of the legislation - will protect operators. In this case the person bought a doughnut operation, very successful, doing quite well, and I think he bought a second one. But then the franchisor added their own doughnut operation in close proximity to the existing two, and the franchisee's revenue began to go down, so there was basically infringement upon his territory.

Legally, the franchisor was protected. It's very clear in the agreement signed between the franchisor and the franchisee that they can open up an operation within so many kilometres, or feet or whatever it is, of the operation. What they do have is a clause which says, "You have the right to buy out or to purchase the new outlet in the vicinity." That's your protection. But if you already own two doughnut shops, why would you now all of a sudden try to buy a third one which is going to compete with the two existing ones you have in that neighbourhood? What happened in that area was that there ended up being about eight doughnut shops by the same franchisor, to the point where the gentleman who did quite well with the first two doughnut shops had to close the doors and walk away from those two shops.

What started off as a very successful entrepreneurial exercise ended up being a disaster for this individual through no fault of their own. The franchisor was also protected, because it was stated categorically in the agreement that you had the option to buy out a new franchise in your territory. That was the protection that person had. But I don't think that's realistic protection, considering there are just so many dollars to be made selling doughnuts in a territory - no joke about dollars to doughnuts or whatever it is.

To me, these are very concrete examples of some of the realities that exist in this industry called franchising. There is no doubt it's going to continue to grow, because it seems to be easy to piggyback on a brand, if you've got a good brand and a good product, and the franchisor has obviously invested in it at that point where they've done quite well because they have a good product, and they deserve recognition for that. But the budding franchisee who sees the success and jumps on the bandwagon doesn't realize, and sometimes doesn't have the protections in place, whether it be through legislation or through their own due diligence, to find out what they have to be aware of and whether they can afford legal counsel.

Certainly the franchise lawyers are experts, there's no doubt, in drawing up contracts. I'm sure the contracts cover every potential loophole etc. I just wonder whether the franchisee can afford that kind of legal expertise on the other side, because those contracts can't be altered. I'm sure it's a cookie-cutter contract that goes to every franchisee; they're very similar.

The onus is on us perhaps to try and find ways to protect the franchisee because it's probably not going to be done in the contract signed by the franchisor. That's human nature. It's the marketplace, the way it works. If you have a very successful company, they're going to try and ensure that these franchise operations are profitable. That's their right, and they should proceed to do that. That's why the onus falls back on us to try and find ways in this legislation to strengthen it so that there is a process which is transparent, which, as I said, avoids costly disputes that involve third or fourth parties and years of litigation.

In many cases, from my reading on this industry for the last two or three years, there are people who essentially have a little nest egg they're looking at for a possible retirement. They may be changing occupations in middle age and they legitimately have put all their family - usually it's family - or individual savings into this employment possibility. In essence, it's a very good way for people maybe to make a living. They can be their own boss, as they say. They can control their own destiny by working hard. Most of them, it seems, who own franchises have a history of being very dedicated to their business, and the franchisors would agree in most cases that is the case, that they put in long hours, seven days a week. It's not a part-time job, it's not a nine-to-five job; you have to put your blood, sweat and tears into this investment. It's not like putting money into NASDAQ or whatever. You have to in essence be there to ensure that the business is successful.

I have a lot of sympathy for franchisees because they put in their life's savings, they work hard and they are the people I would like to protect as much as possible. If we can find ways in the bill to make it fair, to make it as much as possible immune to an ongoing litany of legal disputes, if we can do that and ensure there's a process where we almost obligate perhaps - we almost have to do that - the franchisee to read and go over and have perhaps another party go over the contract to ensure that they understand the implications of that contract, it is so important. I wonder how many of them - sure, they go over the main points of the contract - have done enough. I don't know how you do that, and it's very difficult to oblige franchisees to protect themselves. No doubt that's probably a big problem that's on their own shoulders and no fault of the franchisor or of the industry itself. It's just the nature, the chemistry of franchising, and I think it's going to continue to be a growing business.

If we put certain protections in, if we listen to suggestions made by some of the individuals or groups, maybe we in Ontario can have a piece of legislation that can be very cost-effective and forward-looking. So this again to me is an opportunity that is really quite extraordinary for us, because these pieces of legislation sometimes will never get looked at for another 20 years. We have this opportunity to do it right. Certainly my party believes in trying to do what we can to put forth suggestions, and I hope the government is open to suggestions, because I think it's in everyone's best interests.

As I said, it's an economic and entrepreneurial activity that is sound. Franchising has a lot of good aspects to it, there's no doubt about it, but it does have some serious pitfalls that can be very detrimental to the individual who puts their life's savings in. There's a variety of different franchises, and some of them really have very few litigation problems. I've talked to people in the grocery business etc who say, "I'm doing very well financially, and I have no problems with the company I'm working with," or the small operator who's selling pet food, whatever it is. Some of them are doing quite well and they have no problems.

I'm worried about people who enter into a business arrangement who essentially have no protections. The way to ensure we don't have everybody who has a gripe with their franchisor ending up going to the ombudsman here in Ontario, saying, "I don't like it," and their business is doing poorly and they're not putting in the time and the effort - obviously, we don't want that to happen. We're looking to protect the legitimate person who has put their life's savings into a business, the legitimate person who has done everything possible to protect themselves and to make their business prosper. Those are the people who somehow I would like to protect, because I think they deserve protection, and I think even the franchisors would agree. They're trying to support those individuals, the legitimate person who makes that legitimate investment, and both sides end up doing quite well.

I appreciate your listening to my comments, and I look forward to doing something that I think will avoid a lot of agony and anxiety for years to come. I certainly offer my party's support to try to work with all parties, all stakeholders and the government to essentially do well by this great opportunity here. Thank you for listening.

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

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


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Risks: Ontario Public Hearings, Canada, 2000, Love money, Siren song, Ombudsman, Justice only for the rich, Encroachment (too many outlets in area), Lease controlled by franchisor, Imbalance of information and power, Franchise agreements virtually non-negotiable, Canada, 20000306 Colle

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