Canadian Bar Association (Ontario) Public Hearing Testimony

MARTIN: Were you the counsel in the Bulk Barn case for the franchisor?, ZAID: I'm involved in that., MARTIN: You're not the person who sent out the letters of threat to anybody who would intervene in any way in terms of that action?, ZAID: I'm not going to answer that question. MARTIN: OK, thanks.

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Legislative Assembly of Ontario
March 6, 2000

Public Hearing Testimony
Toronto, Ontario, Canada
Mr. Frank Zaid, Canadian Bar Association-Ontario

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 BAR ASSOCIATION - ONTARIO, CBAO

The Acting Chair (Mr George Smitherman): Our final public presentation this afternoon is Frank Zaid from the Canadian Bar Association - Ontario, business law section. Welcome to the committee, sir. You have 20 minutes, plus whatever time it takes you to pour a glass of water.

Mr Frank Zaid: Mr Chairman, honourable members of the committee, I'm here on behalf of the business law section of the Canadian Bar Association to speak on Bill 33. I will take a very short period of time to give you a bit of my own personal background. I've been in the private practice of law for nearly 30 years, specializing in franchising, both in Canada and internationally. I have been the part owner of two franchise companies. I'm the part owner of three franchisee units. So I've had business as well as legal experience. I've written, spoken, testified and given papers on franchising throughout my career.

However, for the Canadian Bar Association, since July 1971, when the Grange report was issued, by our calculations there have been at least 11 ministers or representatives of ministers in various public forums who have spoken on the subject of franchise legislation. In the written report that I tabled with the clerk, we went through some of that history. The fact is that over the past 30 years this subject has been hotly debated. It has occupied a considerable amount of public and private debate, time and consideration and has created a great deal of uncertainty in the Ontario marketplace as to whether, when and how franchising will ultimately be regulated in this province.

We believe this debate must come to an end and come to an end quickly. It has been demonstrated through every speech or public pronouncement, commissioned study or survey that disclosure legislation is highly desirable. It has been further demonstrated, in the same manner, that registration legislation is contrary to both the public and private goals of establishing a free marketplace environment for business-to-business relations. The fact that Alberta determined in 1995 to repeal its Franchises Act, which had been in force since the early 1980s, with new legislation which provided for certain principles of conduct and disclosure only requirements, further exemplifies that the one province in this country having had franchise legislation chose to deregulate the process and to abandon government registration and review of prospectuses and agreements.

The Canadian Bar Association of Ontario supports the introduction of Bill 33 in its present format on the basis of disclosure-type legislation, with a legislated standard of fair dealing, freedom of association for franchisees and delivery on a timely basis of a prescribed form of disclosure document.

The Canadian Bar Association of Ontario does not support the introduction of relationship standard legislation dealing with various contractual matters typically found in franchise agreements for the following reasons:

(1) There is no specific industry standard applicable to all franchise agreements. It is impossible to determine a set of legal standards which will apply on a uniform basis to the various types of franchises and industries involved in these relationships.

(2) The level of sophistication of franchisors and franchisees is widespread and varies among franchise industry classifications. Sophisticated franchisee investors do not need the protection of relationship standard legislation. Unsophisticated franchisees will benefit far more from education, government publications and franchise associations informing them of the need to be properly financed and advised by legal counsel. Relationship standards will not cure the typical difficulties encountered by unsophisticated franchisees.

(3) Relationship legislation will spur costly and unnecessary litigation. Any time contractual standards or the like are determined by legislation, uncertainty prevails and interpretation disputes arise. While the intent of such legislation may be to assist franchisees generally, the result will be increased litigation, uncertain relationships and additional burdens and costs on the legal system and the province's budget.

(4) Franchising creates economic activity in the province which will be curtailed by excessive regulation. As has been demonstrated in the United States, certain states which have enacted relationship-type legislation found that the economic thrust of franchising withdrew from their states. I give you as an example Iowa. States like Michigan, which introduced very heavy-duty registration-type legislation, experienced an immediate withdrawal of franchise activity in the state, and they ultimately repealed that legislation.

(5) Adequate remedies already exist. Most franchise disputes are focussed on factual matters. Issues of negligence, misrepresentation, non-performance, system standards, unconscionability, misappropriation, the usual legal jargon, whether alleged against a franchisee or a franchisor, are already adequately dealt with by existing common-law, contractual or tort principles and equitable and legal remedies. There is a body of common law developing in these areas as they apply to franchising upon which the legal community may rely in providing advice to franchisors and franchisees and in seeking remedies. It is not necessary for government to override these established principles by enacting legislative standards.

(6) Disclosure legislation is satisfactory. The CBAO believes, with several drafting exceptions which I'll try to run through quickly, that Bill 33 is well drafted and creates little uncertainty for franchisors, franchisees and their advisers. Of course, this is subject to a full review and public debate on the regulations which ultimately will be proposed.

(7) Erroneous assumptions: The Franchise Sector Working Team report stated that there were estimated to be 500 franchisors and 40,000 franchisees in this province. It estimated that there were 5,000 civil cases filed every year relating to disputes between franchisors and franchisees. If you apply some of these numbers, you will find that with 40,000 franchisees in the province and 5,000 civil suits filed every year, that would mean that one eighth, or 12.5%, of all franchisees in the province are involved in new civil lawsuits every year. It would also mean, based on 500 franchisors in the province, that every franchise system, on average, is involved in 10 new lawsuits every year with its franchisees. We seriously question the veracity and the accuracy of these numbers.

Based on research which I personally do every year in giving an annual address on the state of franchise law in the country, we estimate that there are 25 to 30 reported judicial decisions throughout the country - let's assume Ontario has half of those, or 15 - involving preliminary or final issues determined by the courts. While it is difficult to extrapolate how many cases must be filed in order for there to be 15 reported decisions each year in Ontario, it certainly appears unlikely that 5,000 civil suits are commenced annually to result in only 15 decisions.

The eighth reason for it not supporting relationship legislation is a uniformity issue. Franchising is within the mandate of the provinces under the Constitution Act. We already have legislation in Alberta. It is highly desirable that Ontario's legislation be consistent from a legal perspective with that in Alberta unless there are other circumstances dictating the contrary.

We recommend that the regulations which will determine the form and content of the disclosure document be consistent with that in Alberta in order to preserve harmony throughout the country, and that any inconsistencies be minor in nature so that stakeholders may prepare their documents on a national and consistent basis.

Now I will turn quickly to some drafting issues we hope to help your committee with.

The definition of "franchise": In master franchise relationships, the necessary element that goods or services distributed by a franchisee be associated with the franchisor or the franchisor's associate's trademark may not work because in many cases the trademark is of a third party, ie, the franchisor from another jurisdiction. So that definition is somewhat flawed.

With respect to the inclusive portion of clause (a)(ii) of the definition of a "franchise", when referring to a "franchisee's method of operation," it is stated to include "building design and furnishings, locations, business organization, marketing techniques or training." We wonder what the effect would be on the definition if one of these elements was not included. Would the definition fail?

The definition of "franchisor's associate" is too expansive. Use of the terms "significant operational control" and "continuing financial obligation" will create uncertainty as to the scope of exposure of affiliated companies.

Further, if a franchisor is incorporated as a private company, which is usually the case, individual liability may be imposed without it specifically being provided for by the owner or by the person directing the affairs of the franchisor simply because of that person's direct involvement, to use the words of the definition.

In the application of the bill in section 2, exempting single trademark licence arrangements only, we suggest that that exemption should not be limited just to a single trademark licence but to similar such trademark licences.

In the concept of fair dealing in section 3, the duty is imposed on each party. Given our concerns about the application of the various provisions of the act to associates, we think it should be specifically stated that the fair dealing standard does not apply to associates.

The right to associate: We support the right of franchisees to associate. We think, however, that right should be qualified to the extent that franchisees may not disclose confidential information concerning their specific franchise system, as precluded under the terms of their franchise agreements, to other franchisees from other systems in the course of such association.

Exemptions to disclosure obligations: The exemption providing for the grant of a franchise by a franchisee should not preclude a resale of a franchise where the franchisor assisted the franchisee in locating a new franchisee. The qualification, using the words "the grant of a franchise is not effected by or through the franchisor," is uncertain.

Electronic commerce: We suggest that the rescission rights and the effective date of notice of rescission provide for notice by electronic mail. Similarly, we suggest that the obligations to disclose also contemplate disclosure by some form of electronic means with a written acknowledgement of receipt of the disclosure document. These are similar to the proposals currently being considered by the Federal Trade Commission in the United States.

Damages for misrepresentation: We suggest the deletion of the right of action against a franchisor's associate.

Financial disclosure exemption: The CBAO would like to reserve further comments in connection with any exemption to be prescribed by regulation with respect to financial disclosure pursuant to section 12 of the bill.

Last, self-regulation: As has been provided for in Alberta's act, we suggest that Bill 33 contain a provision allowing for the delegation of self-regulation to a body considered capable of governing the persons involved in franchising and promoting fair dealing among franchisors and franchisees.

In summary, the CBAO submits the following:

(1) The bill should be passed substantially in its present form as soon as possible.

(2) The legislation should not be expanded to include relationship standards.

(3) To the extent possible, the bill should be made consistent with Alberta's legislation.

(4) The concept of the liability of and obligations extending to an associate of a franchisor should be limited or clarified.

(5) The right of franchisees to associate should be qualified to the extent that the right does not include the right to disclose confidential information concerning a franchisor as agreed to in an agreement.

(6) The CBAO would like to be consulted to provide further comments on proposed regulations to be promulgated under the act.

(7) The government should consider reserving the right in the bill to allow for delegation of self-regulation to a body considered capable of governing the persons involved in franchising and promoting fair dealing among franchisors and franchisees.

We appreciate the opportunity to assist in this very important process.

The Acting Chair: We've got a few minutes left for questions. We'll start with Tony Martin.

Questions

Mr Martin: Certainly, your presentation flies in the face of some of the information presented to us, particularly this morning by Susan Kezios from the American Franchisee Association, who suggests other than that franchisor systems flee states where there's good legislation. I suggest that maybe bad franchisors flee, and who would argue against that?

Were you the counsel for the Pizza Pizza franchisor?

Mr Zaid: I was one of the counsels.

Mr Martin: Were you the counsel in the Bulk Barn case for the franchisor?

Mr Zaid: I'm involved in that.

Mr Martin: You're not the person who sent out the letters of threat to anybody who would intervene in any way in terms of that action?

Mr Zaid: I'm not going to answer that question.

Mr Martin: OK, thanks.

The Acting Chair: Further questions? Seeing none, thank you very much for your presentation.

That concludes the public element of today's hearings. As was mentioned in the subcommittee report this morning, two parties sought to speak in camera before the committee. They have been granted the right to do so. I would ask everyone who is in the room right now to please exit, save and except for the two individuals who sought prior approval to speak in camera.

The committee continued in closed session at 1543.

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#P800_300718

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


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