Neil Davies Public Hearing Testimony

…an engaging, smart, ruthless agent who befriends and entices business people, mostly immigrants, into signing franchise contracts based on fraudulent misrepresentations and an accountant who arranges business loans and remains silent to all this. I've garnered evidence from part of the bank's file that I recently obtained that the banks don't care because the loans are 75% guaranteed by the government.

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Legislative Assembly of Ontario
March 6, 2000

Public Hearing Testimony
Toronto, Ontario, Canada
Mr. Neil Davies, franchisee

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

NEIL DAVIES

The Acting Chair (Mr George Smitherman): We call on our next presenter, Mr Neil Davies. Welcome to the committee, sir. You have 20 minutes for your presentation.

Mr Neil Davies: Good afternoon. My name is Neil Davies. I am a small business entrepreneur. I've done many things in my life. In 1996, I was looking for another business after many years being in the restaurant business, and I found it was sort of a new society looking for a business; it was one composed of huge government, large unions, and small businesses were being largely taken over by franchises. I felt if you can't beat them, join them. After about six months of searching, I thought I had found a fabulous franchise.

I have a background in the restaurant business. I found a beautiful restaurant, not far from here, in downtown Toronto, five-day week, 15-year lease, and it was represented to me that it had high sales, as it certainly had very high expenses. I was shown cash register tapes, which showed me the sales. Fine. I purchased the restaurant, and immediately it appeared to me that I had been defrauded.

At the end of the summer, when the season changed—I purchased this restaurant in the winter—I knew for certain I had been defrauded. There was no uptake in sales. Having been relieved of most of my money, I could not afford to litigate this case, costing about $100,000 to $200,000. So I went to law school. I learned some law, litigation. I went on an on-line law library and I'm prosecuting the three parties involved myself.

This case is about one year old. Until recently, it went better than expected. I often had the sympathy of the courts. After fierce resistance by the other parties, I got hold of those cash register tapes that they had shown me. I discovered that the figures on these tapes differed by almost $400,000 from the figures on the tapes that I was shown and the figures that their agent had given me and figures that the franchisor had given to me.

Now, when I'm in court the lawyers for the opposing side no longer deny the fraud. They are trying to defend their clients and knock me out on technicalities. I can quote you what one master said when they asked for costs. He said: "I don't want to hear from you about costs. You choose your clients."

Recently, these defendants used rule 56 of the Ontario Rules of Civil Procedure against me, asking for $350,000 that I'd put up to secure their legal costs in the event that they should lose. During examination, I refused to co-operate with them fully and give them all the intimate details of my present and past financial life, although I did give them most of the information they wanted. But because I feared, of course, having another fraud perpetrated on me, and because I did not co-operate fully, I lost the recent motion. I have to put up more money than I can afford to guarantee the other side's costs and therefore I have had to retain a law firm to handle the appeal.

So we have in Ontario a group of men who are carrying on a racket. They have an engaging, smart, ruthless agent who befriends and entices business people, mostly immigrants, into signing franchise contracts based on fraudulent misrepresentations and an accountant who arranges business loans and remains silent to all this. I've garnered evidence from part of the bank's file that I recently obtained that the banks don't care because the loans are 75% guaranteed by the government.

After obtaining possession of my franchise, my restaurant windows were constantly being smashed. When I tried to sell, the franchisor would not approve the sale. Here is a brief excerpt from a conversation that I taped on September 16, 1998, with their Homelife agent, who is their close associate. I am now out of the organization and I'm asking why they gave me so much trouble in approving my sale of this franchise.

The agent says: "Bill called me and told me that he should let me go down and take the business for nothing … so they can have it for free. Why should they agree" to its sale?

In ending, these people are trying to use the courts to shield their criminal activities. I hope this will change with my appeal. In the present, it is your duty to pass some strong legislation imposing a high standard of care on the part of the franchisors in disclosing all relevant information and with tough enough sanctions to deter those who may think of not complying.

The Acting Chair: Thank you very much. Questions?

Questions

Mr O'Toole: Thank you, Mr Davies. You had an interesting experience. You don't have a written presentation at all, do you?

Mr Davies: I can give you a copy of the outlines that I've used.

Mr O'Toole: Very good. OK. The other thing is, I was interested; are you a lawyer now?

Mr Davies: No, I'm not a lawyer.

Mr O'Toole: You just sort of went to law school.

Mr Davies: Without the Internet I couldn't have done this. I have an on-line law library and I get my law from past judges' court decisions. I am accredited as a law clerk in Ontario in litigation.

Mr O'Toole: I'm not questioning your legitimacy. I'm just trying to understand how to explain the lack of success in court. You had a previous business prior to getting into this?

Mr Davies: Yes.

Mr O'Toole: It wasn't a franchise, obviously, of any sort.

Mr Davies: No.

Mr O'Toole: How long were you in business?

Mr Davies: I've been in many businesses, but I have had a small restaurant since 1983.

Mr O'Toole: I qualify myself here as not really having some of the answers to the questions I'm asking, but you say the government guarantees the loans?

Mr Davies: Yes.

Mr O'Toole: Which bank is this? I want to find where that bank is. I'm serious. What bank is it that the government underwrites the loan? I'm not sure of that.

Mr Davies: This is why we have such an explosion of franchises like Second Cup, for example, and Coffee Time Donuts, because the government is underwriting them. When one gets a small business loan, it's supposed to be based on the equipment in these restaurants. So far so good. But in the event of default, the government guarantees 75% of the loan. So the banks don't care.

The proof of this is in information I got from the Royal Bank file. They wouldn't release the whole file, because they're nervous. But I was astounded to discover that the financial statement, which is based on the whole loan, was entirely suspicious. When I investigated the statement, I could not authenticate it. In other words, it's my inference that the statement is forged.

The statement is immediately suspicious to any experienced businessman, never mind a loans officer. This statement wasn't signed, it can't be authenticated, you cannot trace its authors and it has a disclaimer on it saying that the figures come from the vendor, the franchisor. No bank would normally give out a loan under such circumstances. They always want an accountant, preferably a CA, to verify the figures. The only reason they're doing it is that they can hardly lose. They have a lien on the equipment of the restaurant and the government is guaranteeing 75%. It's a no-lose situation.

Mr O'Toole: The bank wasn't related to - excuse the humour here - Minister Stewart, was it? It was the business development bank, I guess, which would be federal, right?

Mr Davies: This was not through the business development bank. I got my loan through the Royal Bank. One can get them through any bank. The federal government is the entity that guarantees the loan.

Mr O'Toole: Thank you very much.

The Acting Chair: There are further questions.

Mr Martin: Yes. We have more questions for you. Thanks for coming today - a very interesting story.

You are suggesting very strongly that we have disclosure legislation. We were told this morning by a deputant, Mr Levitt, that a good salesman can talk his way around any disclosure statement. I'm calling for much more in this legislation. I have tabled my own bill, Bill 35, which talks about a vehicle, controlled by government, that the disclosure statement would be registered with so that we could make sure the information was complete and accurate. We're talking about a dispute resolution mechanism so you wouldn't have to go to court. You could go to an arbitrator or a mediator and have some early resolution that reflected the truth in the situation. We're calling for a definition of "fair practices" that would go so far as to allow franchisees or restaurants to source product wherever they liked.

Have you looked at the bills, and is there is anything else besides disclosure and making sure disclosure happens that you want to recommend to the group here today?

Mr Davies: I have not looked at the bill, but your suggestions are excellent. I think it's excellent as far as it goes. Beyond that, the only remedy would be with other institutions, like the police when it goes into fraud. However, the police are underfunded and are shy to get involved in smaller frauds. They like it over $1 million. Beyond what you are proposing, the only other suggestion I can make is that funding of the police be upgraded or some reform be made there.

Mr Martin: Certainly your story is not unique. We have story after story. Back in the early 1990s there was a flurry of activity around the question of Pizza Pizza and how they dealt with some of the folks they dealt with. At that time they were calling for legislation that not only called for disclosure—because most times it's after you are into the deal that you find out that what you were told in the courtship period is not the truth and a fraud has been perpetrated.

It was also suggested here this morning that we don't have enough casualties yet, that we don't have enough bodies piled out there yet or enough families destroyed in Ontario to warrant anything other than a call for disclosure. What is your experience, rubbing shoulders with colleagues in the business and in the business world, around the question of franchising and the lack of regulation and what is happening out there?

Mr Davies: It certainly has not been a happy experience. You mentioned that we don't have enough bodies yet. I might add that when the time comes, and one day it might, that coffee becomes overly saturated or they publish news that coffee causes cancer, brain tumours or whatever, then you will have enough bodies, because there is a huge number of franchises and they'll collapse. As I mentioned earlier, the number of them being created is infinite because the federal government is financing them.

At the moment, franchises are not a happy situation to be in. From what I have seen, at least in the franchise I was involved in, they were selling to a lot of recent immigrants who not only didn't understand what they were getting into but were unable to assert their rights. They have just gone away and said nothing. So certainly some publicity on this point would be warranted.

Mr Martin: Just one more question, if I might. There is a suggestion as well, of course, coming from franchisors in particular and some of the people in the Canadian Franchise Association and the group that came before us two groups before you, the Canadian Council of Grocery Distributors, that in some instances it's the franchisee who doesn't do the due diligence, who doesn't work hard enough, who perhaps brings some of their own baggage to the situation. We don't hear much about that because, as I suggested to them, there are always gag orders put on as soon as a deal is cut, and ultimately one is, because franchisees can't go the distance. At some point they throw up their arms and say, "I quit," and they usually take whatever lower debt is offered at that time.

Mr Davies: There are people, again, who don't know their rights. If there be fraud, then the gag order can be voided.

Mr Martin: Is that your experience?

Mr Davies: That's what the law says. That's what the court decisions say.

Mr Martin: The question I had for you is, did you do the due diligence? Did you work hard?
Were you a good businessman? Were you a good entrepreneur?

Mr Davies: Yes, I was, and of course what the franchisor does is blame it on the franchisee. Indeed, in my court case initially - these people are so corrupt that they weren't even straight with their lawyers - their lawyers attacked me for being incompetent in my franchise. However, when I got hold of their tapes, they showed me to be a better operator than they were. I had higher sales than they did. So of course, with their tail between their legs, they dropped those attacks. But that is what franchisors do. They want to blame it on the franchisee.

Mr Chudleigh: Thanks for coming, Mr Davies. Very briefly, in your presentation I think you said that when you purchased your franchise, you did so from an agent or a broker?

Mr Davies: I did. The vendor and the broker were in very close collusion.

Mr Chudleigh: But the broker was the person you actually signed the deal with, or he arranged -

Mr Davies: Initially, the broker. Of course, the contract was with the franchisor.

Mr Chudleigh: OK. Thank you very much.

The Acting Chair: Any further questions?

Thank you very much for your presentation, Mr Davies.

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#P508_207203

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


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Risks: Predatory franchise lending, Sales agent shenanigans, Fraudulent misrepresentation, Fraudster broker, Government guraranteed loans, Lender's due diligence not done properly, Lending duty, Ontario Public Hearings, Canada, 2000, Guaranteed government loans, Banks, Immigrants as prey, Symbiotic relationships (industry, banks, lawyers), Fraud, Justice only for the rich, Tony Martin, Gag order (confidentiality agreement), Blame the franchisee, Refusing franchisee resale, Access to justice, Self-represented litigants, Canadian Franchise Association, CFA, Misrepresentations, Police dump cases because of budget constraints, Police can’t/won't investigate losses less than $250,000 Collaborators, Development agents, Canada, 20000306 Neil Davies

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