Gerald Nori Public Hearing Testimony

…the Grange report does a reverse of onus. It says there has to be fair dealing, and if there isn't fair dealing, then it's up to the franchisor to show, and I quote, ""that the contract between the parties was fair."" In other words, the onus shifts, not from the franchisee to prove they were treated unfairly but to the franchisor to prove that franchisor dealt with this individual fairly.

LegislativeAssemblyofOntarioCostofArms.jpg

Legislative Assembly of Ontario
March 7, 2000

Public Hearing Testimony
Sault Ste. Marie, Ontario, Canada
Mr. Gerald Nori, Wishart and Partners

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

WISHART AND PARTNERS

The Acting Chair (Mr Ted Chudleigh): Our next participant is Wishart and Partners, Mr Gerald Nori. Gerald, welcome to the committee. We have 20 minutes to spend together.

Mr Gerald Nori: Thank you very much, Mr Chairman. The reason for my appearance before the committee is I guess partly nostalgic in the sense that you may have recognized the name of the firm, which is Wishart and Partners. Arthur Wishart was a member of the Legislature from this city for many years and also became Attorney General and was Minister of Commercial and Financial Affairs at the time the Grange report was introduced. So we felt it was appropriate that we should appear, in his memory at least, to make some comments in connection with something that Arthur held very dear in terms of wanting to bring in some legislation to correct what he saw were very definite requirements for legislation in this field.

I am appearing basically in support of both Bills 33 and 35 and, as I unfold my comments, I think you'll see where I do deviate from 33 in support of 35.

It's a little bit difficult to understand how this very important segment of commercial endeavour that has the potential of touching and affecting so many people has escaped any type of control over the years.

We recently acted on behalf of a franchisee in a matter that happened in the city of Sault Ste Marie that brought home to us the necessity for some type of action in this field. The nature of the relationship was such that the franchisee was kept primarily in a state of indebtedness throughout the relationship by virtue of the fact that the franchisor was able to control the wholesale price at which goods were sold.

As a result of that, of course, the franchisee never made any money and was constantly indebted to the franchisor and at one point, for reasons that still aren't very clear to us, the franchisor decided it was time to maybe end the relationship, at which time the franchisee was called to a meeting at which the franchisee thought they were going to be talking about a marketing plan for the future. The meeting was held at a local hotel. During the course of the meeting, which was off premises, the franchisor moved a crew of people into the franchise premises and locked the doors and took over the cash receipts etc, so that the franchisee within about an hour found that they were dispossessed. That resulted in a fairly significant lawsuit, which quite frankly the franchisee could ill afford under the circumstance, because there is a huge inequality that takes place in these circumstances.

Normally, what you have is a relatively unsophisticated, underfinanced and probably marginally educated franchisee, in terms of management, fighting against a very large corporation, well financed, well managed, and it's not exactly an equal playing field—unless that franchisee can find the means to fight, and that's difficult because going to court these days, even though I'm a lawyer I don't mind telling you, is an extremely expensive and frustrating experience and should be avoided if at all possible.

In any event, that certainly brought home to us the fact that there was nothing out there to protect this particular person under these circumstances and quite frankly made us a bit of an ally, although I personally espouse being a free enterpriser. I don't think I'm totally laissez-faire, and I do believe that there are circumstances in our economy when an interjection of some kind is warranted.

You've probably heard everything that there is to say on this subject and I don't intend to bore you, and I will leave with you a printed version of my remarks, but there are a few things that I'd like to really emphasize and feel that if you are going to bring in some legislation, which I hope you will, you should at least take these things into consideration.

The upfront disclosure is extremely important for the prospective franchisee to know what they're getting into. It's interesting to look at that comparative that I think the employees of the committee prepared, which I thought was very helpful. It was interesting to note that the most extensive disclosure statement is enforced in the United States, that great bastion of free enterprise to the south, and it's a very comprehensive document that I felt sets out at least the minimum of what should be disclosed. Disclosure up front is extremely important, because there is a lot of information that comes to the franchisee, but I don't think it's the kind of information that they're necessarily responsible for. A disclosure statement made within the framework of legislation would be a totally different animal.

There has to be investor protection. It's quite evident from the material that I saw in connection with the committee's work. I think I saw a figure of something like $45 billion to $50 billion in annual sales in this industry and something like 500 franchisors and 40,000 franchisees. If we stop and think about this a little bit, we've set up the Ontario Securities Commission for the purpose of protecting investors in this province. There is protection in the marketplace from the point of view of forcing prospective vendors of shares to make a complete disclosure and to have their prospectuses vetted by the Ontario Securities Commission.

I don't see any difference between a franchisor out hustling and selling franchises and somebody out in the marketplace selling shares in some marginal mining or manufacturing adventure. I don't see the difference. We've already got the infrastructure there. I don't know why we can't force a franchisor, who intends to sell to the public, to file a prospectus and have it approved by the securities commission under similar circumstances to the guy who wants to go and develop some moose pasture.

It's interesting that in the Grange report there was a recommendation that they set up an entirely new infrastructure. I forget what they were going to call it, but I think it was the bureau of franchise or something. I don't believe that's necessary, under the circumstances. You've already got the infrastructure. You've got the securities commission and you've got staff. It might mean a bit of additional workload, but basically the infrastructure is there, the expertise is there, the know-how is there, and it would just add another layer for them to become involved in. I think that's an extremely important protection for investors in our province, and I believe that all of you believe, probably strongly, that the reputation of Ontario as a place to do business and a place where investors will be protected, is an important feature. It's interesting to note that Bill 35, which I believe is being sponsored by Tony Martin, our local member, contains a provision for upfront vetting of the sale of franchises.

Another item I would emphasize is fairness in dealing. This is pretty big stuff. As I said to you a little earlier, you really have a very uneven playing field here, and I think that fairness in dealings is extremely important. In our experience, we've found that what happens is that the franchisee comes into our office and he or she has stars in their eyes. They've been out there, they've been sold on the concept or have seen it operate elsewhere. Trying to get them to concentrate on the documentation—because when the documentation arrives, it's usually a stack about eight inches thick with lots of legalese and totally loaded in favour of the franchisor. To get that franchisee to sit down and talk about those documents is very difficult, almost impossible. They just want to get on with business as soon as possible, and they don't want to pay the legal fees inherent in getting to the bottom of their relationship.

I think it's interesting that in that circumstance the Grange report does a reverse of onus. It says there has to be fair dealing, and if there isn't fair dealing, then it's up to the franchisor to show, and I quote, "that the contract between the parties was fair." In other words, the onus shifts, not from the franchisee to prove they were treated unfairly but to the franchisor to prove that franchisor dealt with this individual fairly. I think that's an extremely important concept. It goes on to say that the franchisor's conduct was "equitable in the circumstance." So you have this onus on the franchisor, at that point, to prove they dealt with this person fairly.

I think that would lead to this: If there was a provision in the statute that called for an ILA—anybody who is a lawyer will understand what an ILA is; it's a certificate of independent legal advice. That would mean the franchisor would get a certain protection as well, because the franchisee would have to go a lawyer and would have to have that lawyer read those documents and would have to sit down and understand what those documents meant, because that lawyer would then have to sign a certificate that that person in fact read the documents and understood them. So there is some protection as well for the franchisor. I think the reversal of onus plus an ILA might go a long way to getting to the point where the franchisee actually understands what they're doing. I'm convinced that most of them really don't, because of the fact that they've got stars in their eyes.

I think a method of dispute resolution is extremely important. I'm going to say this, and I'm probably going to be taken to task for it, but it's very difficult and expensive to find justice in the courts these days. You've probably all experienced the fact that unless you're in small claims court, going to court is a very tiring, time-consuming and expensive proposition, which frankly should be taken into consideration in these circumstances. I think you would be well advised—Tony has put what I think he calls mediation in his bill, and I believe that that's an extremely important factor. There should be mediation. There should be the ability to call in a mediator to try to resolve a difficulty that has arisen. If mediation doesn't work, then it should be arbitration rather than court proceedings, because court proceedings in the uneven playing field you are involved in here are going to murder the franchisee. He or she is never going to make it, because they will outlast them and out-sophisticate them. If we can get dispute resolutions out of the courts, I think it will help the franchisees immensely.

The other area that I think is extremely important is to provide an exit strategy. What I mean by that is that under certain circumstances there should be the ability for a franchisee to get out of the relationship. Whether it's as a result of the arbitrary termination of the franchise by the franchisor - the example I just gave you - whether it's arbitrary refusal of assignment or renewal of the franchisee by the franchisor, or the death or incompetency of the franchisee, under those circumstances it wouldn't be difficult to provide that the exit and the terms of the exit have to be determined by arbitration rather than in the courts. I think that would give the franchisee some modicum of protection from being overwhelmed in this relationship.

The other thing you should really give some thought to is that there's a problem with control of pricing. I know of franchises where it's not only a question of controlling the product that is going out the door - the coffee or the doughnuts or the hamburgers - it's everything that goes into that franchise. The meat counters, the ovens, the refrigerators - everything has to be bought. Even though the franchisee might be able to source those goods within his or her own community at prices that are superior to what the franchisor is selling them for, they are prevented from doing that. What that does is put the franchisor in a superior position, relative to the pricing, at the cost of the franchisee.

Those are really my only comments. I hope I've been of some help. I think you have heard all these things before, but I thought it might be worthwhile, at least for the memory of Arthur, that I come forward and let them be known. I'm frankly very appreciative of the effort Tony has put into this. He's been an important factor, and I'd definitely like to support his position. I see Bill 35 as going a bit further than Bill 33, and I think that's important.

The Acting Chair: Thank you very much. We appreciate the historical context of your visit as well. Certainly the Grange report was one of the first times this came forward. That was an excellent report on the subject.

Mr Nori: Actually, I was surprised.

The Acting Chair: We have about one minute left for each caucus, if that works.

Questions

Mr O'Toole: Thank you, Mr Nori. I really do commend the history and significance, and we did have a familiarization with the Grange report and with the background of what I would classify as sort of party indecision. Nobody has had the courage to really find the balance. I don't mean that critically.

Mr Nori: No, no. It's true. I think that is what has happened.

Mr O'Toole: We're in the same boat, trying to find a balance that protects the consumer, be it the consumer of hamburger or the franchisee. They're actually both consumers.

One suggestion I recall is the abuse of power position. You call it the reverse onus position. Does that not just exacerbate the civil litigant issue? To establish the reverse onus issue, then you have a corporate, perhaps American, senior in this thing—

Mr Nori: I would see it as just the opposite. I would see it as the big guy now having to come into court with all the resources and proving that the treatment was fair under the circumstances. That's a tremendous onus for the little guy to prove. The other thing is that the documentation is never there. The documentation is always in head office, and you never know whether you're getting the whole story. So I think that's an extremely important concept.

When I spotted that in the Grange report, I thought, "Boy, there's something that really would have some meaning in this legislation to equalize the playing field," because it is tremendously unequal.

Mr O'Toole: I just wonder, if I may, Chair—

The Acting Chair: No, you may not. Mr Brown.

Mr O'Toole: Very abusive.

Mr Nori: You should file a complaint.

Mr Brown: Thank you for appearing. The other side of this, of course, is the entrepreneurship of actually becoming the franchisor. I guess we sit here and think about McDonald's and some of the huge franchisors, but certainly business people in northern Ontario have gone on to franchise their products. Usually that's not where they started at in their heads. They started a business and it worked and they found that the franchisor might be the way to go through the franchise system.

With what you've just told me, do you think that would inhibit the Vic Fremlins of the world over here to franchise his Lock City Dairy throughout Ontario?

Mr Nori: Vic Fremlin? That wouldn't even slow him down to a walk, Mike. If you look at the number of mining ventures that have started in northern Ontario, I don't really believe that would be a big inhibitor. I think we have to keep our eye on the ball and make sure there's a balance between protecting the public and leaving the marketplace open for the entrepreneur.

Mr Martin: Thank you very much, Gerry. That was an excellent presentation and, having worked on the bill, I couldn't have done the defence of it any better.

But I just wanted some comment from you on an issue that you didn't mention, and I think it's important that we deal with it at this time. It's the whole issue of gag orders. You know and I know that the person you referred to in your opening comments was gagged. I asked the -

Mr Nori: I would appreciate it if you didn't take that implication from that, Tony.

Mr Martin: OK, sorry. Anyway, we know that gag orders exist and they are out there. Maybe I shouldn't go there, but -

Mr Nori: I'd prefer that you didn't.

Mr Martin: OK. You can refuse to answer, but I'm going to lay it on the table anyway.

The Acting Chair: The questioner is immune from it, but I'm afraid your position may not be just quite as clear as that.

Mr Nori: May not be as immune—they're very sensitive to that, Mr Chairman.

The Acting Chair: But I think you've made your point.

Mr Martin: You can refuse to answer, but the question actually is your view on gag orders.

Mr Nori: I guess I wouldn't have a view because gag orders are used not only in these circumstances but in many other circumstances as well. They're a very valid legal tool and they do lead to settlement, Tony, in circumstances where there might not be otherwise the opportunity to settle. So I would not attack gag orders as such as a settlement tool in a court case.

The circumstances in the story, I'm told - it sometimes does lead to a favourable settlement for the litigant or the claimant, and I don't think I would attack the gag orders as such. I don't think it would be a good idea, quite frankly, to include it in the legislation.

The Acting Chair: Thank you very much for appearing. We certainly appreciate your presence.

Mr Nori: You're quite welcome. It was a pleasure.

The Acting Chair: I liked your suggestion on the SAC. That was great.

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=2000-03-07&ParlCommID=1&BillID=&Business=Bill+33%2C+Franchise+Disclosure+Act%2C+1999&DocumentID=19726#P321_112600

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


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