Sault Ste. Marie Chamber of Commerce Public Hearing Testimony

One, they're told they can't use a local contractor in a particular situation, and two, ""You're going to have to use the contractor we send up,"" from, say, Toronto, ""and you pay for all of it."" In one example I was told a local quote was in the neighbourhood of $5,000 to $10,000 and the bill from the contractor in Toronto was $30,000.

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Legislative Assembly of Ontario
March 7, 2000

Public Hearing Testimony
Sault Ste. Marie, Ontario, Canada
Mr. Ben Pascuzzi, Sault Ste. Marie Chamber of Commerce

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

SAULT STE. MARIE CHAMBER OF COMMERCE

The Acting Chair (Mr Ted Chudleigh): We now have the Sault Ste Marie Chamber of Commerce, Mr Pascuzzi. Welcome to the committee. We have 20 minutes together.

Mr Ben Pascuzzi: Thank you. I would also like to thank the committee in advance for allowing us to appear before you today.

My name is Ben Pascuzzi. For the record, I am also a lawyer at Wishart and Partners law firm. However, I am not speaking today on behalf of any particular client or my involvement as a lawyer. I think my colleague Gerry Nori, with his vast years of experience compared to my youth, canvassed that far more completely than I ever could hope to do. However, I do sit on the board of directors of the Sault Ste Marie Chamber of Commerce and act as their legal adviser, and it's in that capacity that I'm speaking to you today.

The Sault Ste Marie Chamber of Commerce considers itself the recognized voice of business here in Sault Ste Marie and considers any proposed legislation or regulations that govern franchises to be of keen importance and interest to the members of our chamber.

The relationship, however, is more complex than simply that between the franchisor and the franchisee, and that is especially so in a small city like Sault Ste Marie, which is relatively isolated in the north. I'm sure you'll find this if you travel to other places in the north. There is a real interdependence and interrelationship between the businesses. In other words, when the local franchisee uses local products and local companies for services and goods, it's those same people and their employees who turn around and go to the franchisee to buy the hamburgers and doughnuts and whatever else might be involved. Certainly we see here in the Soo an economic impact on the community by the franchisees through direct employment and direct involvement in the community, as well as through their spending of dollars in the city.

Some of the things I'm going to be outlining to you are based on my discussions and consultations with the various members of our local chamber of commerce. We have over 850 members currently in our chamber. Some of the things I'm going to say you probably have already heard from past speakers. In fact, I would imagine some of your past speakers are probably members of our chamber. Some of the issues my colleague has already touched on as well. I don't think it hurts for points of emphasis to touch on some of them again.

Basically, in talking to the various franchisees, it's interesting that no matter what type of industry I was talking to and what type of product or service they were involved with, you start to see common themes or problems come up with the various franchisees, both those that are still currently in business and those that are unfortunately no longer in business.

The first issue of concern that was raised with me was the issue of full disclosure and material misrepresentation. What I mean by that, as my colleague and the last speaker touched on earlier, is that it's very important to have full disclosure up front. As lawyers, one of our jobs is to sit down with a client and review all of the documentation and financial statements, to be in contact with the accountant and any other person who can provide assistance so that the franchisee can understand exactly what they're buying into. This is true any time someone is looking to purchase a small business.

However, the feeling I got from speaking to various people is that it goes beyond the written documentation. The impact I got from various people I spoke to is that often what is said verbally or what is implied is different from what turns out to be in the written agreement. Granted, as Gerry Nori already outlined to you, it is the franchisee's responsibility to sit there and go through the documents. However, let's face it: We have to be practical. As was outlined to you already, people are getting into a new business; they're excited, everything smells like roses at the beginning. There's a tremendous amount of detail to do with a countless array of issues. So what the franchisor says to the franchisee in a verbal sense and leads him to believe is very important. The message I got from our local businesses that are franchisees is that often what they thought would happen in the event of a particular situation arising isn't necessarily the case.

Another issue that came up that I think it probably serves to just touch on again is the complexity of the franchise agreement. As a lawyer, we like legalese because it gives us a chance to explain it to our clients and it's partly what keeps us working. But putting aside my lawyer's hat and looking at it from an individual's perspective, certainly there are times when I don't understand what the agreement is saying. With my skill and training, quite frankly, if I can't understand what the agreement says, there's probably a serious concern whether the people signing the contract can understand it.

The next issue that came up again was the issue of fair dealings and standards of conduct. I think the previous speaker outlined to you a situation that arose with a particular franchisee. I made some notes here of different situations that have arisen. One example-and of course again I can't use any names or places-there was a franchisee who was basically taking over the franchise from another franchisee and ran into serious problems with regard to the lease. It turned out that the franchisor had always indicated to them, "We'll step in; we will lead you through the way." That didn't happen. The lease situation was rectified, but at the end of the day the franchisee was left with quite a large legal bill and really felt let down by the franchisor, not necessarily in terms of saying, "We're going to fly up our lawyers from Toronto," or Vancouver or wherever, but just in the fact of moral support and financial support at the front end, the idea that this is a team effort between the franchisee and the franchisor. However, it seems that sometimes when things start to go sour, the team only has one player on it, and that's the franchisee.

Another major issue, and one that I know you'll hear about from future speakers or have heard already from past speakers, is the ability to source local product. That's not only goods; that also includes services. Again, looking at the two bills, I believe that Bill 35, Tony Martin's bill, strikes a reasonable compromise. That is, unless there's an issue of trademark or patent involved, if the particular product does the job and the franchisee wishes to carry that product or use that local product, whether it's for direct resale or if there's a question of supplies - ie, cleaning supplies, food supplies - they should be allowed to do that. Any restriction, even in a written contract that has been agreed to between the franchisee and the franchisor, really is a restraint on trade and a restraint that the courts have in the past struck down.

The issue of services as well is important. Everybody can understand that from the franchisor's perspective, there are certain specifications that have to be met when you're designing, for instance, a store. However, let's take a very simple example. If a local franchisee requires a plumber to come in and do some plumbing in the store, as long as that work meets the specifications of the franchisor, and of course the general standards of any regulatory body, ie, a municipality, there doesn't seem any reason to me, from the chamber's perspective, why local services can't be used, for two reasons: the reason I already touched on at the beginning, that it's that local plumber and his or her employees who are the people who, if they're working, support the local franchisees and the businesses, and number two, from the franchisee's perspective, that often what I've been told by franchisees is that the cost of the franchisor bringing in someone from out of town is inhibitive. In other words, the franchisee really gets a double whammy. One, they're told they can't use a local contractor in a particular situation, and two, "You're going to have to use the contractor we send up," from, say, Toronto, "and you pay for all of it." In one example I was told a local quote was in the neighbourhood of $5,000 to $10,000 and the bill from the contractor in Toronto was $30,000. I know the cost of living in Toronto is significantly higher than in Sault Ste Marie, but that's awfully hard to justify to the local franchisee.

The next issue that came up and that again was touched on by the previous speaker is the whole issue of dispute resolution. Looking at Bill 35, Tony Martin's bill, there is a provision in there for mandatory mediation. I would reiterate the comments made earlier that the committee should at least look at the issue of mandatory arbitration as opposed to the courts as an ultimate remedy, for the obvious reasons already stated-they are less costly, they are less time-consuming-and, quite frankly, I think if you spoke to both corporations and unions in the labour relations setting, even corporations would admit that in many cases they'd probably get better decisions than they might get in the courts, because the arbitrator or the arbitration panel over a number of years develops a certain level of expertise in that area. There's certainly at least some argument to be made that you would get better decisions in the long run.

Looking at the labour relations model, I think it's a good comparison to make. Generally in contract law, two parties enter into a contract. If there's a dispute, you turn to the civil courts. However, we have recognized, as in the case of a unionized setting, that there are unique circumstances where the general or fallback way of resolving disputes doesn't fit the circumstances and may require a different way of settling a dispute.

I really think it ties into what we see happening in society generally. Certainly, when we as corporate lawyers draft a shareholders' agreement, we now put in mandatory arbitration clauses almost all the time, that the shareholders to the agreement agree to be bound by the rules of arbitration as set out by the Arbitrations Act etc. The reason we do that is we know, despite all the good intentions, that sometimes shareholders in small companies have fights. If there is a dispute, we're really doing them a favour up front by calling for mandatory arbitration as opposed to looking to the courts if that clause were not there.

Some solutions were presented to me from various franchisees I spoke to, to address some of the issues and concerns I have highlighted. The first solution is the reason we are all here today. Clearly, some sort of legislation is required. Again, I too consider myself a free-market person who likes to leave business people to their own dealings. We've seen many times that when the government gets involved, it can make a bad situation worse. However, the chamber, and people generally, recognize that there are unique situations in contract law where the positions of bargaining power are so unequal that some sort of legislative framework is required to set out the rules of the game.

I think an obvious comparison in the provincial setting would be landlord-tenant legislation. We don't say: "You're an individual. If you want to rent a premises from a landlord, you make a contract and the terms of that contract govern and that's it." No, we have legislation in place because we recognize, especially in the case of residential tenancies, that the bargaining position and the level of sophistication between the tenant and the landlord are so great and the gap is so wide that some sort of legislative framework is needed.

Again, governments have tried to strike a balance between the two sides. However, there probably aren't too many people who would argue we could do away with that type of legislation altogether. I would say that in the case of franchises a similar situation applies, where the differences between the positions of bargaining power and the level of sophistication and access to resources are so great that some sort of legislative framework is required.

The things, which I call front-end solutions, are some of the things I have already touched on, that is, full disclosure up front, as I outlined before. Also, something came up about a cooling-off period. Quite frankly, based on my experience, which is limited compared to Gerry Nori's, I don't know how often a cooling-off period is built into an agreement. By that I mean something built into the legislation where after the contract is signed and everything is done, there is some sort of period, whether it be 60 days or 90 days, when a party can sit back and decide, "I've given this a second thought, I've looked into it further and I've changed my mind."

Normally, when you enter into a contract and sign it, you're bound by it. If you want out, you're probably going to get sued if you break that contract, unless there is some reason or cause. So a cooling-off period would probably seem appropriate, considering the circumstances in which we know these agreements are often entered into.

Third, what is important to the franchisees I spoke to is a right to associate. The fact of the matter is that some franchisees I spoke to aren't here today because they're afraid. They're afraid of repercussions from the franchisor if they were to come and speak publicly. Along those lines, they have similar fears about entering into any type of association with other franchisees, whether it be a general association or an association of franchisees within one company.

On the exit strategy, we have already touched on some of the things that should be looked at; that is, mandatory mediation and the possibility of mandatory arbitration.

There is one other point I want to make here-and like a typical lawyer I have papers all over the place, but I was looking for one sheet.

Earlier I mentioned the restraint on trade. I know there are probably members of the committee who are hesitant in this age when we are trying to roll back government to some degree and eliminate bureaucracy and red tape which, when unnecessary and unwarranted, I don't think serves anybody's interests: franchisor, franchisee or consumer.

However, franchise agreements, even when entered into with minimal standards of voluntariness-that is, someone has to be mentally competent and be of the age of majority etc. To say, "Well, they signed the contract, that's sufficient," that if it's a really bad deal and a one-sided deal, "Too bad, you signed it"-the courts, in general contract law, not specifically dealing with franchises, have said, "No, that isn't necessarily the case." In fact, there are cases striking down agreements in restraint of trade that generally give the reason for intervention the public interest and protecting free trade. The criterion of validity is that an agreement should be reasonable as between the parties, and there is little doubt that the courts mean by this that they will exercise control over unconscionable agreements.

What I'm referring to here in restraint to trade is the idea of sourcing local goods and services, of being able to buy local products. The franchise agreements, for the most part, restrict that. However, the fact that they agreed to it doesn't necessarily mean this shouldn't be covered off in legislation, that there shouldn't be some sort of legislative protection. Even if you take a free-market view of it and say, "We're looking at this from the point of view of letting the parties negotiate as they want," you could argue that if you are truly in favour of a free market, then anything that's a restraint on trade goes against that. I think you will find that in the United States, in the legislation at the state level and in the proposed federal legislation, they look at this issue as well.

In conclusion, I would sum up by saying that on behalf of the Sault Ste Marie Chamber of Commerce, I'd like to thank our local member, Tony Martin, for pushing and sticking with this issue over the years he has served as a member. It's an important issue to our members. A great deal of new small business in Sault Ste Marie, as elsewhere, is in the form of franchises. It is a situation that simply is not like any other contract relationship and requires some sort of legislative framework to be in place.

The chamber of commerce, in consulting its members, has been given a loud and clear message that they want something in place, that they have concerns, that they need solutions, and that too often, even when the franchisee has a legitimate complaint or concern, they simply can't get it sufficiently addressed due to expense and time and all the other things that have been talked about.

Those are my comments. Thank you again for allowing me to speak to you today.

The Acting Chair: Thank you very much. Your time has been used up, so we won't have time for questions. But we do appreciate your attendance.

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#P375_131099

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


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