Charles Gibson Public Hearing Testimony

Do we just want optics? Do we just want to look politically correct in putting this in there? I respectfully submit, no, we don't. I only ascribe the best intentions and I think it's important that the Legislature and the government not allow themselves to put into law something that basically does not change the problem for which the law is being enacted.

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Legislative Assembly of Ontario
March 8, 2000

Public Hearing Testimony
Ottawa, Ontario, Canada
Mr. Charles Gibson, lawyer

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

CHARLES GIBSON

The Vice-Chair: The next presenter is Mr Charles Gibson. Mr Gibson, I understand that you my be willing to give up five minutes of your time so that we may ask Mr Tremblay some questions.

Mr Charles Gibson: Yes. Perhaps we can just see how it goes with me, and if there are five minutes left, I'd certainly like to have Mr Tremblay have the occasion.

The Vice-Chair: That's okay with the committee, so you've got 20 minutes.

Mr Gibson: I'm Charles Gibson. I'm a lawyer. I represented Mr Tremblay in his matter to which he referred during his presentation. I think I'm going to change my presentation from my original thoughts. Sitting here listening to the committee, it seems to me that it dovetails very well with what I was going to present, but I think I'll change the fashion.

We were talking today about whether or not something is for life. We've heard whether or not when someone signs a franchise agreement it should be something which is a pension plan and provides them something for life. I think that most persons would agree that it should not be a pension plan. However, what it should be is a fair chance for the contracting parties to have a commercially reasonable business relationship.

I think it's important to note that in the traditional franchisee-franchisor relationship, there's a real imbalance of power. You have the little guy and the big guy. Traditionally in law that's treated by way of a fiduciary duty. I don't think that in these circumstances in a commercial contract you necessarily have to have the law impose a fiduciary duty, but to be able to ensure that during the life of the commercial contract, which is what it is, both parties have a chance, if they work hard and if the competition doesn't beat them, to have a successful business.

What happens traditionally, in my experience-and I've represented a lot more people than the Loeb people. I've represented dozens of franchisees. I've also-don't tell anyone—represented some franchisors. Traditionally, what happens is that during the course of the relationship things evolve. In every franchise agreement I've seen that's been signed in the last 10 years, as it evolves it gives a discretion to the franchisor. The franchisor then exercises that discretion, whether it be for lowering or increasing of fees, whether it be for costs. Most franchise agreements call for the franchisees to purchase exclusively from the franchisor. They have to purchase, they have to pay the fees, etc. When one has an unfettered discretion in a commercial context, where does that put the person against whom that discretion is being exercised?

I'll draw back. I obviously have some confidentiality provisions from the Loeb incident, as well as that they're my clients who signed the gag orders. This is not just limited to Loeb, because I've represented many franchise situations. Traditionally what happens is: "Well, we've gone for five years. We've paid for the renovations. Now we're starting to make some money. Now let's exercise the discretion, either to increase the fees or the costs, or let's get some new renovations. Let's have them invest more money." Instead of allowing the individual to have a period where they don't have a heavy debt load etc and they can earn some money, they exercise their discretion.

In Bill 33 there's section 3, which deals with the duty to deal fairly. In my review of this section, in conjunction with section 2, I must admit I came to a surprising conclusion. At least a tenable interpretation is that the fair dealing does not apply for contracts that existed prior to the introduction of this bill. I see at section 2, which deals with the application of the law, it states: "This act applies with respect to franchise agreements entered into on or after the coming into force of this section, with respect to" etc. I don't know if that is intentional, but in my opinion, if this franchise legislation is to have any validity, any power for those who are already in the franchisor-franchisee relationship-clearly section 3 says, "Every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement…." I respectfully suggest that should be changed to make it clear, so when you get lawyers like me reading it, it's clear that it does apply under those circumstances. That's as an aside. As a lawyer, I saw that and that flew to me.

But one must now look, in my opinion, at what happens during the commercial relationship when the discretion is being exercised. When it's being exercised, I respectfully submit to you that it should be done in a commercially reasonable fashion. I think that's the key. Nobody expects to invest money in a business and have a pension and have the government say: "OK, we're going to protect you. Nothing that happens is going to be your fault. You've got this free ride." However, when you have an imbalance of power I suggest that what has to happen is that there has to be something which keeps the more powerful party in line. This is a business. A good example is when you have a franchisor who has corporate stores and franchise stores. Traditionally, the franchisor is the wholesaler as well. So if they're the wholesaler and the retailer, they don't care where in the chain of sale the profit goes because it's going in the same pocket.

However, if you're a franchisor and you have franchisees, you have to look at whether or not that decision impacts on the front-line retail profitability. If all your decisions don't take that into account because two thirds of your stores are corporate stores, then what happens to the franchise stores? The franchise stores get squeezed. They make the money at the wholesale and they squeeze it at the retail.

If you have in Bill 33 a section which defines fair dealing-as it stands now the common law provides for fair dealing but it provides for unconscionable transactions. In other words, if it's an unconscionable transaction, then the fair dealing comes into play. However, unconscionable transactions for general purposes means fraud. It's very, very difficult to prove in a civil context. So if you have this fair dealing as it stands now in section 3, I respectfully submit that what you have is a toothless section. It does nothing more than what already exists.

Do we just want optics? Do we just want to look politically correct in putting this in there? I respectfully submit, no, we don't. I only ascribe the best intentions and I think it's important that the Legislature and the government not allow themselves to put into law something that basically does not change the problem for which the law is being enacted. It's got "fair" in there. Let's ensure that there's some fairness ensured by what's in there. If we don't, it'll look good in the name of the law but it will not have any practical effect.

I could go on and give what the proper definition of a commercially reasonable transaction is, but I don't think that's necessary here. You have your experts who can tell you that. But having that in the law, one might initially say: "That's going to cause a lot of litigation. There's Gibson the lawyer. He's going to make more money. That's great." But that's not really what it will do. It will make people have a sober second thought, the franchisor before they do something and the franchisee before they do something. It's ensconced in our law already. The Personal Property Security Act has it, and it's defined. There is a lot of jurisprudence about commercially reasonable transactions and what is and is not acceptable. I think if the law succeeds in doing one thing, then that's what it should do. I'm a litigator, so I only get involved when the problems happen, but in consequence I see what the problems are with disclosure, with right to associate, and with the duty to deal fairly. If this law were to succeed in doing one thing, it should be the fair dealing, because that permeates throughout, whether it's at the front end or the back end.

The right to disclosure helps those 1,000 people who go into a franchise every year, but it doesn't help the 40,000 who are there presently.

The right to associate: Mr Tremblay was speaking from experience when he said that if the right to associate is not backed up by a regulation which says the franchisor as well has to deal with the association when it's set up-I've dealt in situations where there is an association, but if the franchisor refuses to recognize it, what does it do? Again, a toothless section.

I'd just like to conclude by saying this is a law which is required. In 1997 I was in Queen's Park. I met with Mr Martin, I met with Mr Patten, I met with the then minister, Mr Tsubouchi, and we discussed these very things. It is now some two and a half years later and, to be very frank, it looks as if there has been some backing up in what is in the legislation. Your duty, as elected members, is to look at the best and most efficient way to ensure that all citizens are protected, franchisors and franchisees. Sometimes a franchise doesn't work; sometimes a franchise has to be terminated. Not everybody is a good businessman. It's impossible, in my opinion, for the Legislature to put in a set of criteria for rights.

If you do it on a "commercially reasonable" basis, then everybody has got to stop: "Is this reasonable? Am I putting the screws to this person, or am I being reasonable?" If they can't deal with a reasonable commercial transaction, then they shouldn't be in the business.

Thank you very much for listening to my remarks.

The Vice-Chair: Mr Martin, do you have a comment?

Mr Martin: I sure do.

Mr Gibson: Whoops.

Questions

Mr Martin: I can't not respond to your comment on, "Is anything forever?" We had a gentleman before us here today who was second-generation grocery. We had in the Loeb case in Sault Ste Marie two families-

Mr Gibson: I represented them.

Mr Martin: Yes, you did, and one of them left a store in Blind River to his son. His son lost the store, moved to Sault Ste Marie. He thought he would have a chance if he worked hard, if he was a good competitor, a good businessman-and he was all that. He was one of our best corporate citizens. Anybody you'll talk to in Sault Ste Marie today is very sad that he's gone, no longer there. He thought that if he did the right things, if he worked hard and all the rest of it, he was going to have a store that would take him into his twilight years and he would be able to pass it on maybe to another one of his family. Is there anything wrong with that?

Mr Gibson: No. And if there's a "commercially reasonable" provision defining fair dealing—I represented him, so I know what the situation is. If there had been fair dealing and a definition of fair dealing in the law at that point in time, it would have been a different story. And you know something? If there had been a definition of fair dealing in the law at that time, the problem wouldn't have arisen.

Mr Martin: Let me ask you another question, and I know you may have some problem answering because of the confidentiality agreement that you had a hand in, although I don't think you signed it; maybe you had to witness it or something.

Mr Gibson: No, but I have some-

Mr Martin: Yes, some other concerns. Anyway, and this isn't in the bill, the right of franchisees to be consulted on the sale of a system-the franchisee, from what I gather, puts in the money, and the franchisor has the power.

Mr Gibson: Well, that's a simplification, but yes.

Mr Martin: So the franchisor decides to sell the system, but he doesn't ask the franchisee. He doesn't share it with him or explain to him why he's doing this, how this is going to be in everybody's best interest. He just goes ahead and does it. The franchisee wakes up in the morning and it's no longer Loeb, it's Provigo. Is there something that we should be considering there?

There's another part of that, and maybe you can answer them both at the same time. You've looked at lots of contracts. How many sections deal with the rights and powers of franchisees, as opposed to dealing with the rights and powers of franchisors?

Mr Gibson: There are lots of rights given to the franchisor, but very few obligations. There are a lot of obligations given to the franchisee, but very few rights. I hate to come back to the same issue, but that can be dealt with in the terms of a reasonable commercial contract. If it's sold and they don't consult, and the new franchisor comes in and starts acting unreasonably, then he has breached the law. It's as simple as that.

The franchising system is too complicated to say we can break it down into nuts and bolts. You cannot. There is a myriad of different types of relationships. There is the mom-and-pop new Internet type of franchise which takes $20,000 to get in and they give you some tools and you try. Then there are the ones that are going to cost you hundreds of thousands of dollars: Canadian Tire, Tim Hortons, McDonald's etc.

To have one law that's going to give a specific set of rights for such a wide gambit of relationships, you're going to hurt by exclusion. You're going to miss things. You're going to have misapplied things. What might be applicable for the mom-and-pop might not be applicable for the McDonald's. But if you look at it and say, "It's got to be commercially reasonable"-it's the sober second thought, when someone is doing it, and they say: "A judge may or may not be looking at this some day. I have to see whether or not I think it would be acceptable."

Of course, a judge is a whole other set of problems, because franchisees don't normally individually have the means to hire a lawyer and have a big fight. I've heard talk about ADR. I didn't mention it but it could very well be a very important tool for the franchisor-franchisee dispute resolution system because it's very costly to hire lawyers, and it should be something which should be a last resort as opposed to something which is the only way.

The Vice-Chair: Mr Gilchrist and Mr O'Toole both have a comment.

Mr Gilchrist: A couple of brief things. I won't indulge in lawyer-bashing but, for the record, if you had gotten to the clause between 2 and 3, you would have seen that 2(2) says that section 3 and others "apply with respect to a franchise agreement entered into before the coming into force of this section, and with respect to a business operated under such agreement…."

The act does very explicitly say that that clause applies to every single existing franchise agreement that's already in force, so they will have protection from day one.

The other thing is, Canadian Tire has no franchise fee-I wanted that on the record-not hundreds of thousands, not one dollar. It never has.

I'd like to very quickly get your opinion in terms of whether the cases you've dealt with, by and large, would have been materially different if there had been full disclosure, and let me underline and re-underline the word "full." Things such as the complete price list of products-if it's a question of let's say a doughnut shop or a pizza franchise-so that you could go to your local wholesaler and compare the price you're being quoted from the franchisor with what would happen if you walked in off the street; if you knew up front all of the terms and conditions that would apply at renewal time; if every material fact-and I appreciate things can change in the course and you talked about areas where there is discretionary power, but even there-if it laid out in detail what those powers could mean, would it not obviate most of the problems that ever crop up in the term of a franchise agreement? Or might it even preclude a lot of people from getting into questionable franchises at the outset?

Mr Gibson: No, I don't think that it would. It would affect, I'm sure, a certain percentage of franchises at the front end if there was total disclosure. But I don't think, when you have normal franchisees-and again I use "normal," "regular"-being inundated with all kinds of information and they bring them to me and it's about-I'm trying to think of one that I haven't dealt with so I would know nothing about it. If it was about the growing of flowers in a nursery and they said, "These are the prices," and these people -were not really experts in it and they were relying on this as being information which showed that it would be profitable and subsequent to that they found out that it wasn't, or, more likely, they found out that discretion was exercised, it won't do that much good to have learned at the outset that those were the material facts. I'd like to back up one more step and say I don't know how you could ever disclose all the material facts.

Mr Gilchrist: Let me again put on the table something Mr Konigsberg, a lawyer from Montreal, told us this morning. I thought it was a very wise comment that he offers to prospective franchisees who come into his office. He tells them he won't talk to them until they've either gone out and researched the marketplace or spoken to past franchisees. Why shouldn't the law society make that a requirement for every lawyer?

If you're going to be paid to counsel a prospective franchisee, at the outset, unless they are very savvy investors, why shouldn't your first words to them be: "Ignore everything the franchisor has told you in the sales pitch, everything, because if it isn't in this document, it doesn't matter. Do you understand me?" If they don't satisfy you at that point, are you really meeting their needs by allowing them to go further?

Mr Gibson: Am I a lawyer or a business adviser?

Mr Gilchrist: If they've come to you expecting, when they walk out of that office, to have the comfort level to sign the deal, if you in fact don't know anything about growing flowers-and nor do I-I would like to think that the first responsibility either one of us has would be to say: "I can't even come close to answering the issues when it comes to pricing. They've quoted you certain prospective profits. Here's what you must do to satisfy yourself, because there's nothing I can do in this office." I would suggest to you that if you don't make that very express statement explicitly clear to them, then they have not been well served in that one regard.

Mr Gibson: When someone comes into a lawyer's office with a bunch of contracts and says, "Review these contracts and tell me the legal effect of these contracts," if the lawyer does his job, he'll tell him the legal effects. You say to your client: "With respect to the business component, ensure that these numbers are right. Go see your accountant."

Mr Gilchrist: Whatever direction you point them in, but you would agree with me that they should be seeking other counsel on their business terms.

Mr Gibson: Certainly.

The Vice-Chair: Mr O'Toole, a quick comment.

Mr O'Toole: I think it was clarified that the prior provision you clarified at the beginning is important. You would know, if you've been practising in this area-and I'm not trying to contradict you-but Mr Tsubouchi tried, and there was a working group that has put together a consensus of views. This process has been going on basically since the Grange report. Where other governments have attempted to find the balance and have failed, clearly this attempt is to find the best first step, not to absolve us of making a world of perfection; that, it is not. Do you understand?

Mr Gibson: Oh, sure.

Mr O'Toole: It's certainly a warning to the industry, as Mr Gilchrist said, and the legal community as well, to recognize that. I wish to strengthen the language under "fair dealing" myself if there's something that has been defined in law. The first thing I asked was, "What does 'fair dealing' mean to me?" Somebody said that the provision under the Personal Property Security Act would prevail. I am more comfortable with something that's defined; otherwise I'm going to have to pay another $1 million to find out what "fair dealing" means.

Mr Gibson: Didn't the Grange report give a definition at one point in time?

Mr O'Toole: Yes, that's what I'm referring to. It's back to the Grange report and it's one of the substantive recommendations in there. But I've used my time and I appreciated your input.

Mrs Boyer: I just want to assure you, Chuck, that with all these hearings we're going back with a lot of recommendations to look into and to give force to this bill.

Mr Gibson: When I stated it earlier, I said I don't ascribe any bad faith on anyone's part. You have a very difficult job to do and obviously you have many conflicting interest groups that make presentations to you. Obviously, many of them have good spokespersons and they're persuasive from all contexts.

Mr O'Toole: From all their lawyers.

Mr Gibson: That doesn't necessarily mean that lawyers are good spokespersons.

Mr O'Toole, with respect to your comments about it taking so long, I understand why it takes so long. As I said earlier, there is a myriad of relationships. You can't define the franchisor-franchisee relationship on a piece of paper. It's so wide and vast. That's why I get back to the simple. When I say to define, you're going back to the simple.

Mr O'Toole: You go back to established law.

Mr Gibson: Exactly. You go back to the simple and therefore you're not giving lawyers a pension plan by putting all these various things in there that they can attack. You go to one-and that's what judges do anyway. It doesn't matter what the law says, judges look at it and say: "Is this reasonable? Should this person have done this?" If not, they'll find a way to get around it.

The Vice-Chair: Did you really think you were going to get through this in 10 or 15 minutes?

Mr Gibson: It's like when a judge asks me, "How long are you going to be?" and I say, "Oh, half an hour." Yes, right, another two days.

The Vice-Chair: Thank you for your time.

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=2000-03-08&ParlCommID=1&BillID=&Business=Bill+33%2C+Franchise+Disclosure+Act%2C+1999&DocumentID=19724#P599_221480

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


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Risks: Undue influence, Grange Report, Oligopoly: operates essentially the same as a monopoly, Listing fees and inside money, Ontario Public Hearings, Canada, 2000, Imbalance of information and power, Refusal to acknowledge independent franchisee association, Tony Martin, Franchisor sells out, Must buy only through franchisor (tied buying), Gag order (confidentiality agreement), Tied contracting, Justice only for the rich, Arbitration, Fiduciary duty, Commercially reasonable exercise of discretion, Corporate stores competing with franchisees, Corporate stores get better deal than franchisees, Franchisor is wholesaler and retailer, Fraud, Toothless law, Illusion of government oversight, Weak law worse than no law, Can't afford to fight, Attempts to rehabilitate image, Law protects franchisor not franchisee, Canada, 20000308 Charles Gibson

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