Peter Dillon Public Hearing Testimony

I think the debate on the subject, from what I have witnessed, currently risks being hijacked by one or more well-intentioned but, I'll go so far as to say, somewhat obsessed individuals, along with Mr Martin and the media, who just love horror stories.

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Legislative Assembly of Ontario
March 9, 2000

Public Hearing Testimony
London, Ontario, Canada
Mr. Peter Dillon, 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

PETER DILLON

The Vice-Chair (Mr Garfield Dunlop): Mr Peter Dillon. You have 20 minutes, and that includes questions, if we have time for questions. Do you have a handout?

MR PETER DILLON: No.

Good afternoon, ladies and gentlemen, and welcome to London. My name is Peter Dillon. I'm a partner with the London law firm of Siskind, Cromarty. I have been practising in the area of franchising since 1989. At this point, franchising is all that I do. For the most part I represent Canadian and American franchisors. Other lawyers in our franchise law group represent franchisees, although I have over the years represented dozens of franchisees and continue to do so in the case of long-standing franchisee clients.

I am the only lawyer member of the Canadian Franchise Association in Ontario outside of Metropolitan Toronto. I'm a member of the legal legislative committee of the CFA, a member of the American Bar Association forum on franchising and a member of the International Franchise Association.

In September 1998, Western Legal Publishing published my annotation of the Alberta Franchises Act. I am also the editor of QuickLaw's digest on franchise law in Canada.

My interest in appearing before the committee today is twofold. First, I hope to provide some balance to the committee by providing insights from my 11 years of extensive experience in franchising in Ontario. I think the debate on the subject, from what I have witnessed, currently risks being hijacked by one or more well-intentioned but, I'll go so far as to say, somewhat obsessed individuals, along with Mr Martin and the media, who just love horror stories. That's the phrase I hear bandied about and that's the expression that I've seen used when those individuals are soliciting stories from franchisees who have had bad experiences in franchising.

We Canadians are pretty lackadaisical about getting involved in this kind of process. I can tell you that most of my clients are just too busy trying to make their franchise work, whether they are franchisors or franchisees. As well, for the most part, a lot of them have that naïve Canadian confidence that whether they show up or not, everything is going to work out OK. I have that same confidence, but I wanted to be at least one representative of what I perceive is a very large silent majority.

Second, I wanted to add my voice to those advising the committee to exercise caution in regulating this very important aspect of our economy.

I represent about 20 franchisors ranging in size from no active units, that is, they're just getting started, to systems with 150 franchise units from Newfoundland to Vancouver.

My day consists of advising franchisors on complying with Alberta's franchise legislation, purchasing and selling businesses, negotiating leases for franchise outlets and trying to pry money out of Canadian banks, which is probably one of the toughest jobs I have.

Of course, I draft a lot of franchise agreements during my days as well. If you were to ask me, "Were those agreements well balanced in the sense of two parties being equally represented and with equal negotiating strength?" my answer would be no, and I think there's a good reason for that. One factor that all of us appreciate about franchising is the need for consistency. I think our desire as consumers is to encounter that consistency. Consistency among humans is difficult to attain.

I have one small anecdote. I once acted for a franchisor who had to pull out the franchise agreement in order to convince a franchisee-this was a doughnut chain operation-that the franchisee didn't have the right to sell his wife's chili, and that came as a surprise to the franchisee. It was a source of disappointment to the franchisee because his customers liked his wife's chili. But when you're running a franchise system and your customers expect consistency, there simply are things you can't do and serving your wife's chili in that case was one of them. The unbalanced franchise agreement was the instrument that we employed to ensure that the wife's chili didn't get served.

From time to time, I have to deal with termination of franchisees. My most recent franchise termination was a very interesting one, in part, I see, because a couple of the individuals involved in that termination are appearing before the committee. In that case, the franchisee was represented by David Sterns from the Toronto firm of Sotos Associates, from whom you've heard, and the franchisee who was terminated is also appearing before the committee.

The franchise system in that case was a full-service restaurant. The franchisee in question owned his own small doughnut franchise with a dozen or so franchisees-a little bit unusual here. We've got the franchisee who also happens to be a franchisor. And he owned a franchise from a national burger chain.

My franchisor came to me from another non-franchise lawyer and was pulling his hair out. The franchisee in question was proving to be a very disruptive influence. He wouldn't adhere to advertised specials, he refused to buy from approved suppliers, he refused to staff his restaurant in accordance with recommendations, and his restaurant was filthy. Coincidentally, a week before we'd been retained by this franchisor, my secretary had advised me that she was out for dinner with her husband and her husband had become quite sick after eating a meal at that restaurant.

The franchisee was taking some kind of perverse pleasure in ripping the franchise system apart, flexing his muscles, as it were. He refused to follow any dictates whatsoever. However, he always paid his bills on time. He'd been advised by his lawyer that there was nothing we could do. In fact, we conducted an inspection of the restaurant and found what I can only describe as disgusting conditions: mouldy food, accumulated filth in refrigerators and dishwashers, unsanitary food preparation, improper food storage, and the list goes on and on. We took lots of colour photos and then changed the locks on the doors and terminated the franchise. The franchisor hired steam cleaners and renovators and after about a week of cleaning, the restaurant was ready to open again.

The franchisee, who was far from unsophisticated or without resources, brought an application in London for an order permitting him to regain possession of the premises. Because I find judges tend to give the benefit of the doubt to the little guy, I was surprised when the judge upheld our actions and refused to allow the franchisee back in. I think the colour photographs really tipped the scales in our favour.

Although my client could have continued to fight the franchisee, we settled the matter by rebuying the restaurant from the franchisee. We paid him about half of what he had paid us a year previously. Outrageous, you say? The franchisee's weekly sales had fallen to about half of what they were. Six months later, sales are back to almost where they were, but my secretary and her husband still won't eat at that restaurant. That's the kind of damage that a bad franchisee can create for the goodwill of a franchised system.

A lot of people complain that the government needs to heavily regulate franchising because justice through the courts is too expensive and too time-consuming to obtain. This doesn't make sense to me, for a lot of reasons. First, to the extent that the accusation is true, it's an indictment of our court system, and that's where the government's energies should be directed. Second, I don't see why a franchisee should have special rights as a result of his contractual relationship when, for instance, a tenant under a commercial lease would have no such special rights. Third, I can tell you from first-hand experience that judges have a strong predisposition in favour of franchisees.

In one matter several years ago where I appeared for a franchisee, I introduced myself to the judge as acting for the franchisee, and my friend, Mr. So-and-So was appearing for the franchisor. The judge, who was as sharp as a tack but liked to give the impression of being a country judge, said: "Mr Dillon, franchisee, franchisor, I get so confused with these terms. I'm going to say that you're here for the little guy and Mr. So-and-So is here for the big guy." Of course, I didn't object to that characterization and we went on to win the matter, despite the fact that as far as I was concerned my client didn't have the moral high ground in the case.

We in Canada have some significant barriers to productivity and wealth creation. Our climate can be tough on us. We have a lot of government paperwork to contend with. Our rates of taxation are still brutally high. The availability of capital is a problem in Canada. Our geography is terribly daunting and, I can tell you, from the perspective of a franchisor it's especially so. The prospect of opening and servicing a new franchise in Timmins is daunting enough, let alone Vancouver. In addition to being small, our population is widely dispersed. This results in surprisingly few markets of any significant size across the entire country.

One area of life where I think we stand head and shoulders above our American cousins is our judicial system. The Americans, in their Jeffersonian pursuit of Utopian justice, tend to be highly interventionist. I can tell you that my CCH franchise law service extends to over 15 volumes of 6-point print on my bookshelf. I believe that if we attempt to emulate the American example on franchising, we will suffocate the baby. One need only consider the chilling effect on business that Alberta's predecessor legislation had on franchising in that province. Alberta, I believe, saw the error of its ways and totally repealed its highly interventionist legislation in 1995, as I'm sure you've heard.

The fact is we can't analogize our situation with the American economy. The American economy is so large and so robust, their population densities and demographics are so different that to say,
"Well, they have done it, so we can do it," just doesn't hold water. The typical estimate that we provide our clients in terms of the legal costs of starting up a franchise system in the States-this is just the legal cost-is US$100,000 to deal with the 48 continental states. Now, when you're dealing with the potential payoff from the American market, that's a number that you can deal with, but there's no hope of recovering that kind of sunk legal costs from the Canadian market.

THE CHAIR: You've got five minutes, Mr Dillon.

MR PETER DILLON: I spoke earlier of the phenomenon of courts bending over backwards to help the little guy. I think our common-law tradition has also served us very well. Doctrines of unconscionability, fiduciary duty, good faith, commercial reasonableness and others have been used to protect people from unfair bargains, while at the same time preserving our valuable and deeply entrenched right to contract freely among ourselves.

I believe that Bill 33 in its present form-and there probably aren't too many other people in the province who have read it as closely as I have-is a sound response by the Legislature to the concerns of the franchisor and franchisee communities in Ontario. The extent to which it creates additional expense and burden to franchisors is minimal, especially to the extent that those franchisors are already members of the Canadian Franchise Association and comply with the mandatory disclosure policy of the CFA. It's also reasonable in its imposition of a fair dealing obligation and the rights granted to franchisees to freely associate.

Importantly, Bill 33 is consistent in scope and language with Canada's only existing franchise legislation; namely, the Alberta Franchises Act. As I think I've made it clear, my belief is that a government's role is to facilitate, not hinder, commerce. I believe that any changes to the bill from its current form and content would hinder, not facilitate.

Ladies and gentlemen, franchising is an important part of our economy. It should be fostered and encouraged to play a larger role in our economy. It is a sound method for the delivery of goods and services to the Ontario public. Yes, there are some horror stories out there. Some of them are the result of stupid actions by shortsighted franchisors. Some of them are the result of laziness, poor organization and lack of application on the part of certain franchisees-and I've acted for some of them. A few of them result from unscrupulous fly-by-night franchise organizations, although personally, and fortunately, I have no experience with the last category of horror story.

I encourage you to recommend passage of Bill 33 in its current form, for the benefit of all Ontarians. Thank you for your time.

THE VICE-CHAIR: Thank you, Mr Dillon. We've got a few minutes for questions. Any questions from the Liberal caucus?

MR CROZIER: No, I don't have any questions. I just like the idea that that judge had the right perspective.

MR TONY MARTIN: I come to this piece of work not so much by choice as by having been invited in by a number of franchisees in my own community who were being hammered by a new corporation that took over their old franchisor and was just taking their livelihoods away from them. That can be a horror story that we all take advantage of and blow around in the press. Sometimes that's the only option we have to get redress, because a lot of these folks can't afford the legal fees required to fight the bigger companies. I suggest to you that Mr Stewart is on this issue not by choice either but by the circumstance of having been a victim himself, and then because of that and his courage to go public with his story, others phone him and ask for help and advice. Neither of us can sleep at night sometimes for thinking about the families we've heard from over the last three days during these hearings and that we will continue to hear from because we're seen as people who are interested, who care and want to do something. Are you suggesting that we leave those people simply twisting in the wind?

MR PETER DILLON: First of all, let me say that I've a great deal of respect for Mr Stewart. I know something of his situation, although I have no first-hand knowledge. With respect to one of the evils that this legislation is intended to redress-namely, disclosure-I frankly am not sure that you could have ever improved on Mr Stewart's due diligence. You've got a person of exceptional intelligence, exceptional background, with an MBA, who contacted I think 20 out of 22 existing franchisees, prepared pro forma information etc. The courts have reviewed and found against Mr Stewart. I just don't know what else could have been done to prevent Mr Stewart's unfortunate situation. That's point number one.

Point number two is that some businesses fail despite the fact that no one would have expected them to fail. Let me give you, for example, the recent concept launched by Cara foods. I hope no one from Cara is in the room, but people with-very few people in Canada probably have more experience in franchising than Cara, and it was a disaster and they lost a lot of money in it. Let's not forget that even though we're dealing with a lot of sophisticated franchisors and some big business people, we're still dealing with a fickle public, bad locations, errors in judgment etc. So nothing is going to prevent horror stories, both on the part of franchisors and franchisees.

Third, with respect to franchisors, I think the franchisor you described falls into my first category of stupid franchisor, and I do see that. I can't believe it, sometimes, when I see what is short-sighted behaviour on the part of franchisors. But I think, across the spectrum of the economy, we have to believe that enlightened self-interest is going to motivate franchisors to be fair, to ensure that there is a reasonable return to their franchisees. If that's not the case, they're not going to be in business for very long. I'm not sure we can ever legislate good sense on the part of franchisors.

In terms of people who are abused wrongly and fall into the fly-by-night category, I think the judicial system responds. A great deal has been done by the government in the past few years to expedite proceedings, and things are not as expensive or as slow as they once were, and I think that's the way to continue. The fair dealing obligation in the act will certainly assist franchisees in that regard.

THE VICE-CHAIR: Mr Wood, do you have a comment?

MR WOOD: I have a quick question. What rate of return do you think franchisees might reasonably expect on their investment?

MR PETER DILLON: The rate of return that will ensure that within the term of the franchise-be it five years, 10 years, 20 years or whatever-their initial investment is returned, plus a reasonable profit.

MR WOOD: What do you think is a reasonable profit?

MR DILLON: That depends a good deal on the risk involved, but if you ask me, off the top of my head I'd say 10%.

MR WOOD: Do you think they tend to get it?

MR DILLON: In my experience, yes.

THE VICE-CHAIR: Mr Dillon, we appreciate your time today. It was a good presentation, and we'll take everything under advisement.

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=2000-03-09&ParlCommID=1&BillID=&Business=Bill+33%2C+Franchise+Disclosure+Act%2C+1999&DocumentID=19723#P582_192750

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


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