Franchise legislation might get some teeth

When franchisees spoke, they related a laundry list of ways to lose money… Among corporations that rely upon franchising for their expansion capital, criticism of the industry is not welcomed. One lawyer even testified that he had been threatened three times with a lawsuit by an unnamed individual for speaking out about franchising.

The Globe and Mail
March 17, 2000

Franchise legislation might get more teeth
John Southerst

Four days of public hearings into Ontario’s pending franchise legislation last week turned the spotlight on some dubious business practices among retail and restaurant operators in Canada.

As a result, the legislature’s standing committee on regulation and private bills will likely recommend a stronger “fair dealing” provision in Bill 33, the government’s franchise legislation, said John O’Toole, parliamentary assistant to Consumer and Commercial Relations Minister Bob Runciman.

The hearings started in Toronto and moved throughout the week to Ottawa, Sault Ste. Marie and London. The committee, chaired by MPP Frances Lankin, will meet the first week of April to finalize its decisions, and O’Toole said he expects it will submit a written report shortly afterward.

Bill 33 requires that franchisors demonstrate “fair dealing” in their relations with franchisees. Witnesses pointed out that the clause is not defined and has only some conflicting U.S. precedents to explain it.

In their testimony, franchise lawyers John Sotos and David Sterns suggested that courts would give more teeth to a clause requiring “commercially reasonable” actions. Under similar working in other provincial legislation, for example, a bank that seizes a property cannot sell it at a fire-sale price just to recoup its debt. Instead, it must sell the property at the best price possible in the interests of the owner, Mr. Sterns said. “It’s the test you impose on someone who has the ability to affect your property.”

The franchise environment is now unregulated in Canada except for Alberta. Testimony before the committee raised the need for protection of franchisees in their unequal relationships with franchisors. There was talk of “cannibalization,” anti-competitive practices, kickbacks, arbitrary termination or forfeiture of deposits and “outright scams.” And these words came from the mouths of lawyers and expert witnesses.

When franchisees spoke, they related a laundry list of ways to lose money. One told of becoming a casualty in the bankruptcy and corporate takeover of his franchisor. Another discovered the break-even point for his travel franchise required twice the revenue predicted by his franchisor before the sale.

Among corporations that rely upon franchising for their expansion capital, criticism of the industry is not welcomed. One lawyer even testified that he had been threatened three times with a lawsuit by an unnamed individual for speaking out about franchising.

The government’s Bill 33 tries to ensure that franchisees get basic information before signing on the dotted line, but mostly stays out of the contract between franchisor and franchisee.

The evidence heard by the committee repeatedly drew attention to the fact that – apart from the “fair dealing” clause – the government’s disclosure law addresses only cases of misrepresentation before the sale of a franchise. “What happens after the agreement is signed is just as important as what happens before,” Mr. Sotos said.

Testimony from Susan Kezios of the American Franchisee Association in Chicago drove the point home. “Franchisors justify post-sale abuses because they have disclosed all the terms of the contract in these lengthy, unintelligible agreements,” she said. “There are no baseline standards of conduct.”

Under Ontario’s proposed law, franchisees could only hope that the “fair dealing” provision would cover complaints such as cannibalization, where the franchisor opens a new store near an existing outlet. The same is true for unreasonable restrictions on sources of supplies, misallocation of advertising funds and changes in fees.

The committee was repeatedly asked to consider “relationship legislation” – regulation of the behaviour of franchisors and franchisees after the agreement is signed.

Relationship laws in some U.S. states and other countries set conditions and minimum standards for everything from termination of an agreement to transfers, renewals, independent sources of supplies and non-competition covenants – issues normally dealt with restrictively in the franchise agreement. Franchisors vehemently oppose such stringent regulation.

The government members on the committee are philosophically opposed to what they see as “interference” in the terms of business contracts.

Mr. O’Toole said many cases described at the hearings involved franchisors known to have problems with franchisees. If prospective buyers knew these franchisors’ practices and had full access to existing franchisees, Mr. O’Toole feels, they could fairly weigh whether to buy a franchise. “We believe that improving disclosure could improve relationships,” he said. “I think we can get there without going into full relationship legislation.”

While the concession to a stronger “fair dealing” provision is not likely going to offer franchisees as much protection as a full plate of relationship rules, it could at least be one more stone for David when he takes on a Goliath.

John Southerst is a Toronto area writer who can be reached at ac.ratsi|htuosj#ac.ratsi|htuosj.


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