Struggle for franchise law ends in compromise

Mr. Martin at one point even called for an investigation into allegations against the Canadian Franchise Association – a body representing some Canadian franchisors – that is not meeting its advertised commitment to act as an intermediary between warring franchisors and franchisees.

The Globe and Mail
June 27, 2000

Struggle for franchise law ends in compromise
Ontario’s new legislation attempts to inform prospective franchisees, not regulate the industry
John Southerst

Ontario legislation comes into force this fall that sets new ground rules for the often tense relations between franchise chains and the entrepreneurs who invest in their outlets.

The law, approved last month by the province’s legislature, turned out to be weaker than many franchisee advocates would have liked.

But it will still have a significant impact. More than one-third of the estimated 1,300 Canadian franchisors are based in Ontario as well as more than half of the 76,000 franchisees.

Other provinces – notably British Columbia – are known to be waiting for Ontario’s law and will probably enact similar legislation.

The law, which was passed after a last-minute deal had been forged in committee, brings to a close a 29-year-old effort to regulate the sector in Ontario.

It sets several basic rules for franchisor behaviour:

  • It forces those who sell franchises in Ontario to disclose basic information to new franchisees at least two weeks before the agreement is signed or money changes hand.
  • It prohibits franchisors from punishing members of their systems who participate in franchisee associations.
  • It imposes on both parties a ”duty of fair dealing,” including a responsibility to act in good faith and according to reasonable commercial standards.

Wording in the bill, aimed at overzealous franchisors, explicitly mentions enforcement of the terms of the franchise agreement as an area of concern.

But as some franchise lawyers and industry insiders have pointed out, these basic requirements address only the sector’s bottom-feeders – those who lie, intimidate and swindle.

It won’t address the vast bulk of franchise disputes, which seem mostly to revolve around the interpretation of highly restrictive, punitive and airtight agreements drafted by franchisors.

In committee, NDP MPP Tony Martin had pressed hard for legislation that would also regulate numerous details of the franchise relationship, such as territorial encroachment, renewals and dispute resolution. But government members believed such an approach would unnecessarily intrude on business contracts, namely franchise agreements.

In the last-minute committee deal, all parties agreed instead to require franchise agreements to make a number of boilerplate statements, specified in the regulations.

These statements are an attempt to alert franchisees to some of the realities of the industry. The most important one informs franchisees that they may not get the best available price on goods and services they buy from the franchisor. Other statements simply advise prospective franchisees of the existence of mediation and other alternative means of dispute resolution, the availability of commercial credit reports to get a handle on their franchisor’s financial strength and the need to contact current and former franchisees before accepting an offer to purchase.

In short, it’s an attempt to inform – not to regulate.

The last-minute manoeuverings came after a dramatic public prelude. A week-long series of public hearings on the bill featured numerous tales of franchisee woe, with talk of “cannibalization,” anti-competitive practices, kickbacks, arbitrary termination, forfeiture of deposits and “outright scams.”

Mr. Martin at one point even called for an investigation into allegations against the Canadian Franchise Association – a body representing some Canadian franchisors – that is not meeting its advertised commitment to act as an intermediary between warring franchisors and franchisees.

The impact of the legislation may also be felt beyond the limits of franchising. The definition of a franchise in the Ontario law was borrowed directly from the U.S. Federal Trade Commission version, which U.S. courts have interpreted to apply to a number of businesses that didn’t consider themselves franchises, such as manufacturing sales agents and distributorships.

But a saga involving franchising and politics could not end without a final oddity. Introduced as the Franchise Disclosure Act, the legislation passed into law with an amendment that renamed it the Arthur Wishart Act (Franchise Disclosure).

Using Mr. Wishart’s name is, for a legislative body, an unusual recognition of the glacial pace and unconscionable delay in offering even minimum protection to franchisees in Ontario.

A few insiders know the act commemorates the Conservative minister of financial and commercial affairs in 1971.

That year, Mr. Wishart accepted the report of a committee headed by Samuel Grange, the first alarm bell to warn of – in Mr. Grange’s words – “deceptive selling practices,” “financial irresponsibility” and “inequitable” contract relationships he found in the fast-growing franchise sector of the early seventies.

Although Mr. Wishart did not commission the report, he was the first among many government ministers over the coming decades to promise to study the recommendations – as he said at the time – “with a view to implementing the recommendations.”

In fulfillment of a long Canadian tradition, the 29-year study period that followed resulted in – what else? – a compromise.

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

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