Dr. Helena Jaczek, MPP, Second Reading Debates

We believe that our modest amendment to the disclosure requirements of the existing legislation will, in fact, protect both franchisors and franchisees and allow them to make informed decisions that will certainly prevent future litigation and misunderstanding and allow them to have a profitable business relationship.

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The Legislative Assembly of Ontario
September 23, 2010

Second Reading, House Debates
Private Members’ Public Business
Dr. Helena Jaczek, MPP

The Committee of the Whole
Second Session, 39th Parliament
Toronto, Ontario, Canada

ARTHUR WISHART AMENDMENT ACT (FRANCHISE DISCLOSURE), 2010
LOI DE 2010 MODIFIANT LA LOI ARTHUR WISHART SUR LA DIVULGATION RELATIVE AUX FRANCHISES

Ms. Jaczek moved second reading of the following bill:

Bill 102, An Act to amend the Arthur Wishart Act (Franchise Disclosure), 2000 / Projet de loi 102, Loi modifiant la Loi Arthur Wishart de 2000 sur la divulgation relative aux franchises.

The Acting Speaker (Mr. Jim Wilson): Pursuant to standing order 98, the honourable member has 12 minutes for her presentation.

HELENA JACZEK, MPP

Ms. Helena Jaczek: At the outset I would like to make sure that everyone knows that this bill, Bill 102, An Act to amend the Arthur Wishart Act (Franchise Disclosure), 2000, is co-sponsored by my colleague from Parkdale–High Park and my colleague from Parry Sound–Muskoka. I think that this type of collaboration is something our constituents expect of us. We know that in our ridings many people did not actually vote for us or our party and it is our duty to represent them in this House wherever we can. It has been certainly an interesting and very satisfying experience to work with my two colleagues on this particular bill.

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I’d also like to recognize in the west members’ gallery some supporters of the bill: Les Stewart, the founder of the Canadian Alliance of Franchise Operators, and Detective Fred Kerr, the corporate fraud manager for York Regional Police’s major fraud unit.

This bill came about because of a constituent, a constituent who came to tell me a very sorry tale about her experience as a potential franchisee. A pizza business placed television, radio, newspaper and magazine advertisements promising a complete business operation with training and support. My constituent was one of several people from across Canada to respond to their ads. She was looking to invest in a franchise as a way to financially provide for her family.

She provided the franchisor with a significant payment to secure a franchise. It turned out that the franchisor was running an elaborate scam across the country, taking money from those who believed they were purchasing a franchise and then disappearing. The pizza business was ordered by the courts not to sell franchises in Canada. No jail time was served; no funds were recovered. The owners of this particular business went on to sell other franchises to other investors in Canada.

This type of extreme situation is something that we believe our bill can, in fact, prevent. We believe that our modest amendment to the disclosure requirements of the existing legislation will, in fact, protect both franchisors and franchisees and allow them to make informed decisions that will certainly prevent future litigation and misunderstanding and allow them to have a profitable business relationship.

It’s important to think about exactly what a franchise is. One of the definitions that I liked was one that the Manitoba Law Reform Commission produced in a consultation paper. Essentially, “a franchise is a licence from [the] owner of a trademark or trade name, permitting another to sell a product under that name or mark.” It has, over time, evolved into an elaborate set of agreements under which the franchisee undertakes to conduct a business or sell a product or service in accordance with methods and procedures that are prescribed by the franchisor, and the franchisor undertakes to assist the franchisee through advertising, promotion and other advisory services.

It’s also quite instructive to read about the history of franchising in Canada. Essentially, in the beginning, it was government who granted private individuals and corporations the right to carry out activities that would otherwise be restricted to the government. In fact, here in this country, that type of arrangement helped to facilitate the development of infrastructure and services such as railroads, utilities and banking, so that modern private sector franchise actually appeared in Canada in the 1850s.

The Singer sewing machine company attempted to organize themselves in such a fashion. They were not particularly successful, but the concept was developed further by Coca-Cola. They invited regional franchisee bottlers to produce and bottle soft drinks under its trademark, and Coca-Cola’s rapid expansion was funded by the franchisees, who in return received exclusive distribution territories and support. General Motors began distributing automobile inventory across the country through individual dealers in 1898. Dealers could purchase vehicles at a discounted price for resale and were granted regional franchise rights. In return, they were required to sell only the products of a single manufacturer. This distribution method shifted to dealers some of the risks of market downturns and proved to be successful for the automobile industry, at least until the recent recession.

Following the Second World War, franchising expanded and became a more and more complicated business. New industries took up the concept, including fast food restaurants, hardware retailers, drug retailers, and motel and hotel services.

By the 1970s, franchising had become a popular method of doing business and an enduring part of the Canadian economy. However, there were high-profile failures associated with this rapid expansion and as growth continued in what was often an unprincipled and unregulated fashion. So, in 1971, the Ontario Minister of Financial and Commercial Affairs established the first public inquiry into franchising in Canada. This resulted in the Grange report, which actually called for legislation and even wanted to establish something described as a franchise bureau and registrar. However, little action was taken, so the franchise business continued in an unregulated fashion until there were a number of disputes that came to the public’s attention in the early 1990s.

A particular high-profile pizza franchisor had a large number of its franchisees saying they were subjected to arbitrary cost structures and a feudal-style management structure. So, in 1994, the then Bob Rae government announced the formation of a franchise sector working team to make recommendations on franchise regulation. The team was composed of franchisors, franchisees and government. The team recommended that alternate forms of resolving franchise disputes should be explored and adopted. They recommended that the Ontario government carry out wide consultations and explore how national harmonized regulatory standards might be pursued.

Nothing happened until 1998, when the then Mike Harris government released a consultation paper on franchise legislation.

MPP Tony Martin introduced a private member’s bill in 1999 that dealt with franchising. There were several public hearings that followed, as the government also introduced some draft legislation. The topics of discussion centred around the power imbalance between franchisors and franchisees, the restrictions placed on franchisees for the sourcing of products and services, and the need for provisions for alternative dispute resolution. The result is our current Arthur Wishart Act. But we know that since that act was passed in 2000, we have ongoing problems. We believe that the disclosure provisions in that act are not sufficient and do not offer sufficient protection to both franchisor and franchisee and have resulted in completely unnecessary legal action.

We need to understand that in fact the relationship between the parties to a franchise agreement can often be compared to a marriage. The parties depend on each other for their continued well-being. The relationship is intended to continue for a lengthy period of time, and the arrangement is intended to be satisfactory to both parties.

While franchisors and franchisees generally share a common desire to succeed, there is also a considerable potential for conflict between them, and the parties frequently have dramatically unequal bargaining power. The franchisor is usually a large, sophisticated business organization, has a lot of franchising experience, and may control the terms of the franchise agreement. The franchisee may have little business experience, and they often must take or leave the franchise agreement as offered. They must rely to some extent on the franchise’s representations with respect to the potential for business success.

In recruiting an investor to open up a new franchise outfit, a franchisor is, to a large degree, gambling with somebody else’s money. Indeed, the franchisor may receive an upfront franchise fee and thus may reap immediate financial gain even if the outfit fails quickly. In the event of failure, the franchisor may be the only buyer for the franchisee’s capital equipment and may do so at a deeply discounted price, perhaps reselling it to a future franchisee at a substantial markup. Franchisees are somewhat locked into the relationship by high sunk costs or invested funds that cannot be recovered if the franchise relationship ends. The franchisee continues to be at a disadvantage in relation to the franchisor in terms of access to information and control of operations throughout the franchise relationship and especially during negotiations and at the time the franchise agreement is signed.

The intent of our legislation is to ensure that potential franchisees are provided with information on which to make important investment decisions and to protect investors from unfair and deceptive business practices in the franchise area. The disclosure requirements of our amendment allow for individuals to do some self-evaluation in terms of understanding their financial commitment. It requires them to consider whether they have the necessary management skills, education and experience to operate a business. The issues for franchisees to consider are things such as the history of the franchise, the financial stability of the operation, the directors or general partners involved, their level of experience, and whether there is ongoing training for franchisees.

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Prospective franchisees should also consider issues with respect to the goods and services they will be selling, offering or distributing, such as demand for the product, fluctuation in sales due to seasonal nature, whether the franchise can carry other lines of goods and whether there is a continual supply at a fair price. There are also issues related to the location of the franchise and their sales territory.

They are also suggested very strongly to consult a lawyer so that they can make sure that the deal they sign is one that they are comfortable with. We believe that this will protect both parties—both franchisee and franchisor—and allow for a far more profitable business relationship.

This document is a verbatim copy of the Official Report of Debates (Hansard):
http://www.ontla.on.ca/web/house-proceedings/house_detail.do?Date=2010-09-23&Parl=39&Sess=2&locale=en#P941_225352

Copyright (c) 2010
Office of the Legislative Assembly of Ontario
Toronto, Ontario, Canada


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