Franchising disputes stir call for legislation

An increase in legal disputes between franchisers and franchisees has lawyers talking about the need to regulate the industry.

National Post
February 23, 1993

Franchising disputes stir call for legislation
Jim Middlemiss

An increase in legal disputes between franchisers and franchisees has lawyers talking about the need to regulate the industry.

“Unfortunately, there are franchisers out there who are taking advantage of the vacuum in legal protection for franchisees and they’re exploiting well-intentioned, but naïve, investors,” said Toronto lawyer John Sotos, counsel for the Canadian Franchisee Association.

“The need for legislation is overwhelming and [it] should have been there a long time ago.”

Ned Levitt, who represents both franchisees and franchisers, agrees that “some type of disclosure is very important to maintain a healthy franchising market.”

But Levitt, the chairman of the Canadian Franchise Association’s legal and legislative committee, added this could be done through self-regulation, rather than legislation.

He is developing a voluntary disclosure scheme for his association. “If that’s successful and members adopt it, it doesn’t mean you have every franchiser, but those who aren’t members or don’t abide by it will be conspicuous by their absence.”

While the trend in the U.S. is toward legislation, Canada has been cool to the concept.

Alberta is the only province that directly legislates franchising. British Columbia is examining the situation and a private members’ bill in Manitoba, similar to Alberta’s legislation, died on the order paper last year.

That contrasts sharply with the U.S., where at least 17 states and the federal government have laws governing financing.

Alberta plans to up the ante in the franchising game this spring, the government is proposing an amendment to its Franchising Act which, some lawyers say, radically alters the relationship between franchisers and franchisees.

Under the current scheme, a prospectus must be filed with the Alberta Securities commission. The Tories now want to go further and govern the relationship between franchisers and franchisees.

The bill requires parties to deal in good faith and proposes rules on notices, terminations, renewals and trust accounts.

“It’s a big change in the legislation,” Levitt said, adding that franchisers look at it with “shock and horror.” It could make it “harder to do business in Alberta.”

But Sotos said his group welcomes the change. “The proposed Alberta legislation is light years ahead of what Ontario has right now. There should be some disclosure of material facts and we also believe there should be a duty of good faith in relationships between franchisers and franchisees.”

Frank Zaid, a special counsel with the Canadian Franchise Association and a partner in a Toronto law firm, said there has been a “strong lobby against the Alberta bill” by both his organization and the International Franchise Association.

The legislation goes beyond what is needed, he said, adding he doesn’t “think the bill will go further in its present form because of political considerations.”

But Alberta securities lawyer George Goulet isn’t so sure. “My educated guess is that it will carry through and be implemented because it’s not really a political issue, it’s a regulatory issue. The government more or less defers to a regulatory body that has expertise in its own field.”

Despite the Alberta initiative and bickering between franchisees and franchisers, lawyers doubt other provinces will see legislation as a solution.

In Ontario, lawyers say franchise legislation is low on the New Democratic Party government’s agenda largely because it sees franchising as a business-to-business relationship, rather than a business-to-consumer relationship.

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Risks: Alpha Male attorney, Canadian Franchisee Association, Collaborators, Call for franchise law, Frenzied lobbying, Tobacco-industry-type defense, Fox to guard the henhouse (self-regulation), Close ties: IFA & CFA, International Franchise Association, IFA, General counsel, CFA, Canada, 19930223 Franchising disputes

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