Mr Gilles Bisson (Timmins-James Bay / -Timmins-Baie James
Mrs Claudette Boyer (Ottawa-Vanier L)
Mr Brian Coburn (Carleton-Gloucester PC)
Mr Garfield Dunlop (Simcoe North / -Nord PC)
Mr Raminder Gill (Bramalea-Gore-Malton-Springdale PC)
Ms Frances Lankin (Beaches-East York ND)
Mr Pat Hoy (Chatham-Kent Essex L)
Mr David Young (Willowdale PC)
Substitutions / Membres remplaçants
Mr Bruce Crozier (Essex L)
Mr Steve Gilchrist (Scarborough East / -Est PC)
Mr Tony Martin (Sault Ste Marie ND)
Mr John O'Toole (Durham PC)
Mr Bob Wood (London West / -Ouest PC)
Clerk / Greffière
Ms Anne Stokes
Staff / Personnel
Ms Susan Swift, research officer,
Research and Information Services
The committee met at 0923 in the Hilton London
Ontario, London, following a closed session.
FRANCHISE DISCLOSURE ACT, 1999 / LOI DE 1999 SUR LA
DIVULGATION RELATIVE AUX FRANCHISES
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 / Projet de loi 33, Loi obligeant les parties
aux contrats de franchisage à agir équitablement,
garantissant le droit d'association aux franchisés et
imposant des obligations en matière de divulgation aux
The Vice-Chair (Mr
Garfield Dunlop): Good morning. We are ready to start.
We have 20-minute presentations, and that includes the question
period. We like to ask at least one question from each party.
I'll just notify you at the five-minute interval.
Lessif: I'll do my best to allow some time.
Vice-Chair: If you can. If we don't get time to answer
questions, that's one thing, but I just wanted to let you know
that that is part of the 20 minutes. You can proceed.
Good morning, everyone. My name is John Lessif, and I am the
owner-operator of four McDonald's restaurants, located in the
communities of Ingersoll, Tillsonburg and Woodstock. I'm also a
member of the Franchise Sector Working Team, which has been
involved in the development of Bill 33. I have been an active
member of the FSWT since it was first established in 1995.
I am pleased to have this
opportunity to offer my opinions to the committee on Bill 33. My
views are based on my experience as an independent owner-operator
in a franchise system and reflect my opinions as a member of the
Franchise Sector Working Team.
By way of background, I have
been a franchisee in the Canadian McDonald's system for 20 years,
and I'm proud to say that in that time my business has evolved
into a family operation involving my two children. When I chose
to enter a franchise system, as opposed to starting my own
business, it was because franchising offered me a readily
identifiable brand, a proven operating system and the appropriate
support and training.
Like me, my fellow McDonald's
franchisees are independent, small business owners, and
collectively we represent 70% of the system's 1,100-plus outlets
across Canada. In Ontario, there are 99 franchisees who own and
operate 287 McDonald's restaurants. Like any small business
owner, we have invested substantial savings and have dedicated
ourselves to operating viable and successful businesses.
As a McDonald's
owner-operator, I pride myself on the very significant
contributions my business allows me to make to my community. Not
only am I highly involved in local community and charitable
activities, but my business makes a considerable economic impact
as well. I employ a total of 240 employees across the three
communities in which I have restaurants, ranging from 60 to 100
employees per location. Perhaps most importantly, the majority of
these employees are young people, high school and post-secondary
students, who need that first-time employment opportunity and
on-the-job training to gain a foothold in the job market. To sum
up, operating a thriving business puts me in a position to make a
meaningful contribution to the local economy and my
I'd like to talk about the
issues that are in the bill. Let me begin by expressing my
support for the introduction of Bill 33. I would like to take the
next few minutes to comment on certain elements in the bill, as
well as a number of issues that continue to be raised in the
context of what is absent from the bill.
The first element is
excessive regulation. At the outset, I would like to say that any
legislation affecting the franchise industry must strike an
appropriate balance in providing certain protections for
franchisees without driving up the costs of entering the
industry. There are many responsible and successful franchise
systems operating in Ontario today. Legislation designed to
protect the prospective or established franchisee must not be so
onerous or restrictive that it penalizes responsible franchisors,
either financially or administratively, resulting in excessive
costs to the system.
over-regulates the industry will only result in higher costs of
doing business for both the franchisor and the franchisees like
myself. On the broadest level, increasingly prohibitive costs
will have a dampening effect on industry growth, to the detriment
of existing systems, new
franchise opportunities and associated employment growth. At a
micro level, this can indirectly impact small-town
owner-operators like myself, who, in the face of rising system
costs, will be challenged to maintain and grow our support of the
local economies, both through employment opportunities and
community involvement. I believe Bill 33 balances the needs of
all parties without imposing undue or costly restrictions on the
On disclosure: As a
franchisee in a mature and successful system, I strongly believe
that disclosure, one of the cornerstone principles of the draft
legislation, is a critically important element in determining the
viability of any business undertaking. The disclosure
requirements in the bill will ensure that those interested in
investing in a franchise opportunity have access to key
information needed to make a fully informed decision before
signing a franchise agreement.
It is also important to
acknowledge that disclosure can only enable a potential
franchisee to make a fact-based decision based on the actual
state of a franchise system at a certain point in time. It is
simply not possible through disclosure to legislate for any
number of unanticipated changes that may develop over time. I
believe the disclosure requirements set out in the bill are fair
and reasonable and will provide the appropriate level of insight
into a franchise system's financial status and operating
I want to emphasize, however,
that even the highest level of disclosure does not relieve the
prospective investor from the obligation to undertake due
diligence in evaluating the information they obtain. A
prospective franchisee, like any prudent investor, must properly
assess this information in conjunction with input from the
appropriate advisers and independent research. In my opinion, it
is incumbent on the potential franchisee to not only consult with
legal and financial advisers, but to go beyond this and research
local market conditions through discussions with local economic
development officers and local chambers of commerce.
In summary, legislated
disclosure requirements are not a guarantee for success. They are
of no real value to the prospective franchisee who chooses to
proceed without a proper evaluation of all the facts. Simply put,
common sense cannot be legislated into the business process.
On the right to associate,
there are several franchisee forums in my system that facilitate
franchisee discussion on relational and business issues. For
example, the McDonald's system employs franchisee strategy teams,
national and regional advertising boards and a national licensee
council which deals specifically with relationship issues.
Further, McDonald's places no restrictions on me from associating
with any organizations outside of the McDonald's system.
With regard to the right to
designate suppliers, McDonald's employs a central buying system
to negotiate product purchases based on its system-wide needs for
both corporate and franchised restaurants. This high-volume
approach results in significant economies which translate into
lower costs for the Canadian system and, ultimately, our
customers. As a franchisee, I also rely on the quality assurance,
product specifications and product development that come with the
company's involvement in procurement.
McDonald's does not use the
vertical integration approach to purchasing, but rather all
goods, services and products are purchased from arm's length,
third-party suppliers. In addition, all corporate dealings with
suppliers are transparent in that all product and distribution
costs across the Canadian system are fully disclosed. Any cost
savings and rebates are passed on to the whole system. Bill 33's
disclosure requirements will ensure that a franchisor's policy
regarding supplier rebates and discounts is known to the
While I and many of my fellow
franchisees do source some products locally, I understand and
accept that the strength of the centralized system and the
collective benefits it provides would be undermined by any great
degree of independent sourcing by those in our system.
With respect to dispute
resolution, at present all disputing parties may voluntarily
agree to submit to mediation. Further, it is my understanding
that the recently implemented court-mandated mediation program
will encompass franchisee disputes. Therefore, I question the
need for a separate process to be mandated under Bill 33,
particularly when no better resolution would be guaranteed. Would
not a separately legislated process conflict with a
court-mandated program? Again, creating a separate dispute
resolution mechanism, with its associated costs, will only
contribute to increased costs of doing business in the
The McDonald's system
supports the concept of mediation as an alternative dispute
resolution mechanism and employs it on a voluntary basis. By its
very nature, mediation must be voluntary to be effective.
On encroachment, I agree
that, through pre-sale disclosure, a potential franchisee should
be made aware that at some point in the future the franchisor may
build additional outlets in a defined proximity of the subject
site. It should also be clear through disclosure whether the
franchisee will have the right of first refusal on any new
outlets and whether the franchisor has a policy regarding
encroachment. I would like to point out, however, that it may not
always be in the best interests of the franchisee to assume a new
site. For example, I would be making an ill-founded business
decision to assume another outlet if I believe that the site is
not a good one, if I do not have sufficient capital for the
additional investment or if I am experiencing challenges in
managing my existing business.
Encroachment is not an issue
in the McDonald's system. Where a franchisee's existing business
is impacted negatively by a new location, whether it be corporate
or franchised, the issue is always discussed in order to reach a
mutually satisfactory resolution.
On relationship standards, it
is my belief that relationship standards cannot be legislated.
How can trust, respect and
openness be measured and interpreted in an objective way? In my
view, trust, openness and respect between the franchisee and
franchisor can only be established over time. The imposition of
relationship standards could have a detrimental effect on the
highly productive relationship that currently exists between me
and my franchisor. Regulation of the franchisee-franchisor
relationship would force my franchisor to work to meet an
imprecisely defined standard that may be inconsistent with the
culture of co-operation, consensus and collaboration that
McDonald's has cultivated.
In respect to sales
projections, I recognize that there have been cases where sales
projections have been used loosely in the pre-sale process. I
suggest that sales projections should be supplemented with two
additional pieces of information: first, industry sales data that
would provide the potential franchisee with a benchmark on
generally how the industry is performing; and second, historic
sales figures on comparable existing sites in the system. Both of
these would provide the potential franchisee with more
information than they might have access to otherwise.
In conclusion, from my
perspective, the majority of franchisees in Ontario are involved
in sound franchise systems and operate successful businesses.
It's my observation that for this reason a large proportion of
franchisees who fully support the bill may not take the
opportunity to participate in the public hearings because they
are either too busy running their businesses or simply have no
issues to raise.
In closing, I support the
introduction of the bill and believe that it embodies a number of
key principles important to strengthening the franchise industry,
to the benefit of both franchisees and franchisors. I look
forward to my continued involvement in the legislative process
for the bill as a member of the Franchise Sector Working
I must apologize for this,
because in doing a little bit of homework this morning when I got
up, I realized that on Monday when I sat in at Queen's Park and
listened to the presentations and in reviewing my presentation
this morning, I perhaps missed communicating these points in my
presentation, so I don't have anything written on this. I'm just
going to give this verbally.
The Franchise Sector Working
Team met a week ago and talked about five proposed amendments
that the committee might consider putting into the bill. I don't
have that in writing, so I'm going to give these verbally to you.
After discussion at our meeting a week ago, the consensus from
the team was that we should propose these to the committee today
to consider in making amendments to the bill in future.
(1) To expand the right of
action for misrepresentation to include agents and brokers.
Currently, agents and brokers are not mentioned at all in the
(2) To permit electronic
disclosure. This was touched on, I know, on Monday; I don't know
about in Ottawa or Sault Ste Marie. But we're recommending that
you consider adding that to the regulations.
(3) To require disclosure for
the sale of an additional franchise to a franchisee if a material
change has occurred. That point is that when a sale is made, it
currently reads that those are exempt. We don't feel that they
should be exempt, so we'd like you to consider making that
(4) To require disclosure for
renewal of pre-existing franchise agreements. Currently,
pre-existing agreements do not apply in the bill, so we'd ask you
to consider adding that or making the change to that.
(5) The term "payment" in the
definition of the franchise; to clean up the wording on that. As
it now states, there are franchisors out there which do not ask
for a prepayment. These franchisors should be included. Canadian
Tire, for example, when you buy that franchise you're not asked
to put up a fee in advance. So, those franchisors which don't ask
for prepayment should be included in the wording of the bill.
That concludes my
presentation this morning. If you have any questions, I would be
happy to try to answer them.
Vice-Chair: We've got about six minutes. First, the PC
caucus, have you got any comments?
Mr John O'Toole
(Durham): Yes. Thank you, Mr Lessif, I appreciate that,
and I'd like to thank you for your work on the franchise working
group. I think they've worked very hard to come up with some sort
of balance, and I appreciate that. Just to reinforce a couple of
points, I appreciate the amendments as well. This is an ongoing
thing. There's always a state of reviewing excellence, and that's
what it's about. It's in a continual state of review. In a
regulatory sense, probably the easiest way to legislate this is
to provide a legislative framework with regulations that can be
ongoing and updated.
There are just a couple of
points I'd like to re-emphasize. You mentioned, after your 20
years of experience in a successful operation, the due diligence
that's incumbent on the franchisee. Would you like to see
incorporated some strengthening of those duties so that they're
actually signing off? We've had this mentioned on two or three
occasions, having independent legal advice rather than just
rushing in and opening that store and getting going. A lot of the
enthusiasm for new business operations is such that they want to
get going; they may not take the due diligence. So how about the
independent legal advice and the independent financial advice?
You have mentioned that, but perhaps you'd like to address
If I understand your question, you're suggesting that it be put
in a regulation for the franchisee to sign off on?
Mr Lessif: I
think that's an excellent suggestion, by all means, because what
happens when you start a new business is that the adrenalin gets
flowing and sometimes your heart rather than your head makes some
of your decisions for you. That's an excellent suggestion.
Mr Bruce Crozier (Essex): We don't
have much time and I thank you for your presentation. In your
conclusion you said from your perspective the majority of
franchisees in Ontario are involved in sound franchise systems.
What is your perspective, to back up that statement?
My perspective is just my knowledge of the franchise industry for
me as an independent person involved in our chambers of commerce
in three communities in southwestern Ontario, that experience
that I have.
Do you have some knowledge across Ontario, to make that
Only in respect to the fact that I'm involved in many of the
organizations that McDonald's has from a franchisee standpoint,
so I get exposed to a lot of Ontario, other communities.
OK. Thank you.
Mr Tony Martin (Sault
Ste Marie): We've heard some pretty sad stories over the
last two or three days in front of this committee, both in camera
and in public, of particularly franchisees who find themselves
caught up in bad systems that act unilaterally, have agreements
that are stacked in their favour and they have no compunction
about using that.
You present your case as a
man with a family who's been in this business for 20 years, and I
suspect that you hope to be there for a good long time to
Martin: -and perhaps even pass some of these entities on
to your children to run.
We had a number of people
before us yesterday in particular who were hoping to do the same
thing. I wouldn't characterize them as young, woolly-eyed,
heart-pounding, excited entrepreneurs. Some of them have been in
the business for a long time. Some of them learned the business
from their fathers and their mothers. At this point in their
history they're under threat of losing that business and don't
see for them a bill that focuses almost solely on disclosure of
information on the sale or buying of a franchise as in any way
going the distance to protect their interests or to give them a
fair shake at protecting their interests.
What do you have to say to
them this morning that might give them some comfort re this
legislation that we're considering?
I'd like to respond to that wearing two hats, one as an
independent owner-operator and the other as a member of the
Franchise Sector Working Team.
Over the last five years the
team put our best thinking together, which you people have in
front of you there, for the wording of the meat of the bill, and
there was give and take in that. It's not a perfect scenario.
There was give from franchisors and there was give from the
franchisee's point of view.
What this bill does, I think,
is present a fair and equitable situation to look after all
franchise scenarios. I can't speak to an individual who has had a
franchise for a number of years and for whatever reasons is
faltering. You are asking me to answer a somewhat speculative
question, and I don't think I can answer that.
Martin: I suggest to you that the bill we have in front
of us continues a regime where it's all take on the part of the
franchisor and all give on the part of the franchisee. If at this
point in our history we don't have the intestinal fortitude to do
what is right on behalf of the many very hard-working, sincere,
intelligent small business people across this province, who have
been represented to some small degree over the last two or three
days, telling us their stories, then this will continue. And
people like you and I, who I suggest know better, will have to
live with that.
Vice-Chair: You have about a minute left to respond.
Mr Lessif: I
guess my comment on that is that the Franchise Sector Working
Team put this bill together to submit to this committee to amend
or add to. In our best judgement, this is a fair bill that
answers to the points you made. That would be my response to that
and my comment on that.
Vice-Chair: Thank you, Mr Lessif. I appreciate that very
much, and thank you for bringing those proposed amendments for us
FRANCHISE SECTOR WORKING TEAM
Vice-Chair: Our next presenter is Mr Bob Krupp of
Krupp's Food Market. Welcome. We are on a 20-minute schedule, so
please free to start right now.
Krupp: Thank you and good morning. First, my apologies.
I have "Madam Chair" on this. Is the Chair still ill?
I'm just going to read from
this, but I would like to make one comment on the heels of John's
comments with regard to the bill that was put forward. We were
all part of that on the Franchise Sector Working Team. However,
the basics of fair dealing are still at issue as far as I'm
concerned, in that, yes, fair dealing is mentioned but it's not
defined. You will see that that runs through here and may sound
like a conflict between John and me. I think the fact that fair
dealing is there is important. But having said that, I believe
there is more to be done.
My name is Bob Krupp. I am
from Kincardine, Ontario. I am addressing you today from my
perspective as a past franchisee and with very limited experience
as a franchisor. I am also currently an acting member of the
Franchise Sector Working Team.
During my working career I
have experienced some of the strengths and weaknesses of the
franchise sector from both perspectives. From 1968 to 1979 I was
employed by an independent grocery wholesaler, Knechtel Wholesale
Grocers, from Kitchener. During my tenure with Knechtel, after
three years in the wholesale division, I managed and supervised
corporate supermarkets in the Kitchener area for Knechtel.
Subsequently I purchased a
small grocery store business in Kincardine, Ontario, from
Knechtel Wholesale and
operated it as a Knechtel associate store, a franchisee, until
Although there was no upfront
franchise fee associated with this purchase, it was mutually
agreed that Knechtel would be the primary supplier of goods and
that the associate store would comply with certain standards of
customer service, advertising and operations. It was more or less
a buying agreement.
The implied and practised
objective was for Knechtel to assist the franchisee to achieve
operational success and profitability, thereby increasing
revenues and profitability for the distributor-franchisor.
During the 1979-95 time
frame, with the assistance of the franchisor, my company
assembled appropriate property and developed, constructed and
operated a larger, full-service supermarket in Kincardine.
Concurrently, my company
redeveloped the former grocery store location into a mini-mall in
order to offset obligations of the lease that had several years
remaining. One of these retail outlets was a convenience store,
which I developed in a similar fashion to a franchise.
Ultimately, because my focus
was on the supermarket, I adjusted the business format of the
convenience store to that of a partnership, with the ultimate
objective of selling the business outright to the franchisee. I
felt that unless my company was prepared to contribute continuing
expertise and assistance to the franchisee, the drivers would not
be substantial enough to promote a high level of commitment by
I would like to state up
front that I believe franchising to be an excellent vehicle for
supplying high-quality goods and services to consumers in an
efficient manner. If the goals and objectives of both the
franchisor and the franchisee are met, the chances of success are
Often an individual has many
qualifications required to achieve success in retailing; however,
they sometimes perhaps lack the capital resources or a
commercially viable business idea. With the assistance of a
franchisor having developed a successful business format, the
franchisee, through sweat equity, may be able to secure financial
stability as well as build equity in the franchise business.
There are several examples of
very successful franchise systems that have provided financial
success for many individuals. However, given the large number of
failures in this growing sector, I think it is fair to say that
there are good franchise opportunities as well as those which
have been developed simply to attract the hard-earned after-tax
dollars of unsuspecting individuals.
In a perfect world, the need
for legislation would not be an issue. Experience demonstrates
that it is because of the self-serving franchise systems that
inequities exist, and therefore some mechanism must be sought to
level the playing field to ensure fair dealing.
I will attempt to be brief
in my comments because the committee has previously had the
benefit of several expert witnesses regarding the goals and
objectives of the Franchise Sector Working Team.
The Franchise Sector
Working Team, as you are aware, consists of representatives from
the Canadian Franchise Association, franchisees from a variety of
Ontario franchise operations and Ministry of Consumer and
Commercial Relations staff. Additionally, experts representing
the views of franchisors and franchisees are present to provide
professional perspectives on franchising.
The Franchise Sector
Working Team was formed in late 1994 to work together in order to
establish a framework by which the franchise sector could address
mutual interests as well as to determine the need for
legislation. From the outset, it was evident that franchisor
representatives wished to have less regulation and disclosure,
while franchisee representatives preferred more disclosure
together with a method for dispute resolution. Several important
areas of concern were discussed at length, at times generating
heated dialogue as to what should be included in legislation and
regulation. Some pertinent issues discussed were:
self-regulation; good-faith standards, or fair dealing; power
imbalance; alternate dispute resolution; code of ethics or
conduct; disclosure and misrepresentation; territory or market
exclusivity; and arbitrary termination of the franchise.
Prior to speaking to
specific issues of concern, I would like to state for the record
that I am in agreement with several minor amendments being
advanced to the committee by MCCR staff, which are: to permit
electronic disclosure; to expand the right of action to agents or
brokers; that upon granting an additional franchise to an
existing franchisee, disclosure would be required only if there
had been a material change; that franchisees pre-existing before
legislation would be subject to a disclosure document upon
renewal or immediately in the case of a material change, as
suggested above; and within the definition of "payment" include
the terms "direct" or "indirect" payment. That alludes to what
John was saying with regard to franchise fees that are built into
the operational and purchasing of goods and products.
In the interests of
brevity, I will confine the remainder of my comments to two
specific areas of the proposed legislation put forward by the
ministry that fall short of my expectations.
Fair dealing: Although the
fundamentals of the proposed legislation were reached by
consensus, the "fair dealing" clause, as proposed, will not
achieve the result sought by franchisee representatives.
Franchisee representatives proposed that a code of ethics or
conduct be developed to define the terms under which a franchise
would operate. However, agreement could not be reached with
regard to enforceability. It was agreed that a "fair dealing"
clause would be necessary to ensure that the imbalance of power
inevitably present in this business format was addressed with
regard to dispute resolution. In the absence of a mechanism for
statutory remedy, a code of ethics or good faith standard is
resolution: Again, in the absence of a suitable dispute
resolution mechanism, fair dealing must have a definition and state the remedy
available to the franchisee. Stating the terms of fair dealing,
if in fact franchisors intend to participate in an active,
expanding market in the long term, would not disadvantage any
legitimate franchisor. Considerable discussion ensued with regard
to the appointment of an ombudsman to assess the validity of a
dispute between a franchisee and a franchisor. It was felt that a
third party review by someone familiar with franchise sector
issues could resolve disputes, avoiding costly litigation. The
imbalance of power between franchisees and franchisors renders
litigation irrelevant due to cost.
In conclusion, there are,
of course, many additional areas of concern that in my view
should be strengthened in the proposed legislation. As an
example, the issue of balance of power with regard to additional
franchisees in a particular market is not addressed. However, I
feel it is important to move forward with at least a basic
framework that provides some elements of fairness. I believe that
if fair dealing and commercial reasonableness were defined, with
substantial consequences in the case of a breach, this
legislation would be a good first step. However, if this is not
addressed as a minimum, in my opinion the Franchise Sector
Working Team has achieved very little.
Thank you for your time and
attention. If you have any questions, I'm here.
Vice-Chair: Thank you, Mr Krupp. I'd like to start out
with the Liberal caucus.
Mrs Claudette Boyer
(Ottawa-Vanier): Thank you for your presentation. It was
quite useful; good comments, good recommendations. Along the way,
you said you were in agreement with several minor amendments that
were advanced. I would like you to elaborate on where you say
"within the definition of payment, include the terms `direct' or
I think where the ministry is coming from on that one is that
with my franchise, as an example, there was no fee per se. The
fee was involved in the purchase of goods, in advertising and
other charges that were attributed to the franchisee but not
called a franchise fee per se. Lots of franchise fees today,
certainly in fast food and others, have a fee that you pay up
front and then maybe an ongoing one year after year. I think the
ministry felt that if it was missed, then that would be construed
to mean that if you didn't pay an upfront fee, there was in fact
no franchise fee. So "indirect" would, I think, clarify that
there are franchise fees included in the cost of goods or other
Martin: I want to thank you for coming forward and
sharing with us your thoughts, and I also want to thank you for
your honest assessment of the bill as it now exists. We're trying
really hard here to get a handle on the truth in this issue and
at times it's difficult because there are competing interests in
this, as you know. You expressed and shared with us very clearly
your experience of the working team, where there were lots of
areas of discussion and disagreement.
You list in your
presentation the points that were discussed. There are about
eight, and there were actually only two out of that eight that
you really got to in the bill. One was the good faith standards
and fair dealing and the other was the disclosure and
misrepresentation. You then go on in your presentation to
actually say that even those really don't work.
Well, the disclosure will
work for new people coming in, but for those already in, there's
nothing in there for them. And the stories we've heard over the
last three days were primarily about them, some very well-meaning
and hard-working individuals, entrepreneurs and small businesses,
in my own community and across the province, who are under duress
at the moment because there is no place they can go. In fact, the
amendments that have been proposed by the working team don't deal
with this either. They're technical in nature and they capture
the dealers and the brokers, but they don't deal with this.
I guess my question for you
is this. You're saying in your conclusion that in fact the team
has really achieved very little. I'm not going to put words in
your mouth, but I would go a little further to suggest that if we
move forward with Bill 33 and do nothing to it, we are giving out
a false sense of security to an industrial sector that may think:
"I'm protected. There's legislation, there's regulation." And
some of those people who are anxious to get into the business,
who do the due diligence now and bring in lawyers and accountants
to check it out, may be lulled into a sense of not having to
worry about that so much any more if we adopt Bill 33.
You've suggested a further
defining of "fair dealing" and I agree with you there. What in
your view would be some of the specifics of that that we could
do? I guess two questions: One, do you agree with me that that's
a possibility, that we could lull people into a false sense of
Yes, I'd be glad to elaborate on that.
What has happened in our
discussions-and the reason I didn't want to bring up all these
issues that we've talked about is that they were discussed ad
nauseam and in a lot of cases just couldn't go any further-it
would seem that the bill needed to get a start. We needed to
start somewhere. There are too many dichotomies of interest. In
the efforts of getting something put forward, we've agreed to
disagree on some of these issues, so the bill went forward.
What concerns me is exactly
what you said, that it looks like there's something, but "fair
dealing" being stated in a clause just as two words without
definition and without clarity on what it is and what it means, I
can't take that anywhere. If I'm treated unfairly, in my view,
unless there's some description of what that means, it's pretty
hard to take that to litigation or even to a third party mediator
if it's not defined. It's in the eye of the beholder. So I think
there needs to be some description around that term if there's
going to be commercial reasonableness practised in a franchise
With regard to disclosure,
I didn't address that issue, because I thought that we came a
long way with disclosure. There are several areas now that will
be required. I think Mr O'Toole made a good point though, that
disclosure without somebody having advice is a little bit
redundant because, again, as John said, the heart rather than the
head sometimes makes these decisions.
I wish my cousin had had
more disclosure at his disposal. When I was advising him not to
go into the franchise he went into-of course, he'd already
decided he was going to go in-when I asked him what I thought
were important questions that he should know with regard to pro
forma, where the numbers came from and how they were going to
back that up, if at all, he said, "Oh, well, he said it would be
this and it would be that." I'd ask him another question and he
said, "Oh, he said...," and then tomorrow, "What does he say?" It
wasn't documented, so it wasn't something I could use as
I think disclosure is one
piece of it. Then that allows a person to go for financial and/or
legal advice. The difficulty with that is that the individual who
wants to get into business is usually already hooked, already
sold on the notion, so it's probably way more important that
there is some way to make sure that there's fairness throughout
the contract. Not after the signing; the signing is one thing.
You can ask all the questions you want and you can get all the
disclosure. But once you're in business, it's: "How are you going
to react? How is the franchise going to do?" And there are lots
of really good ones out there, so I don't meant to beat up the
Vice-Chair: Mr O'Toole has a question.
O'Toole: I appreciate your input this morning. Just a
couple of things we may want to get to: You mentioned in a subtle
way that you had a brother or a relation who didn't take your
advice and went with their heart instead of their mind. Do you
think-very briefly, because I have a couple of real
questions-that that is substantively the way a lot of the
decisions are made by new franchisees?
O'Toole: I think it is important to really rigidly
require certain due diligence provisions-do you know what I
mean?-a cooling-off period, whatever. Otherwise, they're just
going to say, "Where's the store, where's the key?" I sense it
because of some personal experience as well.
I want to respond to a
couple of things. You were in the grocery business. We heard
repeatedly that the supply issue was a substantive problem in the
grocery business, in the disclosure saying, "Thou shalt buy
`everything' from me." It becomes a really serious problem even
if it's in disclosure.
O'Toole: I'm not sure if you have any suggestions there,
but it does come back to fair dealing as well. I'm kind of
rolling all of this in. It's our understanding that the fair
dealing provision is being referenced to the Alberta model, which
really hasn't played itself out in the courts just yet. I think
there's some sympathy with the "commercial reasonableness"
definition, in my mind anyway. I can't speak on anything more,
after listening for a number of days.
You've got the fair dealing
and the commercial reasonableness, you've got disclosure and
association. Now when you look at where you were-and no perfect
world-do you think we've moved tremendously forward from the
dilemma we found ourselves in in the early 1990s, when the then
government had the ability to make decisions and found a way of
avoiding it by finding some kind of working group to deal with
the Loeb situation in Ottawa, which is the same business, and did
nothing? Do you understand what I'm saying?
O'Toole: It's difficult to find that balance and move
forward. Really, the question is, do you feel there's enough
strength, with a few minor amendments, to really make this a
win-win for both sectors?
If "fair dealing" and "commercial reasonableness" are defined and
there are significant consequences if they're found to contravene
those rules, then it gives an opportunity, once you're in the
deal-with respect to disclosure again, that's fine, and I
counselled this fellow quite strongly. I'm pretty aware of
business, and I gave him as good a shot as I could. I've taken my
spouse often to a lawyer because I'm doing a business deal, and
she gets outside advice. He tells her not to sign it, and then of
course we sign it. That can sometimes be a false sense of
With regard to the grocery
industry, the compression is a problem. In my days, the franchise
was not that restrictive. But they're tightening the screws, and
you're going to hear more stories about it. They are really
tightening down. To buy all your product all the time from one
supplier is not commercially reasonable in a lot of instances,
because they're not that good at what they say they do. Having
said that, there are other people with real examples of that.
Vice-Chair: Thank you so much for your time, Mr Krupp.
It has been a pleasure.
Martin: On a point of order, Chair: There is some
material you might have some interest in reading that talks a bit
about this business of what agreements say and what they don't
say and what in fact they really mean. The article I'm referring
to is called Avoiding the Traps: Boilerplate That Fights the Ten
Most Dangerous Contract Terms. I'll give you a copy of the
summary our researcher has done so that you can take a look at it
and in further discussions you have with the working team perhaps
you can bring it up.
The notion is to use that as a guideline for improving?
Vice-Chair: Is Sue Ricketts here? Good morning, Ms
Ricketts. You can start whenever you wish. You have 20
Ms Sue Ricketts: Thank you very
much for giving me a chance to speak my opinions. I can't speak
for any organization; I can only tell you what happened in my
I was brought up with the
belief that Canada was the land of milk and honey, the golden
place. My father chose to come here as an orphan and brought his
two sisters with him because of his belief that this was a good
place to be and well governed and well controlled and safe.
Until June 1998, I always
held that thought in the back of my mind. That's where I come
from. I never wanted to leave here. I never had any reason to
question. I believed that when things go wrong, as they do at
times, this country has laws and courts and mediation systems
where wronged parties could present their side and an agreement
could be found. I'm not talking about theft, murder, robbery or
anything like that; I mean business dealings between two people,
two companies, two entities. That's definitely not true regarding
franchising. The contract is one way, and no changes are allowed
or you're just not a franchisee.
When I look back on it, I
can't believe I fell for the scheme. It went like this: "We have
a wonderful idea. You put up lots of money, you provision a
store, you pay us a fee to use our name, and we'll co-sign all
the borrowing you have to do and make a deal with your landlord
by co-signing your lease. In exchange, we'll be the sole provider
of your inventory, your procedures, your prices and conditions of
operation. We'll also mandate when you must do store
refurbishing, which contractors you can use, and all the
conditions of operation must meet our standards. We'll give you
time to try to find out about us, but we won't let you change any
of our conditions. We'll tell you what the average franchise
should earn. Of course, the statements we give you contain no
debt and thus give a wrong picture of the true operating
What all that really means
is that they control everything, and when they want to get rid of
you, they can and will, without prior notice. They'll take
everything and make sure that you can't afford to take them to
court. They'll have discouraged and not permitted their
franchisees to belong to any group which might insist on
mediation or arbitration or some other form of handling disputes.
The laws of Ontario let them take away your source of earning
without any recompense for past work, for efforts in building
them a business, and of course there is no formula for even a
partial return of your investment. Thanks for the set-up,
franchisor, and thanks for your protection.
Shortly after I lost my
franchise, I wrote a statement which speaks to my feelings at
that time, and you're welcome to read it. Without any prior
notice, my franchise was taken over. In seven and a half hours, I
went from owning two locations, with 16 employees, to having
nothing except my home, which had been pledged to the bank as
security to obtain operating credit. Nice feeling.
Shortly after writing that
statement, I received a settlement agreement through my lawyer
from the franchisor's lawyer. To a non-lawyer it's pretty
intimidating and frightening, and that is its main purpose and
intent. I am aware that other franchisees in my situation have
received this and signed it, and then of course they can't speak
Following a page of
legalese, clause 1 says that I agree never to take them to court.
Clause 2 says that if they can find fraud, wilful misconduct or
misrepresentation by me, or my husband, who was never involved in
the business, they can do whatever they want to, and they want me
to agree that I'll pay them $10,000 for every instance they can
find of my damaging them or their franchise in any way. Clause 3
says that we, and all our descendants, give up any right to seek
redress. Clause 4 says that they admit no liabilities or
obligations and we agree with them. Clause 5 says that we will
not speak about the terms of this agreement to anyone unless the
law requires us to. Clause 6 says that we agree not to talk to
anyone connected with them or any potential franchisees in any
way that might be construed as negative. Clause 7 says that we
all agree not to hinder them in realizing as much from their
actions as they can. Clause 8 says that even though they have
thrown me out without a thing, the franchise agreement is still
in force. So they still have control over me. Clause 9 indicates
that the laws of Quebec prevail and that if I want to fight I
must go to court there, although my business was not in Quebec,
it was always in Ontario.
Needless to say, I didn't
sign the agreement that they sent. So we sit, almost two years
later, and I have never heard from them since. I never received a
penny. I'm now being harassed by a couple of collection agencies
over bills which they didn't pay and retail sales tax is holding
$18,000 which they won't release because they can't find out
which of their departments cashed my PST cheque in February 1997.
There's also a fax that I sent to my local member of Parliament
making some recommendations. Even though it's too late for me,
it's my aim and my sole intention to prevent this from happening
to anyone else.
I've read that since 1993
there have been 170-some articles printed regarding failed
franchises. These articles mention 4,600 people directly losing
their businesses and their investments. That's a huge number of
families being devastated. I'm sure they all had employees who
were immediately affected by the business closure or upheaval.
You have it in your power to stop this from happening again.
Please make sure that you speak for those who need you to do so.
Thank you for your time.
Martin: I want to thank you for coming forward and
telling your story. I know that it takes a lot of courage and
effort to come and do this. This is exactly what we were hoping
would happen as we crossed the province these last few days to
hear from people who have had an experience in franchising that
in some instances was positive, in many instances was not, so
that we could get a handle on just exactly what the situation
was and how it was that
people were suffering and what things came into play or did not
come into play that resulted in this situation as it now
You paint a very worrying
picture here with the description of the document that you
received and the various things in it, which really speak to
what's in it for them and nothing-actually, what's in it for them
that they will get from you, more than anything.
I guess there are two
questions. Are you aware of others who have experienced the same
circumstance? What would you recommend by way of changes to this
bill that would have been helpful to you or might even be helpful
to you as you continue to struggle with trying to get
Ricketts: My problem with justice is that I can't afford
it. They took all my money; they took everything. How do I go to
court? I was told by my lawyer that because of the size of the
franchisor, they would just put in an appeal no matter what
happened, and I haven't got a war chest to fight them. I believe
that it's very important that it be mandated by law that there is
some form of dispute mechanism which all parties can afford. It
doesn't matter who's right, whether it's the franchisor or the
franchisee, you should still have the right to mediation. The
courts are not really affordable, and they want payment
beforehand; they don't want payment when you win. It doesn't work
Just something you might
want to know: My businesses weren't exactly that small. I had
sales of $2.6 million a year. However, you'll see my profits were
minuscule. They were controlled by the franchisor directly. If
there is national advertising that says the price is this much,
I'm not going to find a customer who is going to pay me any more.
That's part of the problem.
There were a number of
systems in place that made sure that your profits were in the
hands of your franchisor. We had a credit note system. We had to
take all product that was on sale, and the deal was that we kept
it for 90 days and if we didn't sell it we could return it. That
means I get to pay the freight two ways, in effect. But because
of the system, we had to pay for product in 30 days. So I've
already paid for it. Then they issue a credit note maybe two
months after I've returned the product, which is only good
against buying more inventory. It doesn't pay my staff, doesn't
pay my landlord, doesn't help me keep the business going, and so
I have to go to the bank to get interim financing. That's the way
this franchise works.
How do you get out of it?
You don't. You keep struggling and working and trying your best
to make a profit.
Martin: You mentioned the question of a dispute
resolution mechanism, and I couldn't agree with you more that
there needs to be something put in place. What has been suggested
over the last three days by some folks is that the new provision
in law that cases go to mediation before they actually go to
court might do the trick. But what we were told yesterday morning
by Professor Gillian Hadfield is that that may, on the surface,
look like a good thing and that it may work, but in fact before
you get to that mediation process you actually have to have
already developed a case and have had legal advice, and you're
into the adversarial legal system already.
What I think you're
suggesting, and what I certainly am suggesting-maybe you can
comment on this-is a system where there is a third party
arbitrator and where, before you get into those very detailed and
complicated and expensive legal wranglings, maybe something could
Ricketts: Absolutely. I believe that's the most
important part of it. It's my understanding that car dealerships,
for one, have that type of agreement. They pay a regular fee,
both franchisor and franchisee, to provide funds for a mediation
service, if needed. You know that you have the ability to at
least argue your case yourself with your franchisor and have it
fairly looked at.
I just feel very frustrated
because I have no option. I'm just going to have to learn to get
over it and get on with life. However, I don't think that's a
reasonable way of dealing. I don't think it's fair to say to
people: "You've done your due diligence, you've got your job,
you've built a business, you've worked very hard, but they can
take it away. It's OK." If I were an employee, I would at least
get a week's wages for every year that I spent. If you're a
franchisee, it's: "Thanks for the business. Bye."
O'Toole: Thank you very much, Ms Ricketts, for a very
personal story. Your victim's statement really is a lot more an
emotional plea to level the playing field, and I certainly can
assure you that I have heard that and it's important.
I look at you, and I've
heard a number of stories that were similar, and to put a real
face on it is extremely important, outside of this whole legal
babble that's in some of this legislation, or any legislation, I
suppose. But I want to broaden it out a bit. It's not just this
community here, arguably not even just this province.
Ricketts: Certainly not.
O'Toole: The only other province that has any
legislation is Alberta.
Ricketts: And even that is not much help; it's 60 days.
You don't really know an organization in 60 days of dealing with
O'Toole: I guess I'm trying to make a point here, and I
don't want it to sound anything more than an incredible lack of
leadership federally. Because the very definition of "franchisor
and franchisee" under the Competition Act could be described, I'm
sure, as an abusive-dominant position. The person with all the
gold has all the rules. The golden rule?
There's no question in my
view that it's-buyer beware, extremely aware. If nothing else
comes out of these hearings, it's certainly important to take a
sober second thought, exercise due diligence. You can tell people
that until you fall down on the road, but when it's clear legally
that you couldn't possibly take on the giant, whoever that
Mr O'Toole: -not that they're bad
but to have your day in court, as you've described it.
I call on the Competition
Act to renew the reviewable trade practices under the Competition
Act. I think that's critical. Any province trying to,
helter-skelter, do this commercial thing isn't really helping the
people of Canada. Ontario, certainly by this act, is doing more
than nothing and more than the two previous governments, ever
since the Grange report has moved forward significantly. Is it
perfect? No. But I think if you look at the three fundamental
purposes-and this isn't a lecture; it's more or less bringing you
up to date on where we are, through what you've lived through and
lost, a lot of your life.
Disclosure: I'm sure if we
can make that stronger, we will listen to you and others to make
it stronger. The whole attitude of fair dealing and commercial
reasonableness may even find its way in there and this right to
associate, thereby educate your peers. Do you not agree that
those are substantively important moves that may help? That's why
you're here this morning.
Ricketts: That's why I'm here. When I signed my
agreement in 1989, the franchisor assured me and showed me that
their franchise agreement met every one of Alberta's rules, was
the best legislation in this country. Needless to say, it didn't
go too far.
Martin: On a point of order, Mr Chair: Is the
parliamentary assistant tabling some amendments here on further
strengthening the disclosure piece and also suggesting that maybe
we would consider adding commercial reasonableness to the fair
Vice-Chair: I don't think he has tabled anything at this
Martin: OK. I just thought maybe he was.
Vice-Chair: We've only got a couple of minutes. I'd like
to make sure that the Liberal caucus has a chance to comment on
this. Mr Crozier.
Crozier: That's kind of you, Vice-Chair. Would you
consider your problem, Ms Ricketts, one of competition or one of
simply dealing with an unfair franchisor?
Ricketts: Part of it is competition in that the industry
that I was in tends to have an average net sale value of between
13% and 18%, very small.
Crozier: So the franchise you had was in competition
with other businesses or other franchises of a similar
Crozier: Do you mind telling us what the business
Ricketts: Computers, hardware and software.
Crozier: Ah, OK.
Ricketts: But what really put a strain on relations was
that after eight years of operating, my lease had to be renewed
with the mall. The mall insisted that I move my location to a
space which was double the size that I had, and the franchisor
made all the arrangements. Then after everything was put in place
and signed, I went to the bank and the franchisor had forgotten
to tell me that small business development loans don't apply to
the second store.
Crozier: Conveniently forgotten to tell you.
Ricketts: Yes. Scramble, you know, panic. This after
having very minuscule returns. You'll find them there.
Crozier: Is the franchisor you dealt with a solely
Vice-Chair: Ms Ricketts, thank you very much for taking
the time this morning. We appreciate hearing of your personal
experience. Thanks again.
Ricketts: Thank you for the chance.
Vice-Chair: I'd like Diane Meeuse to come forward. How
are you this morning?
Meeuse: Fine, thank you.
Vice-Chair: You have around 20 minutes, Ms Meeuse. We
can ask some questions in that period of time.
First of all, I'd like to thank you all for giving me the
opportunity to provide you with this letter which outlines my
concerns regarding your investigation into formulating badly
needed franchise legislation. Would you like a minute to read
this outline? Like it says, I had a franchise for 10 years, and
when the lease expired, all I got was a handshake, and that was
it, even though they gave me a bad location and they admitted it.
They said, "We're all in this together, so thank you very
I think we should have
something to protect us. I was sort of a beggar for punishment. I
didn't just buy one; I bought three. I only listed one here, but
I bought two more, because at the beginning it looked like it was
a good deal and sales were creeping up. I thought: "I'll give it
five years. It should come up." Then they said they were bad
locations. The one I mention here had a 10-year lease; the other
ones had six. One was in Ottawa, and the other one was here in
Crozier: Just one second. Chair, is there something
written from the deputant? We don't have a copy.
Sorry, I gave out at least 25 or 30 copies.
Vice-Chair: Has everyone got a copy now? OK. Go ahead,
I also bought my franchise in 1989. It seems like it was a
popular year for franchising. I asked them verbally when it
expired. I knew it had a 10-year expiration date. They said:
"Don't worry. Even if you die, it's going to go to your kids. You
can't lose with us. You're a family member."
For the first couple of
years, they seemed like normal, nice people to do business with.
I was winning awards for getting the sales up and I was a
wonderful person. But near the end they said: "We're not renewing
the lease with this mall. It's nice knowing you. You are getting
a little bit older; maybe you should retire. You have grandkids." I said: "I'm not
ready to retire. Isn't there any way you guys can help me? Give
me another location or something?" They said: "No, you need
another-now the fee is not $210,000, it's $300,000. If you have
this, maybe, but maybe you should look after the grandkids. Thank
you very much." That was it. I lost a lot of money.
Vice-Chair: Three stores, did you say?
I had one here in London that had a 10-year lease. Then I bought
another one that had a six-year lease. A total of three, yes. One
Vice-Chair: In Ottawa, London and where?
One in Ottawa and two in London. So you're looking at a big
investment and nothing to show for it at the end of 10 years of
hard work. They said one was a bad location. The second one, they
said: "The mall is being emptied now. A lot of stores are pulling
out." Actually, it's the one across here, the Galleria. I had my
daughter running the one in Ottawa because she lives in Ottawa.
She said, "Aren't you going to renew?" They said, "You might have
another baby and you won't have enough time to look after the
store, so perhaps you should just stay home with your baby,"
basically. So we lost that investment too. They bought her store
for just the equipment, used equipment. What is it worth?
Practically nothing. They sold it to another franchisee who was
new, because they could bully him and tell him what to do and he
would do whatever. They like that. They like new people.
In the location I had, the
rent was 40% of sales. In any business you can't make money if
the rent is that high. I said to them, "Perhaps you should talk
to the landlord and get the rent reduced." They said, "Oh, we
can't do that." But that's OK. I understand that. Business is
business. You sign up for a certain amount of rent, and the
landlord expects that. When a mall is being vacated and there are
a lot of empty stores, a lot of times the landlord will reduce
the rent for you. But they weren't one bit interested, because I
was paying the rent and they weren't. They only do things to help
themselves, but when it comes to helping the franchisees, they're
not too generous.
I don't know; I don't
really have a solution for the way they treat franchisees, but
I'm not the only one who was treated like that by this company.
More than 50% of the franchisees are not happy. But no one wants
to say anything, because the minute you voice your opinion,
you're treated awful, and they don't want that. I told them that
since I'm out, I'm going to come out and say the way we are
Vice-Chair: We appreciate that. We probably have some
questions here for you. Is that OK?
O'Toole: Again, Ms Meeuse, I appreciate the story, the
real dilemma of the individual franchisee. It's important to make
sure there is a framework of fairness. That's ultimately what
you're aiming for. Would you say, though, that you were-and I'm
not trying to say that you weren't-adequately prepared or advised
to make that investment decision, or were you anxious to get into
No, I wasn't really anxious to get into it. But they promised me
a pretty good return on my investment and they said: "We'll help
you in any way. You don't have to worry about it. All our stores
make money." After I was in it, I talked to a lot of franchisees
when we were at meetings and found out that hardly anyone made
O'Toole: That wouldn't be fair dealing, perhaps.
O'Toole: Did you actually have the $210,000, or did you
have to borrow it?
I had the $210,000, but I borrowed the rest from my
O'Toole: I'm not sure if you're familiar with the three
provisions that currently exist in this proposed legislation. One
is disclosure, which says, "This is the business plan; these are
the rules." Then there's the whole issue of fair dealing, which I
suspect some judge would say means what it says, for both
parties. Then there's the right to associate. In that, you could
check the Web site-electronic disclosure-and you could do a lot
of individual and collective research in asking other people,
"How are you making out?"
Yes. I asked them.
O'Toole: What did they say?
Before I got I into the system, they were so afraid to say
anything against the system that they all said, "We're doing just
fine." But now that I think about it, they didn't actually say:
"Yes, we're making money. We're very happy." They just said,
"We're doing good."
O'Toole: "Come join us."
"We have fun with the customers." They just changed it.
O'Toole: They changed the subject.
O'Toole: Thank you for putting a real face on this.
Crozier: Did you actually have a franchise agreement
that was signed?
Crozier: So when Second Cup came along and suggested
that your daughter go home and raise children and that they would
cease the franchise, did you have advice that they were able to
do this so flippantly, to simply tell you to go home?
I didn't think they could do that. But when we asked the lawyer
about suing them, he said: "You don't want to go up against a big
company like that. They have a lot of money to fight it." We lost
a lot of money. We don't have a lot of money to back us up right
Crozier: But your advice was that what wasn't in the
agreement would allow this company to simply get away with
It does say that they don't really have to renew after the time
Mr Crozier: OK, so it was at
renewal time that this issue came up.
Yes. But verbally they don't say that. They say that even if you
die, your family gets it. They tell you that verbally: "Your
money is as sound as anything with us. Just come on board and
you'll make money." They give you financial projections that show
how much money you are going to make. Even in the worst-case
scenario it makes money.
Crozier: You spoke about the location, that their reason
was the location was no good. Who chose the location at the
Crozier: They do. So they come along after they have
chosen a location and tell you that your location isn't any good,
so for that reason they are simply going to take the franchise
away and don't offer you an alternative.
Crozier: That's unfortunate. This is one of those times
when we are all trying to work towards a solution to prevent the
kind of experience you have had from happening to others. Are you
totally out of the business with Second Cup?
Thank you. Just a comment. You talk about input, that you hope
the input you bring to us will guide us in drafting good
legislation. My colleague Mr O'Toole talked about disclosure,
fair dealing and the right to associate. Do you have anything
else that you would like to bring as a recommendation to this
bill, or do the three main points in the legislation satisfy you
and we can work on them?
Basically, they want the franchisee to take the responsibility.
But since they claim we are in this together, like a family,
shouldn't they have some of the responsibility? They chose the
wrong location and they got my money, so aren't we in this
together? Shouldn't they give me another location?
Martin: Thank you very much. I recognize the
No, I'm not nervous.
Martin: I could understand it completely if you
I got over it.
Vice-Chair: You can really open up now.
Martin: Your story presents to me like a case of
Martin: They see you with $210,000 and they want to get
it out of you, so they will tell you anything you want to hear.
Then as soon as you sign the agreement and get into the business,
it's game over, end of story. Were you here for the presenter
Martin: She ended up in a bad situation too. She thought
she was part of the family. As a matter of fact, she probably
thought she was one of the favoured ones. You probably did
So did I. I won a lot of awards.
Martin: Yes. You were the favoured one. Then when they
decide that they've got as much out of you as they possibly can
and they perhaps see another victim, they sort of leave you aside
and then they send you a document.
Just let me read you a
couple of the clauses in Ms Rickett's statement from the firm.
Clause 1 says that she agrees never to take them to court. That
is giving up fundamental rights. Can you imagine receiving a
document from somebody that says, "I agree never to take you to
Another one says that she
and all her descendants give up any right to seek redress against
them. How could you ask somebody to sign something like that?
I wouldn't sign that.
Martin: It's unbelievable. It's legalized extortion.
Martin: And we have here a bill that in my view simply
puts a false face on a system that will be no more regulated
after we put it in place than it was before. I think that would
be doing the industry more of a disservice than just not doing
anything. We are suggesting, by way of legislation that I have
introduced, Bill 35, that among a lot of other things there
should be some dispute resolution mechanism, someplace you could
go and present your case, and the franchisor would have to come
and present their case, and some third party arbitrator with no
vested interest would deem who was right and who was wrong; if
they want you out, at least recognize some of the investment that
you made and the contribution that you made.
If I were a bad franchisee, why would they sell me three stores?
They weren't all sold at once. The second one was four years
later, and the other one was five years later. Why would you give
three stores to this lousy franchisee? It doesn't make sense.
Martin: I have a document here that I shared with a
gentleman earlier that talks about some of the agreements that
people sign. It says here:
"Franchisees should not
assume that what is said by the franchisor during
negotiations"-during the courting period for a franchisee-"will
be reflected in the franchise agreement. Almost all franchise
agreements include an integration and/or no representations
clause. These clauses, ie, the `I didn't say that' and the `this
is it' clause, appear to be routine but actually relieve the
franchisor of any obligation to fulfil agreements made during the
negotiations or to even acknowledge that any agreements were made
other than those written in the franchise agreement."
This is the industry that
we're looking at today. This is the industry that you were caught
up in. We read the advertisements to come on and invest your
money and this is turn-key and no problem, you don't have to have
any experience, we'll teach you and all that kind of thing.
At the end of the day,
what we end up with, for the most part, are more and more people
like yourself who have been victimized.
Martin: So thanks for coming today.
There's one more thing I'd like to say. After I bought the second
location, later on the mall was kind of getting empty and they
said, "We don't think we'll renew this lease with you, because
the mall is not very busy, so we don't think it's a good
location." But they went and signed with the mall for another
four years after I left. One day I said to the leasing gentleman:
"Why did you do that? You know it's a bad location. You wouldn't
let me run it." He said: "You're from London and you know London.
We're going to get somebody out of town to lease that. They won't
know any different."
Martin: I rest my case.
I thought, "My gosh, this is worse than extortion, what you're
Vice-Chair: Diane, we really appreciate your time this
morning and thanks for being so honest and up front with us.
MARCH GROUP INC
Vice-Chair: To the committee, there has been a little
bit of a problem, and Mr March is going to go on here now instead
of Mr Sovereign. They've agreed to trade places. So, Mr March, if
you could take 20 minutes, please.
March: I don't have any handouts here. My name is Hal
March. I'm part of a national franchise system. I have six
locations. My problems are a little bit different than what
you've been hearing so far, because I'm an ongoing operation. But
I've learned some things the hard way, so I just thought I would
give you a few comments about my situation.
One of the things I am
concerned about is saying anything that could hurt my business or
come back on me, so if we don't need to name my franchise, I'd
rather not. We'll just call it March Group, which is my
One of the things I've
learned very quickly is that if you don't go along then you can
end up in some very serious fights with the franchisor, where
they can make things very difficult for you or try to force you
out of the system. I think you really need to have something in
your new legislation that will allow franchisees to get together
without any kind of repercussions from the franchisor. I've been
involved with this particular system for over six years, and we
have experienced some really bad times where it was important for
us to get together as franchisees. I've been accused of being an
organizer. At one point, they asked me to leave the system, and
that was the reason cited: I'm an organizer, trying to get the
franchisees together so that we could resolve common problems
that we have. Our feeling has been that they want to keep
everybody separate, a sort of divide-and-conquer attitude about
things, because if you get them together, then you have a
stronger voice and it's harder for them to fight a group, but
they can certainly fight individuals.
When I was listening
earlier about people trying to avoid going to court, that's
exactly what I did. When they asked me to leave the system, I
avoided going to court because there's no way. I don't have the
deep pockets of this major corporation, which at the time was
owned by probably one of the largest corporations in the world,
at least they'd rank in the top 50. How can you fight someone
like that when you're just a private business individual? I
managed to sort out my particular problems. I guess you find ways
to get around them and continue.
But I think you should
force the franchisors to facilitate a licensee group or a
franchisee group so that they can meet on their own without
feeling the pressure of the franchisor and try to help solve
problems and make presentations together. That's really
important. I think they have to be forced to encourage that. It's
really hard. A lot of people like myself-what I ended up buying
myself was really a job. I invested a bunch of money. I make less
money than I made before when I worked for a company, but you
learn those things and accept them as you go along. You don't
have a lot of money in a lot of cases. A franchise system, I
think they control it in such a way that you-they want you to
make money, of course they do. They want you to be successful.
But if they can control it so that they're always guaranteed to
make money and you're just satisfied and can continue, I think
that's what they do.
The next point I wanted to
make was that I found, when I got into this, they had a 19-page
franchise agreement with really fine print. I said: "I want to
change this. I don't agree with that, I don't agree with this."
They said: "No, if you change anything, then that's it. We just
won't accept this. Everybody signs it." So I reviewed it with my
lawyer, and he said, "If you want to get into business, you have
to have a certain amount of trust, and I guess if everybody else
in the entire system signs this, then go ahead." I signed my
agreement and then I found out afterwards that in fact is not the
case. There are different deals for different people across the
country and who knows who, and when the companies changed hands
certain special deals were made and that kind of thing.
I think you should obligate
the franchisor to disclose those kinds of differences. If they're
saying there's a standard contract, then tell everybody what is
not standard in the system, that company A has a special deal
because of this and company B has another special deal because of
this and you are lumped in with everybody else and you pay on a
different basis because of these reasons. I think that should be
disclosed. It really hurts you if there are no negotiations and
you're told that's the way it is. You have to have some
confidence in the company that you're dealing with, that they're
telling you the truth and that things are in fact fair and equal
across everybody. But when someone else has an advantage, then it
destroys the whole system.
The other thing, and I think it was mentioned again
this morning too, is that there should be some way to resolve
conflicts. We've tried in our franchisee organization to get them
to help solve conflicts. I guess one of the biggest conflicts we
had was when they asked me to leave the system. I called all the
franchisees I knew who had any kind of influence with the company
and said, "Here's what they've said." We more or less got a
petition together, saying: "Are you nuts? Here's a guy you said
has been your top franchise for the last five of six years, and
you want him to leave the system? What's that about?" It had to
do with the organizing, that's why. It was only because of
getting that petition together that they felt, "OK, we've got the
rest of the franchisee body here behind this guy; let's make this
problem go away." So I came back in the system and we solved our
But there is nothing in
place today to resolve any conflicts. Any time there is a
conflict, they separate you and treat you as a one-on-one
situation, and then when you start talking to other franchisees
you find that your problems are common. I mean, you're running a
similar system. It's a franchise system, and they're supposed to
be the same. But there's nothing there to resolve those
conflicts. So I think that's really, really important, and it has
to be controlled by some outside party so that there's no undue
influence by the franchisor.
The last point I want to
make is about contracts. Mine wasn't quite as bad as the previous
one, which said you couldn't take them to court. But mine
basically says that all conflicts etc and/or interpretations are
left up to the franchisor. So if there's an interpretation to be
made on our contract, their decision is final. By the way, they
can change the contract at any time, and you have to agree to it
and live with it. So it's basically a contract that says, "We'll
tell you what to do, and if you don't like it, tough." I think
that's a very unfair kind of contract, because you don't know
what's going to happen in the future.
I think the franchise
agreement should have a lot more give and take, so that it's not
one-sided and is there to protect the franchisor and the
franchisee. A one-sided agreement doesn't work very well. You
don't find out how well these things work or not until you have a
conflict or that kind of thing.
One example I would like to
cite about this area where things may not be fair is that I pay
8% of my gross revenue back to them just to have this name in
place. They say that part of that money is for administration,
which I understand-they have to provide for overhead-and part of
it is for advertising. That's fine. Let's just say there is this
lump of money that is supposed to be spent for advertising, so
that you get the benefit of that back in your marketplace.
Well, in our system, many
of the locations are still owned by the corporation. It's their
choice. They've decided to run them and that's the way they want
to run this. It tends to be the very large cities that they want
to own. They take all the advertising money and spend it all in
their cities. Back in the cities where I run my locations, we
don't get anything. I have questioned them about it, and so have
other franchisees, and they say: "Well, we do spend the money. In
fact, we spend more money than we have." When it comes time to
question, "What goes into that advertising fund?" they won't give
us the details.
We've had some meetings
when we've had questions periods. We questioned our president
about where the money comes from and where it goes. We have found
out that they end up paying salaries to their own sales reps for
their specific areas, those kinds of things, out of our
advertising fund. If something is set up and the intent is for it
to be used for advertising, then the money should be dealt out in
such a way that it's fair for everybody. I think there needs to
be something in there to make sure the franchisees are protected
in those instances as well. Maybe you can settle it through
conflict resolution or through making sure that certain clauses
and phrases are in the franchise agreement. But it's just
frustrating when you have to try to fight a corporate giant to
get back money you have already paid them.
That is pretty much what I
had to say this morning. I'm sorry I don't have any formal
handout or anything.
Vice-Chair: That's fine, Mr March. Do people from the
Liberal caucus have any questions for Mr March?
Crozier: Yes. Thanks for coming, in spite of the fact
that you're concerned that someone, or your franchisor, would
know you are here. I think the mere fact that you are reluctant
to name your franchise goes a long way in speaking to why we need
this kind of legislation. Some would believe that in this country
you should never be afraid to come forward. Thanks very much for
In view of that, the one
part of the bill that you mentioned that's interesting to me is
the right of association. Again, I think any reasonable person
would think you should never have any doubt about the right of
association in this country. It's a little scary that you have to
bring that forward. Again, it speaks to the need for this kind of
legislation and, in my view, the need to make the legislation
binding on the franchisor or, more important to the franchisee,
because it brings the franchisor to the table, because in many
instances they are large corporations. I appreciate the fact that
you would take these steps under those circumstances.
I think you also mentioned
conflict resolution. That would appear to be important to a
franchisee, because oftentimes, in fact in many instances, you
are small, independent business people. I have some understanding
about what you're saying. Although I wasn't involved in a purely
franchise operation, I operated a retail business where there was
a marketing agreement. It was an independently owned business,
but the type of marketing, the advertising and the style of the
store were under a marketing agreement. So I have some
appreciation of what you are saying, and I want to thank you for
coming forward, notwithstanding the fact that there was some
concern about naming your franchisor.
Vice-Chair: Thank you, Mr Crozier. Mr Martin.
Martin: I also want to do the same. I know we have had a
number of people, very courageous entrepreneurs, come before us
over the last two or three days pleading a case and asking for
some relief in terms of some circumstance they had already
experienced or were in. They weren't looking for undue advantage.
They weren't looking for a playing field that was slanted in
their favour. They were looking for some fairness, some access to
justice and some return on the investment and work they put into
a particular operation. I don't think that's a lot to ask.
To a person, franchisees
have called for some kind of dispute resolution mechanism. We
need to work with that little bit. Exactly what should that look
like? There is some concern that we will introduce into the
industry something that will be onerous and expensive and take
away from a person's or a system's ability to actually do the
thing they are good at, which is sell a product or service. We
need to find some way of balancing that. I suggest there are
ways, if people of good faith sit down around a table and try to
come up with something.
Have you given much thought
to the details or specifics of a dispute resolution mechanism
that you think would work perhaps in your circumstance?
It could be made up of the people involved in the process, as
long as it has some way for people to vote on the outcome and is
balanced. Maybe it's four people, two company representatives and
two franchisee representatives, and they vote on issues, or
something along those lines. It doesn't have to be terribly
complicated or expensive.
Martin: I get the feeling from what you just said too,
and this is another important point: the sense of balance and
equity of power.
There has to be. No one is going to agree to things if it's going
to be one-sided. It doesn't make sense. It has to be win-win. If
you're with a franchise system, you have to do things that are
going to support that system too. Your investment is in that
name, not just in your own franchise outlet but also in the
entire name. So you want to make sure that whatever works is
going to work for everybody and is beneficial. There's no sense
in doing things that are going to make the franchisor go
Martin: There's some sense that this new piece that's
tagged onto the court system now, which calls for mediation,
would be a vehicle, although Professor Hadfield said to us
yesterday that that's the first step into the legal system. So
before you got to mediation, you would have to have had legal
advice, put together a case and the adversarial system would
already have begun. I suggest that as much as possible we would
want to try to stay away from that and try to come up with
solutions that, as you say, benefit both parties.
I also appreciated your
comment on the right to associate, which is in this bill. I
commend the government for that. I think it's a good move. But,
again, how far does it go if the franchisor isn't willing to
recognize your right? You can associate as much as you want, but
if the franchisor isn't willing to negotiate with you or sit down
with you across a table and deal with the association, if they
still continue to want to deal with individuals, then what's the
point, as in situations like your own? I know there is at least
some generic value in the right to associate-to get together,
share, come up with some commons solutions and move forward. But
it seems to me that we need to be looking at something in the
legislation that forces the franchisor to actually recognize the
Yes, I see that point now. And you want to make sure that things
are happening. I don't know how you would follow that up. I guess
it wouldn't be an easy thing to do. I don't know if you would
force them, so that in order to carry on a licence as a
franchisor, or something along those lines, they're forced to sit
down and have meetings with representatives from the franchise
committee and the franchisor and send the minutes on to the
government body, or whatever. I don't have an easy answer for
that, but I see what you're getting at. It's a bit of a
Mr Bob Wood (London
West): Do you have any sense of what return on
investment the franchisees in your system might be getting?
I've been doing this for six years and this is the first year
we've had any significant numbers of people who have been
profitable. The return on investment is probably well under one
tenth of 1%. Our business is fairly capital-intensive. That has
some influence on it. Yes, it's pretty ridiculous.
Do these people have to put in capital money up front?
There are a couple of ways you can do it. Because it's so
asset-intensive-you have to pay a franchise fee up front, yes.
But that's not the most significant thing. In order to acquire
the assets, you can lease the assets that are needed to make this
work, but everybody in our system who is leasing assets is still
continuing to lose money. They lease the assets from the
franchisor. The others that have the financial ability to borrow
the money to acquire those assets are probably making less than a
tenth of a per cent return on investment.
What sort of return did you expect when you went into it?
That's funny. I got a pro forma made up which showed that I would
probably make about a 15% return. I didn't draw a salary for the
first 18 months I was in business. After that I've taken a modest
salary, only at a mid-manager level, not someone who's invested a
lot of money in a business. From that standpoint, it's a little
bit frustrating. My business might be unique because of the
amount of capital required to run it, but in a lot of cases what
you're finding is that people are investing a big chunk of money
in franchises and buying themselves jobs, and not high-paying
jobs. Most people who are in their own business tend to work long
hours. There should be
some protection against that kind of thing. I don't know how you
deal with that. You have the same problem even with a cab driver.
He spends all his money for his licence and his car and that kind
of thing, but he's still making a little over minimum wage. I
don't know how you get around that. There are other businesses
with similar problems.
Mr Wood: I
gather the return has fallen well below your business plan's
Yes. We keep thinking it's around the corner, because it has been
cyclical. That's the other thing they tell you: The business has
been cyclical. They were making those kinds of returns in the
1980s, but it hasn't been here for the 1990s. Hopefully the new
millennium will be a bit better for us. I realize I'm leaving you
a little bit in the dark here by not telling you my franchise
Vice-Chair: That's perfectly fine.
Mr March, we appreciate
your taking the time to come and make a presentation to us today.
Sorry about the mix-up in the time that happened.
Vice-Chair: Our next presenter is Mr Lewis
Sovereign: Thank you, folks. It's been an interesting
morning. I just wanted to comment that my purpose for being here
is that I am currently a franchise sales representative for a US
company. In reading the article on this committee in the London
Free Press, it's something that affects my livelihood so I
thought it was my duty to come and make a positive contribution,
if I could.
As far as the bill stands
right now, the very limited scope that it's in right now, there
is some boilerplate disclosure stuff that's very good. I see a
bit of an interest here as to whether government should take some
action. Maybe Mr Martin has the opinion that if we do, it somehow
endorses franchising in general. There could be times when it
would be interpreted that way and it could have an effect, so I
suspect we do need to be careful as to what we do.
As far as disclosure and
association, I believe that good franchisors welcome it. The one
I currently work for encourages both. We use a disclosure
document currently given to all Canadian prospects 14 days ahead.
We encourage an association and in fact provide incentive. The
difference is, what we need to look at are some of the
fundamentals of the industry, of the buyer and the seller.
I made two recommendations
here that were not related to disclosure or association. One of
the recommendations was that people starting up in the franchise
business be required to post some sort of bond, especially when
there are tangibles involved, like equipment and delivery of
goods. How this helps is that it can provide some recourse and it
puts some of the research into the franchisor. It puts the onus
on a person selling them a bond to do business.
Franchisors typically have
an evolution in that they start out with a great idea and a
concept, and maybe a guy has proven a great idea and like Henry
Singer did in the 1800s, says, "Hey, the best way to get this out
there quicker and faster is to franchise it."
In the beginning, a
franchisor will be primarily capitalized by franchise fees. There
is a curve, and sooner or later the return from his royalty or
the retail sale of his product and idea starts to exceed his
franchise fee. It's during that curve period that a franchisor
needs to be scrutinized a little more in a bond process or some
sort of-you saw these individuals who are up here who didn't have
the ability to do their due diligence in the beginning. I did it
myself. I sent US$4,500 across the border for a satellite dish
franchise eight years ago, and the next month when I called them,
they were out of business. So I know the experience of being
This idea of a probationary
period for new franchisors in our marketplace is valid, given the
scope and size of the Ontario marketplace to franchise in.
The next recommendation was
that a portion of fees allocated to tangible goods be held in
trust. If you look at what's happening in the courts-and this is
what concerned me-a newspaper article in the London Free Press
said that there are 5,000 court cases related to franchising in
Ontario. To somebody considering buying a franchise at the time,
that might be an astonishing number. The unfair thing about that
statement is that it didn't go on to say that there were probably
17,000 cases before the courts involving independent business
people on the same types of issues.
I think some of the concern
today is more related to the entrepreneurial spirit in North
America, the increase in independent business people, and not
specifically franchising related. But there certainly are some
things that we can do to address and make this particular
industry more viable, because the statistics are that the
franchise structure in the business community in North America
today is a valid structure and actually increases the chance of
success of an independent business person. You wouldn't think
that, sitting here listening to people this morning.
Disclosure documents and
disclosure in general is not the be-all and end-all. I realize
we're just starting here. The problem with the disclosure issue
is this: This is currently the disclosure document that we give
out to people considering a franchise. Franchise buyers are
typically in a transitional period in their lives. I give it to
people for 14 days. I ask them for a receipt for it. I phone them
up and say, "Did you read it and understand it?" The first person
who says yes to me, 90% of the time I know right away it's
impossible. I've read it five times in three years, and I don't
So there needs to be some
system in place-and I don't believe government involvement. I
believe a mistake they make a lot of the time is that they take
it to their lawyer or accountant, and perhaps that individual
specializes in a
specific field, and he's not particularly qualified, but we tend
to take people's advice in a profession based on our perception
of that profession. That's a situation for an independent body to
help the person.
The problem with disclosure
is that it needs to be reciprocal. By "reciprocal," I mean that
we also need to encourage franchisors to have their buyers offer
proven disclosure as to their capabilities. It's an unfortunate
old salesman's adage that buyers are liars. What happens to us
sometimes is that we make a sale and somebody tells us they have
a particular net worth or access to funds. Then, when I've taken
their deposit and they've made application for the franchise and
we start to go into the development process, I find out that they
indeed did not have those funds, or access to them. Now, all of a
sudden I'm in a tough spot as a franchisor. I've taken a deposit,
I bore expense, I've maybe flown them somewhere for training or
flown my engineers out to look at their sites and do site calls.
Then we say to the person, "Gosh, you told us you had $400,000,
or access to it, and now you really only have $250,000." Maybe we
need to encourage franchisors to look a little more closely at
the qualification of the people involved.
All the laws or things we
do or pass are not going to prevent the people who enter the
industry with ill intent. They don't care whether the guy is
qualified or not. A thing I heard years ago: As long as they pass
the mirror test, you could sell them a franchise, or sell them
anything; it wasn't particularly franchising. It was that if you
held a mirror up to their face and they fogged it up, if they
were alive, you could sell. That mentality exists at all levels
of the selling profession, in the business community in general.
That mentality exists out there. So encouraging franchisors to
better qualify their leads can still-again, this isn't
disclosure. Disclosure is a benefit. If you're considering giving
a large amount of money to someone who cannot get a bond in your
business community, based on the delivery of goods or something,
do you really want to give that person a lot of money? The
primary benefit, to me, of disclosure is that it slows the person
People who are buying a
franchise, who are in a transitional period in their lives, are
making life decisions here. They're changing their whole life.
Maybe they're getting the golden handshake from a bank or
whatever institution they were involved in before. This is a life
decision that should not be susceptible to urgent closing tactics
of professional salespeople, or susceptible to just them
following their dream. Gosh, I hear it all the time: "My wife and
I have been working away at such-and-such jobs all our lives, but
we always wanted to be in this industry. So we're going to buy
into it. This seems like a shortcut way for us to do it." Of
course, in many instances they are qualified, they do have the
money in funds.
The other situation is
that, like any other product we buy, we sometimes grow tired of a
franchise. One of the problems with the franchise structure in
that case is that all of a sudden you're an independent business
person and you start up on your own and you go out there and take
that hard role, and if you succeed, wonderful; if you fail, you
take responsibility, and that's it. You did it, you failed, you
go on with something else. But if you do that in the same context
with a franchisor relationship, then all of a sudden you don't
look in the mirror as much any more. You have a big corporation
there maybe, that you perceive has deep pockets that you can now
have legal recourse against to help you with your losses.
Certainly there needs to be some mediation process in place.
I've been hearing Mr Martin
say that this is part of the legal process and that you're
stepping them into the courts. But I think it's valid to have
something in place to prevent half of these scenarios from going
to court, primarily because these people are telling us they
don't have the resources to go to legal battle. In some cases, we
all know they're walking into court, having made commitments and
signed documents and put themselves in a position where legally
the courts are going to have no recourse but not to find in their
favour. By getting to that in-court position, all they are is
further in the hole and maybe more deeply hurt by the fact that
they went the extra step, prolonging the agony.
I'm always pro prevention
in all objections. One of the things I noticed from one of the
ladies who was up here prior-I notice in dealing with franchisees
that in the beginning, like in any business prospect in the
beginning, they have a different mentality and perception than
they do after they've had to get into it and roll up their
sleeves and go to work. We need to encourage them more to realize
what is happening in the beginning and to test them: Do they
understand their payment process? Do they understand that they're
putting up a $10,000 or $20,000 fee but their capital
requirements are $250,000? That's what they're going to have into
it over a time period. I've always been amazed at the fact that
I've told people that, and they come back and tell me they can do
it better. I say, "Gosh, we've had a thousand people do it in the
past 35 years and they couldn't do it better, so when you can do
it better, please show us how." We need to ingrain in them that
this is what it's going to take and then provide some step where
the franchisor also has a better chance to look at them. We get
them to fill out credit applications sometimes and they're not
obligated to fully disclose. We are. We tell them, "Here's who's
sued us, here's who's been with us for years, here's who's left."
We give them full disclosure. They know everything about us, but
sometimes we're at that position where we enter into business
relationships with buyers that we don't know as much about as
we'd like to.
It all leads to this: What
is the committee going to do or what is Bill 33 or 35, or
whichever ones we implement, going to do to prevent the franchise
buyer-protect the consumer, not hinder business development,
because we want global franchisers to come into our marketplace
and bring their ideas and create employment, all those things.
But there needs to be more depth to the bill than exists in its current state to
make it something valid to the consumer and to the business
Those are my comments. Any
Martin: I must say, I appreciate your last statement,
which is that the bill needs to be deeper and it needs to be
developed further. I couldn't agree with you more. Anything that
we can put in place today to prevent franchisors and franchisees
from taking advantage of each other I think is going to be better
in the long run for everybody concerned, particularly for the
health of our economy. We've heard stories over the last three
days, and some of us have heard them over the last five or six
years. Some of us have experienced them ourselves in the lives of
friends and neighbours. I came to this piece of work from my own
constituents who brought me to a meeting back in 1995 and shared
with me what was going on.
There are some things,
though, that you've said that cause me to worry a bit. You've
basically laid out a new twist on "blame the franchisee." The
franchisees somehow, in your view, in some instances-and perhaps
it is true-don't disclose everything. They say they've got
$350,000 and they only have $250,000. I would suggest to you that
anybody who has had to go out and borrow a little to prop up the
money that you have yourself, the financial institution that is
going to lend you that money is going to find out everything
about you. I know in my own experience I've had to go to the bank
to borrow. They knew the size of my shorts. It's amazing the
things they know about me.
To suggest for a second
that there's an imbalance there and that the franchisee is
somehow to blame in terms of disclosure or is the cause of their
own demise because they didn't disclose, I think is stretching it
a bit. Nevertheless, I'm willing to give that in some cases it
But what I wanted to talk
to you about even further is, you sell franchises. American
Sovereign: We are a Canadian registered company as well,
but yes, it was a company that started in the United States.
Martin: It seems to me, from listening over the last few
days, that you're selling Canadians the American dream.
Martin: And some of them have experienced what that's
about-and we heard some stories here this morning-without the
attendant regulations that many American jurisdictions have
developed over some 30 years now. It was 30 years ago that
California brought in a fairly comprehensive franchising
regulatory regime. Here we are, entering the new millennium, and
we're looking at what I would consider a very primitive limited
disclosure, right-to-associate piece of legislation. You
suggested at the end of your presentation that it needs to be
fuller. Could you expand on that a little bit for me?
Sovereign: Again, the disclosure-interesting
comment-return on investment, those types of things, more depth
as to what people disclose. I realize there are financial
statements needed in here. There are some other areas to
What I wrote down was that
the issues that come before the courts have some common
denominators. There are some issues that come up in franchising
that are common problems. There's lack of capitalization, lack of
management experience, non-delivery of goods. I think
non-delivery of goods and people entering into the business and
agreements with people they shouldn't be are part of the
I didn't mean to put the
onus or do a blame-the-franchisee thing, Mr Martin. I'm just
bringing to light that in some instances that is the case.
Although you say the financial institutions will find out
everything about you, what happens in many instances in franchise
structures where it's land- or finance-based, the financial
institution also becomes part of the culprit. The reality in life
is that the 80-20 ratio exists in all industries and businesses.
Franchising in this world didn't change that; 20% of the people
produce 80% of the productivity. That's just the way life is.
By expanding on what more
needs to be in it, there are other issues and common problems
that come up to franchise buyers. In the beginning they don't
have the necessary resources to research the franchisor properly.
They can't understand these large disclosure documents, or even
smaller ones in many instances. I like the fact that there is a
clarity requirement in this bill. I don't know who determines it.
I found it rather amusing, a government bill that wanted to
encourage clarity in the written form, and there are parts of it
that were a little confusing to me. That's OK. It's a good
There are common issues. If
you look at all the franchising problems that have come before
us, association with lease agreements-third party involvement
with a franchisor is an issue. In the beginning, some of these
people simply need advice to put some "subject to" in their other
clauses. If there's a third party lease agreement, make a
"subject to": "Should my franchise fail, or if my franchisor goes
out of business and folds up and leaves me out of business, I
need a `subject to.'" I need an opportunity to get out of here,
because this person is now in a jam with the third party. They
signed a lease agreement but not a franchise-it's nothing to do
with franchising. All kinds of business people in retail and any
other thing get involved with lease agreements that sometimes
they'd like to break and get out of. They need some better
guidance in the very beginning to give themselves some
In dealing with franchisees
at the end, when they're coming to the end of their term, it
always astounds me that these people have been involved with my
organization for 20 years, and when I ask: "Have you read the
termination clause? Do you know we have first right of refusal?
It's 20 years ago that you bought it, so would you take a moment
to go and read that?" they say, "Gosh, I didn't understand that."
They need business planning in any term agreement. It's almost
like estate planning. A person has to be prepared for what can
happen at the end. What can happen at the end is that the guy
might have designed and wanted the ability to shotgun you out of
there, so you need to know that up front. You need a little bit
of testing when you go to buy a franchise. We used to give them
tests: "Please provide us in handwriting what the payment
structure is for our franchise fees." They'd had the disclosure
document for months, they had the franchise agreement for months,
but they couldn't copy out of it and put it back to me. So they
didn't know; they didn't understand it. So you reiterate and try
The same with the end: "Do
you understand what happens at the end of your agreement?" They
need to know that up front. They need some clarity and they need
some guidance because of the nature of both the franchisor and
the franchisee. The typical franchise buyer is a person in a
transitional period in their life. I think the longer I've been
in the industry and the longer I've been in the sales profession,
as with anything in life, you tend to get exposure to more
situations and you start to see these things happening. "Gosh,
here's a government committee coming to town that's going to do
something about franchising in Ontario now." I welcome it and
hope that we can make some positive contributions.
Vice-Chair: A couple of quick questions here from the PC
Do you have any sense of the rate of return on investment that
your franchisees get?
Sovereign: Yes, a little bit. It's an interesting case.
In the particular product that I'm marketing right at this
moment, is that what you're referring to?
Sovereign: There are a number of ways to look at return
on investment. What we advise people is that typically this
particular product will outperform the rate of return on, let's
say, a golf course, whether it's a 5%, 6% or 7% return. What we
shoot for in one component of our investment, if they're getting
into our industry in a particular manner, by converting a
property or buying an existing property, is a 20% return on their
initial investment, on their down payment.
The problem, Mr Wood, with
a land-secured, equity-building lifestyle investment with my
particular product is that part of the return on investment is
based on equity. If we design their business on a five- to
10-year growth program and they watch it evolve from a particular
low-end or start-up operation to a high-end operation, their
property becomes more valuable. It's always easy for the salesman
to provide a best-case scenario.
Maybe I should have given you some guidance. You've raised some
important considerations. In terms of the money they put in-not
what it's worth today-what kind of return would they expect and
what kind of return would they get?
Sovereign: It's probably going to run around what some
bonds and lower-end investments do, somewhere between 2% and
That's 2% and 6% of the money you put in?
Sovereign: On average. Again, that's not a true case of
return. If you look at land criteria and what they do-I've got an
individual who advised me. He did three of them in 21 years and
made a $1 million on every one at the end when he rolled them
over, because we instill some land criteria that cause the
property investment to increase in value. So, what do you say to
an individual up front? The fellow before me said, "Hey, these
people buy jobs." Typically, to get involved in a franchise
investment, they quite often have to buy a lower-paying job.
"We're going to ask you to put up a quarter of a million dollars
to make less money than you have for the last 10 years."
The $1 million comes on land appreciation?
Sovereign: Land and business appreciation. Yes.
Crozier: Thank you for your comments this morning. I
think you've made some interesting recommendations in your
proposal. The real test of committee hearings is to listen to
suggestions and for either the government to accept
recommendations and amend their legislation and/or for us in the
opposition to propose amendments. I found all three of your
suggestions rather interesting. Perhaps you and I can keep an eye
on this to see if they make it into the legislation. Thanks for
Vice-Chair: Thank you very much. It was a pleasure to
have you here.
CANADIAN FEDERATION OF INDEPENDENT GROCERS
Vice-Chair: We have a couple of cancellations, but we
have a deputation here that is ready to make a presentation and
I've asked them if they would do that. I appreciate the fact that
they are: the Canadian Federation of Independent Grocers. If
they'd come forward and do their presentation, that would be
great. Is Mr Sands here the presenter?
Scott: He's the coordinator. He coordinated us and got
us all here.
My name is John Scott. I'm
president of the Canadian Federation of Independent Grocers. I'm
past 50, so I have to use these glasses.
With me this morning is
Peter Knipfel, chair of the board of directors of CFIG. He also
owns and operates the Knechtel grocery store as a franchisee in
Chesley. Also with me is Gary Sands, our vice-president of
government and industry relations.
We appreciate the
opportunity of appearing before you today, particularly since it
is in reference to a long-awaited piece of legislation, Bill 33,
An Act to require fair dealing between parties to franchise
agreements. Ontario now stands poised to become the second
province, after Alberta, to enact franchise legislation. Alberta
passed its own bill, as you know, also called Bill 33 a few years
The Canadian Federation of
Independent Grocers is a national non-profit organization founded
in 1962 to further the
unique interests of independent and franchised grocers through a
progressive partnership with government, industry and the
From very modest beginnings
in the province of Ontario, we now boast a membership of about
2,000 retailers located in every province and through most
communities in the country. A board of directors of 18 regionally
elected members governs us.
As I indicated previously,
CFIG views Bill 33 as long overdue. It is probably safe to say
that over the years the issue of providing some form of
protection to franchisees has polarized both the industry and
successive governments across the country. Indeed, Ontario will
become only the second province, after Alberta, to have
legislation enacted that governs the relationship between
franchisor and franchisee. This is notwithstanding the fact that
franchising is one of the most important economic activities in
this country, certainly in the province of Ontario, where it
accounts for almost half of all retail sales.
CFIG believes that in this
committee's deliberations on Bill 33, it is important that
legislators always keep in mind the context in which many
At the outset, the reality
of our industry, as you've heard over the last few days, is that
it is dominated by big business in the retail, manufacturing and
distribution sectors. In this era of acquisitions and mergers,
this trend is becoming more pronounced and is of increasing
concern. Consequently, this power in the marketplace has created
the potential for abusing the franchisor-franchisee relationship.
And make no mistake, abuses have occurred. Many of the franchise
agreements that exist are one-sided contracts that ultimately
devalue the assets and investments of some hard-working
In the absence of the
ability of the franchise industry to appropriately self-regulate,
it becomes the responsibility of government, as the agent of
public interest, to provide the legislative framework for
regulation. Just as important as protecting the interests of
franchisees is recognizing that the $40-billion to $50-billion
franchise industry in Ontario, which provides so much economic
benefit to so many, is put at risk by the unscrupulous behaviour
of a few franchisors.
The greatest difficulty
encountered by franchisees with their franchisors usually stems
from a lack of desire on the part of some franchisors to act in
good faith. This has often led to an untenable situation for some
retailers, and in recent years their franchisors have often
unfairly forced them out of business.
Some observers have
characterized many of the contracts that exist in the marketplace
as feudal in their approach to the franchisor-franchisee
relationship. As well, notwithstanding the substantial amount of
personal funds invested by a franchisee, there is little or no
protection in most cases where a dispute arises by consumer
protection, labour or securities legislation.
In that context, there are
two fundamental weaknesses in franchise agreements that allow
abuses to occur. First, the concept of good faith or fair dealing
is not embodied in the agreement. By setting out fair dealing as
a concept in Bill 33, hopefully both parties will now recognize
the responsibility to observe commercially reasonable standards
and act in this manner throughout the franchise relationship.
contracts are usually drafted in very broad terms that are
one-sided and provide the franchisor with lopsided discretionary
powers that are not conducive to the long-term development of a
healthy franchise industry. Fairness, not fear, must be the
backbone of our franchise industry.
Fear is generated when
franchisees are forced to sign restrictive or controlling
franchise agreements that limit their ability to manage their
businesses as independent operators in the best interests of the
consumer, or when retailers who do not sign new agreements
receive arbitrary notices of termination or non-renewal in
consequence. When franchisors unilaterally increase franchise
fees and change pricing programs without either notification or
any form of consultation, retailers are forced into new pricing
programs that are profitable for the franchisor, but are neither
profitable nor sustainable for many franchisees.
Fear occurs when
franchisors locate new stores in the same marketplace as the
franchisee they supply. Fear of economic retaliation should
franchisees associate to discuss commons areas of concern and,
therefore, increase their potential bargaining power; fear due to
not having been able to obtain disclosure of all material facts
before purchasing a franchise; and fear that in order to resolve
any dispute, a franchisee must weigh the cost, time and
uncertainty of litigation.
That is why we welcome and
support Bill 33. We see the major achievements of the bill as the
creation of three new rights: most importantly, the right to
expect to be dealt with fairly, the right to associate with other
franchisees; the right to obtain disclosure of all material facts
before purchasing a franchise. The need in the marketplace for
such legislation is clear and deserves all-party support.
We do believe the bill
could be stronger in defining fair dealing. CFIG has difficulty
understanding why the legislation cannot simply say that fair
dealing means the observance of commercially reasonable standards
and manner throughout the franchise agreement. Given that the
burden of any litigation to resolve a dispute falls more heavily
on the franchisee, we suggest that a definition that provides
more clarity ensures that we provide a better balance between the
interests of both franchisor and franchisee.
Society embraces the
concept that consumers should be dealt with fairly and,
consequently, must be able to understand fully and clearly the
details of their transactions with suppliers of goods and
services. CFIG sees no reason why the relationship between a
franchisor and a franchisee should be exempt from a similar
We wholeheartedly support
the other main provisions in the legislation, which provide
franchisees with the right to associate with each other and to join
or form an organization without restrictions imposed by
franchisors, and, most important, the disclosure obligations now
imposed on franchisors.
While some have criticized
Bill 33 for not going far enough, CFIG believes that having this
legislation passed is vastly preferable to indefinitely delaying
protective legislation because the industry cannot reach
agreement on each and every clause of the bill. On a contentious
issue such as this, it is doubtful that any legislation could be
drafted that would satisfy everyone in the industry. We also
recognize certain political realities. This issue has polarized
successive governments and the industry. Asking for substantive
amendments at this stage would probably kill the bill outright.
It has been said that a journey of a thousand miles begins with a
single step. CFIG believes that the passage of Bill 33 in Ontario
is an extremely important step in providing some balance between
the interests of franchisors and franchisees.
It is also an important
strategic step in ensuring franchise legislation is enacted in
each and every province across Canada. Two provinces have already
indicated to us that, in the interests of interprovincial
harmonization, they are awaiting passage of this legislation to
determine if other provinces intend to base their legislative
frameworks on the current Alberta Franchise Act. Our journey
across the country will begin the moment this bill passes into
law. We will take the Alberta and Ontario legislation to every
provincial government and demand similar protection for their
In conclusion, CFIG
supports the act before you and we urge, in the strongest terms
possible, speedy passage of Bill 33. We commend the government of
Ontario for reintroducing this legislation. Thank you.
Thank you very much. The government caucus, Mr Gilchrist.
Mr Steve Gilchrist
(Scarborough East): Thank you very much, gentlemen, for
your presentation. I appreciate the perspective you bring and the
fact that you represent such an extensive range of business
interests across Ontario. I also appreciate that you recognize
that we operate in a bit different framework in the political
sphere. I'm very encouraged from what we've heard so far from all
three parties in terms of their support for the principles behind
the bill and a recognition that there has to be a starting point
somewhere. We will continue to have discussions on how big that
first step will be.
In that context, I was
wondering if you had seen the five or six amendments we have most
recently seen discussed by the working group.
Gilchrist: When you do, perhaps you might want to
comment if any of these do or don't pass the test from the
grocers' perspective: expand the right of action for
misrepresentation to include any agents or brokers involved in
the selling of the franchise; permit electronic disclosure, for
example, if you wanted to download your disclosure document from
the Web; require disclosure for the sale of an additional
franchise to a franchisee if a material change had occurred in
the relationship or in the franchise agreement since you first
signed on; require disclosure for the renewal of a pre-existing
franchise agreement-as the act is written now, it wouldn't apply
if you are currently a franchisee and your 20-year term has run
out; and clarify the term "payment" in the definition of
franchise to include indirect payments.
Are those all things you
would see as further strengthening this bill and further
improving the protection for franchisees, and consumers
We think those would be good amendments. We haven't had a chance
to look at them, Steve, and we would like to review them. At
first blush, they certainly sound to us like they would
strengthen the bill. We would be happy to look at those
amendments and formally respond to you when we get back. If I
could take a copy of them with me, that would be great.
Gilchrist: We'll make sure you get them.
They certainly sound like they would strengthen the bill.
The Liberal caucus, Mr Crozier.
Crozier: Thank you, gentlemen, for your presentation. I
guess you understand, as we all understand, that in a sense there
is all-party support for this. It was supported by every party at
first reading, and I think all of us have the same objective in
mind of the need for this kind of legislation.
I might ask if you'd expand
just a little bit because I'm surprised that you have made the
suggestion that substantive amendments at this stage would
probably kill the bill outright. The whole idea behind committee
hearings-we might as well not waste our time, quite frankly, if
we're going to ask people to come before us and then not listen
to them; in other words, not make amendments. A bill such as this
isn't worth the paper it's written on until it's tested, so you
might as well try and get it right. Because what you're telling
us, I believe-and maybe you can comment on this-is that this
isn't as good as it might be but it's OK and that we'll go ahead
and pass legislation that's so-so rather than try an amendment. I
hope I'm not getting that message. You can clarify that for
I think what we said in our closing is a reflection that we
recognize certain realities, that this issue has polarized a
number of governments, including the Liberals when they were the
government and the NDP when they were the government. We know
that within the industry there are various views on this
legislation. Some people would not like to see any legislation at
As we said in the
presentation, we believe this is an important starting point. We
have no legislation, even in draft form, in most of the provinces
across this country. We want to start somewhere to start building
legislative protection across the country. We intend to come back
to seek amendments and give this bill a chance to work and see
where it goes.
I think John wants to add
Mr Scott: Don't lose sight of
the fact that the commercially reasonable standards is an
amendment that the CFIG, like many others, would very much like
to see in this bill. Your concept of fair dealing doesn't have a
whole lot of use without that amendment. We'd like to see that
happen. Secondly, if you were going to go to a far-reaching bill
and they were in power-perhaps Mr Martin's bill encompasses all
of the elements that a franchisee would like to see. But in
making the statements we have that we'd like sure like to see an
amendment on the commercially reasonable standards, we're
reflecting what we believe is a political reality in dealing with
the government. Again, we commend the government, particularly
this government, which has not gone into regulation regarding
business, for bringing it forward.
Crozier: Sure. Some would suggest, though, that once
legislation is on the books, it's just as difficult to get it
amended as it was to get it there in the first place. So my point
is the old saying, "When the going gets tough, the tough get
going." If it takes time and it's tough to get the right bill in
place, let's do it now. That's all.
We've been after this for seven years. There are people in the
audience who are well aware of our activities for seven
Crozier: Let's not take something that's half-baked-
Then make an amendment on commercially reasonable standards and
it might be helpful.
Crozier: Good. They're the guys who are going to control
this, so as long as they understand that.
Martin: I also thank you for coming forward and making
the presentation you have. I understand the anxiety that you hold
to get something in place. I am like Mr Crozier, though, just not
wanting to put something in place that gives people a sense of
security that really isn't there.
You mentioned the fair
dealing piece that really doesn't say anything. People think,
when they sign on, "There's legislation that protects me; they
have to deal with me fairly," and then five or six years down the
road, when they end up in trouble, they find out it doesn't mean
anything. I don't want to do that to people. I don't want to set
people up for failure in that way. That's why I was insistent on
this bill going on the road, so we could hear from-the working
group was limited in the people it heard from. We needed to hear
particularly from the franchisees out there who are experiencing
some of the reality of the business world today. And we have, in
spades, over the last three or four days, and we will continue to
for the rest of this day.
My question to you though
is, this is a bill that's gone out to hearings after first
reading. It allows for a greater scope. We're not tied to a
principle here and we can talk about all kinds of things. I would
suggest to the government that maybe some other material be
brought to the table, that some other efforts be made to
understand the circumstances that people find themselves in out
We've heard so far in our
deliberations that the grocery industry is in great flux from a
number of different perspectives: farmers who can't get their
product onto the shelves, small producers who can't their product
onto the shelves, grocery stores whose ownership has changed, who
now are looking at having to sign new agreements that aren't in
keeping with the spirit of the original agreement. I know in my
own community we have three grocers, who were some of our best
corporate citizens, and they're not in the grocery business any
more. I'm not sure where some of them are. One of them is now
running a bingo hall. These were people who contributed in very
serious and meaningful ways to our community. The fact that small
producers can't get their product onto the shelf at some of the
major grocery chains is killing the economy of some of the
regions of northern Ontario and that's a worry to me.
With that in mind-and I
don't know if you've given this any thought or not-what else
could we do here? What other information could we bring to the
table that will be helpful to us in perhaps resolving some of the
issues particular to the grocery industry at this point in
You're right. The grocery industry is in a state of great flux
and we're very, very pleased to see the number of franchisees who
have come forward, and you're going to hear more today from our
particular industry. There is a lot of pressure on a lot of
people right now.
I just want to pick up on
your last point. I know you've heard from primary producers and
people who traditionally sell into grocery stores. I submit to
you with great respect, sir, that most of the arguments on that
don't come under the franchise situation but rather under the
Competition Act and the issues of tied selling, which is
something that perhaps this government can't look at, but
something you ought to have a look at.
Vice-Chair: That has been raised this morning by Mr
Anyway, sorry. Peter, do you want to respond to any of the
comments on the industry?
Knipfel: Just from a franchisee's perspective, in our
industry this is our primary asset. This is what we've invested
our money in to hopefully see us through to retirement. With the
consolidation today in the grocery industry and the control that
the franchisor has over the franchisee as far as pricing and our
profitability is concerned, we need some protection for some fair
dealing with our franchisor. That's basically all I have to say,
that that's what we'd like to see.
Martin: Do I have time for-
Vice-Chair: You've got five seconds. That does include
your preamble, though-your normal preamble. Go for it.
Martin: I recognize the common commitment around the
table to looking at the Competition Act and challenging the
federal government, and we'll probably have this discussion
further, but our jurisdiction is provincial. That's where we have control. We're
dealing with the provincial government. Is there anything we
could do to be helpful in that piece? We have a Ministry of
Consumer and Commercial Relations.
On that particular one, on the restrictive selling issues, I
believe-in fact I know-that the Ministry of Agriculture, Food and
Rural Affairs has discussed it with some of the major grocery
chains and has some similar concerns. I do not believe that any
representations have been made by this government to Ottawa, but
there has certainly been a tremendous amount of representation
made by the smaller processors and producers directly to the
Competition Bureau on the issue. It is a big concern for our own
retailers, as you can imagine, because they're supporting the
local economy and all of a sudden they're precluded from that.
It's a very difficult situation.
I don't know what else you
can do there, because it's federal legislation. But I do know in
this situation, as Peter says, doing something on the
"commercially reasonable" thing would be huge in this piece of
O'Toole: On a point of order, Mr Chairman: If I may,
just respectfully to the comments you've made, if you have a
position that outlines what you've said, it would be important
for that to be on the record, engaging not just the Ministry of
Consumer and Commercial Relations but the Ministry of
Agriculture, Food and Rural Affairs, as well as the federal
Mr Scott I
think that would be productive, to recognize that the
agricultural sector industries have commodities and supply
management issues that are removed from this legislative
framework. Your industry has made the supply issue a significant
issue in the hearings this week. I appreciate that.
Crozier: On the same point of order and just very
briefly, it's interesting that the whole idea of franchising
itself goes to the point of competition. If we really got to the
very bottom principle of it, franchising would be no more than a
name on a store, because you should be able to be free, under
competition rules, to buy from anybody, but we know that's not
the case with franchisees. McDonald's supplies the patties, I
suppose-I don't know. It's an unfair example. But if you really
went to the very principle of competition, you wouldn't have
franchises, because that in itself restricts a franchisee from
doing certain things. That's all.
Franchising is a big part of our industry, and what you're trying
to do is shepherd franchising into the next century in a
productive manner. I think that's what we're all trying to do
Crozier: I think we all are, for sure.
I'm not sure, but was I bothering you with my comments?
O'Toole: Oh, no. I think they were very productive
comments. I mean that genuinely. If you have a position as the
independent association, I would like to see that.
OK. We'll provide you with that. The various ministries are well
aware of our discussions.
O'Toole: I'm sure they are. It's part of the public
Vice-Chair: Gentlemen, thank you so much for your time
this morning, and thanks for moving your time ahead.
If I could have the
committee's indulgence for just a moment, the previous speaker,
Mr Sovereign, made a statement and he'd like to make a
clarification. Would anyone mind if he took a minute to do that?
Mr Sovereign, you've got a minute.
Sovereign: I just want to take a brief moment here. I
was asked by a committee member as per a specific return on
investment, and I'd like the opportunity to retract that
statement. I gave you a percentage number based on a recent
conversation with someone else involved in the company. A more
honest and accurate answer is, I don't know, sir. I don't know
what the exact returns on investment are. The proper and ethical
thing for a franchise salesperson to do when asked questions
specifically pertaining to return on investment is to refer the
person asking the question to the uniform offering circular,
which I do have a copy of here, and if Mr Chairman would like, I
will leave a copy for the committee for copy and distribution, or
if Mr Wood would like, I can leave it for him. Is that OK?
Vice-Chair: That would be fine.
Sovereign: Would you like this, sir?
Well, just give it to Ms Stokes.
Vice-Chair: Thanks for that clarification. We'll now
adjourn until 12:55. That should get us here by 1.
The committee recessed
from 1156 to 1304.
CAMERON'S FOOD MARKET
Vice-Chair: Ladies and gentlemen, I'm pleased to call
the meeting back to order. Our first presenter this afternoon is
Cameron's Food Market. Mr Cameron, please feel free to start
whenever you wish.
Cameron: Mr Chairman, honourable members of the
committee, ladies and gentlemen, I would like to thank you for
the opportunity to appear before you today to make this
presentation regarding Bill 33, a most important and desperately
needed piece of legislation.
With me today is Bob Uhrig,
a Knechtel franchise store owner and co-chairman of Western
Ontario Grocers Alliance. This presentation is not only about my
personal experience but echoes the concerns that Western Ontario
Grocers Alliance has with franchisor activity in Ontario
My name is Bill Cameron
and, with my wife Diane, I own and operate an 18,000-square-foot
franchised food market in Kincardine, a town on Lake Huron with a
population of 6,000. We have owned and operated a Knechtel
franchised food market for the past 16 years. We presently employ
17 full-time and 48 part-time employees. The business is operated
as Cameron's Food Market, under the Knechtel banner, which is a
franchise of Sobeys Capital Inc.
It is important to mention
that today our business is very successful, even though we are
competing against a larger National Grocers' Zehrs store, which
is corporately owned and operated. Each year over the past four
years, Cameron's Food Market has been awarded a Canadian
Federation of Independent Grocers, CFIG, award of merit, which
recognizes outstanding independent grocers in Canada.
I am also the secretary for
Western Ontario Grocers Alliance, which is a registered,
non-profit corporation created in July 1999 to represent the
interests of 64 Knechtel franchise owners in Ontario. This
alliance was formed by the Knechtel franchisees to collectively
deal with some very restrictive agreements that were being
arbitrarily imposed by Sobeys this past spring.
We believe this provincial
government needs to be congratulated on their resolve to
implement some form of legislative control over the manner in
which franchisors carry on business with franchisees. This type
of legislation is long overdue and will address some of the
pre-sale abuses, especially in the area of pro formas and
disclosure. For this government to recognize, through Bill 33,
the right of the franchisee to associate and share information
and ideas that are of common interest without fear of retaliation
is extremely important to the members of Western Ontario Grocers
At this time, I would like
to relate to you a personal experience regarding my association
with our present franchisor. In the beginning, our store was
associated with Knechtel Wholesale, a family-owned business
operating out of Kitchener. This association flourished, due
largely to the common belief that honesty, integrity good
principles and fair play were the rules that would ensure the
success of both businesses-the retailer and the wholesaler. Our
Knechtel franchise in Kincardine, as well as those is many other
communities, operated successfully and harmoniously with Knechtel
Wholesale, with nothing more than a handshake to consummate their
business relationship. In 1993, Oshawa Foods bought Knechtel
Wholesale, and it appeared at that time the expected rules of
business that the Knechtel associates were accustomed to would,
for the most part, be retained.
On April 1, 1996, we
executed a business transaction with Oshawa Foods where we signed
a trademark and franchise agreement and a sublease for the
premises, with an initial term of 11 years, expiring in the year
2007. Also, in return for a substantial loan of $585,000, we
signed a general security agreement and loan agreement: $415,000
was used to buy the remaining 25% ownership of the business, and
the remaining $170,000 went to a major renovation of the
business. Diane and I also signed personal guarantees for all the
obligations of the store to our franchisor and to our bank. The
term of our loan is 10 years. It would be retired in the year
The success of our
business, due in part to the trusting relationship we had with
our wholesaler, enabled us to purchase full ownership of the
business. The total price paid was approximately $1.8 million,
which was viewed as fair market value. When we first bought the
business in 1988, and when we borrowed the money to finish that
process in 1996, there was a well-understood but unwritten
commitment by Oshawa Foods, and prior to that, Knechtel
Wholesale, that they would not compete against their own
retailers, who had invested large sums of money in their markets.
As a result of this, the value of the stores was significant.
In December 1998, Sobeys
purchased Oshawa Foods and in doing so became our franchisor.
Sobeys obviously inherited all the agreements we signed and also
our outstanding loan. I would also have thought they inherited
Oshawa's business deals and the intent under which they had been
agreed. However, this was not the case. In November 1999, we
invested a further $100,000 in our business for new refrigeration
counters. The installation and setup of these counters involved
Sobeys's engineer and store support personnel.
On December l, three weeks
after the installation was completed, Sobeys announced to us they
had secured property within our community and they would be
constructing a 35,000-square-foot supermarket under the IGA
banner. They also informed us that this store would be a new
entity into our market, and that it would not only compete with
the existing Zehrs store but would also be a new competitor for
our Knechtel franchise. Sobeys's rationale was that if they
didn't do this project, our existing competitor would have done
it, and they would have hurt us even worse than Sobeys was going
to hurt us.
At a meeting with senior
executives of Sobeys, I was assured that fair dealing would be
the main ingredient in producing a win-win solution to our
situation. Needless to say, their subsequent action of offering
to buy our business for less than 50% of our initial purchase
price did not demonstrate even an attempt at dealing in a fair
manner. In the January-February edition of the Canadian Grocer
magazine, it was reported that Sobeys's position on competing
directly against their own franchisees is: "Sobeys says, in such
an unlikely case, it would pay support to protect the independent
business. If the business still suffered, Sobeys would buy the
business." Obviously my question is, for what price?
These predatory actions of
exploiting the weaker position of the franchisee happen only
because there is a lack of legislated controls over the
franchisor to respect and protect the franchisee's trading area
from acts of encroachment. The potential of this encroachment has
severe and direct financial costs to the franchisee by
drastically impairing their ability to sell their franchise for
fair market value.
In many cases, franchisees
are left only with the option of having to consider a fire sale
price offered from the franchisor. The value of independent
retailer stores has declined significantly because of this
current policy of the franchisor of expropriation without
compensation. Their ridiculous offer to purchase our business is
a testimonial to this policy.
Another alternative is for us to stay and try to
compete. In our case, however, even the study performed by
Sobeys's marketing department showed that our volume of sales
would be so negatively impacted by the entry into the market of
the new IGA store that we would be losing money if we continued
to operate. Even today I struggle with Sobeys's lack of
understanding of why we feel so betrayed.
How do I answer the
following questions? How will we deal with our lease and loan
obligation to our franchisor when we no longer can service them?
What about the fair market value for the equity that we have
worked so hard for over the years, and were led to believe by our
previous franchisors would be realized when it was time to sell?
How and why can a franchisor treat their franchisees in this
manner without any outside scrutiny?
There are some who say that
civil action is another option. However, not many franchisees
enjoy the financial position to venture down this lengthy path.
Taking on a large franchisor who has unlimited resources of money
and legal ability is viewed by many as foolish. One has to
remember that by the time the process of civil action is
finalized, the encroachment has already happened and the damage
has already been done. At this point, the likelihood that the
franchisee is already experiencing financial distress or even
bankruptcy, unable to present or continue a challenge, is highly
The franchisor controls the
cost of 95% of products purchased by the franchisee, and they
control the retail price which the franchisee sells these
products for. Ultimately, they control the franchisee's
profitability. Independent retailers over the past year have seen
a significant decline in their ability to turn a profit, while
franchisors have continued to increase the cost of goods sold to
them. As a result, the franchisee, with strict expense controls
and good store operations, is left to depend only on the
franchise program to deliver a marginal but controlled level of
success to their business.
When put into a position
where the franchisee is losing money under the franchisor's
program, what the franchisor says they will do is inconstant with
what they really do. They say that they will subsidize the
franchisee, but they do this only after the franchisee's equity
has been destroyed and they have become totally indebted to the
franchisor. This new IGA franchise in Kincardine, according to
Sobeys, will be subsidized many hundreds of thousands of dollars
per year until the franchise becomes viable. This is done as a
matter of policy. However, in our situation of this territory
encroachment, no subsidy has been offered to ensure the continued
success of our Knechtel franchise. This is a franchisor that is
prepared to give preferential treatment and an unfair advantage
to one franchisee over another in the same trading area.
When you consider the
contents of this presentation, please view it as only the tip of
the iceberg. Since Sobeys's acquisition of Oshawa Foods, they
have initiated an aggressive corporate expansion policy even
against their own retailers. I know of no less than three other
Knechtel franchisees that could at this moment be sitting here
and giving a similar account of events they are facing in their
own communities today.
It is apparent that when a
franchisor decides to become aggressive in expansion to maximize
their penetration in the marketplace, even if encroachment is a
necessary tactic to accomplish their goals and ensure their own
success, fair dealing is expendable. As put to me by a senior
executive of Sobeys at a recent meeting: "If a franchisee is not
prepared to expand or invest what we believe is necessary to
secure our market share, they will be run over and discarded." I
believe this says it all, and confirms that franchisors have
shown an intent on dealing in an unfair manner, and their
behaviours are prime examples for the necessity of strengthening
If this process of
eliminating the "in" on the word "independent" is allowed to
continue, not only the future but the very existence of thousands
of small producers across Ontario will be threatened. Because of
the outrageous listing fees charged by the wholesalers, which
could equal $130,000 per stock-keeping unit, they will be unable
to afford to sell their products to the large major supermarket
chains. Due to the restrictive agreements to which the
franchisors are forcing their franchisees to adhere, the local
independent retailers or franchisees will not be allowed to buy
from these small producers on a direct basis, even if the costing
is better than what is available through the franchisor. In the
end, we will have an obstacle to fair competition, and when
complete control over the retail market is realized by the major
franchisors, who, by the way, are also the major corporate
players, higher retail prices for the consumer are a
I am concerned that under
the definition for "fair dealing," the tactics we are facing in
Kincardine and other communities would qualify as a breach of
Bill 33. If not, then the discretionary powers which are heavily
weighted in favour of the franchisor through one-sided franchise
agreements will continue to be abused. I and the Western Ontario
Grocers Alliance prefer to see a clearer definition of what "fair
dealing" really means, with the hope that a clearer definition
would include a reference to scrutinize "trade area
"Fair dealing" should
impose within the act an enforceable legal obligation on
wholesalers and franchisors, who are also competitors of
independent retailers or franchisees, to act in a "commercially
reasonable manner" where they exercise discretion that could
affect franchisees adversely. The franchisors say they already do
this and that it is only good business to treat the franchisee
fairly; therefore, to amend this bill to define "fair dealing" to
reflect the franchisors already admitted good treatment of the
franchisee is only a modest request.
Vice-Chair: You've just got a couple of minutes
Cameron: If the existence of this law was in place today
and addressed meaningful penalties for its breach, I would not be sitting here in
front of you on the verge of losing my investment or, even worse,
In conclusion, the
franchisee or independent retailer has had no legislative
protection; however, Bill 33 provides some and is a basis to
build on in the future. We strongly believe it will send a clear
message to the franchisor that fair dealing will be a major
component in their business relationship with their franchisees.
The passage of this legislation with a defined and enforceable
"fair dealing" provision is long overdue, and we strongly
recommend that this government of Ontario pass Bill 33 into law
as quickly as possible.
Mr Chairman, honourable
members of the committee, ladies and gentlemen, again we thank
you for the opportunity of appearing before you and we look
forward to answering any questions.
Vice-Chair: We've got time for about one quick one. Has
anybody got a fast question? Tony?
Martin: Yes. I don't want to in any way diminish the
seriousness of your presentation. We've heard this story now
several times over the last three or four days. I'm into this
piece of work because of similar stories in my own community of
Sault Ste Marie. There are three grocers no longer doing business
in my community-wonderful corporate citizens, did the whole nine
yards and they're out of business now. I believe there's a fuller
inquiry called for here into this industry. It seems to me that
having two entities control 80% of the distribution of product is
problematic, at least in the grocery industry. Would you support
such an inquiry?
We're dealing with this
bill after first reading, so the scope for us is quite large
compared to after second reading, where you have to stick to the
principle of the bill and follow that through. We can make
recommendations to the minister and the ministry on things we
hear that will be helpful to us in the end in putting together a
piece of legislation, or developing or crafting a piece of
legislation, that would go the full distance. It seems to me
there's more to be said, more to be found out and more
information to be had around the circumstance of the food
industry in Ontario at this particular point in time.
Cameron: Yes, I would support it. However, the
Competition Bureau ruled to have 80% of our food distribution
controlled by two people. My problem is that at the present time
I'm still a very viable and very successful retailer, but I'm on
the verge of seeing that go away on me, seeing my investment
destroyed on me by an aggressive and dominant wholesaler and
franchisor. If this law had a definition for fair dealing, I
would have something to be able to fight back with. At this point
in time I have nothing other than civil action, and civil action
is an extremely lengthy and expensive process.
Vice-Chair: Thank you very much, Mr Cameron.
Uhrig: Could I have 10 seconds?
On behalf of the Western Ontario Grocers Alliance, which was
forced to become viable some time ago through our situations with
Sobeys, I just wanted to quickly define the environment today.
The minister has alluded to it here, that 80% of the distribution
is in two people's hands. In the last six months we've seen a
tremendous need for fair dealing, in today's environment when
everything is controlled by the franchisor. In the changes, as an
example, that Sobeys wanted to make with us, there was no fair
dealing involved there at all. That's my point.
Vice-Chair: We appreciate your time. Thank you.
O'Toole: Just on a point of order, Mr Chair: Do they
have a written submission?
Vice-Chair: No, they don't.
O'Toole: You read from a script. I would appreciate
getting a copy of that script.
Cameron: OK. I have an extra copy.
Martin: On a point of order, Mr Chair: This is the last
day that we have together as a committee. We've been sitting and
listening for four days now and we've heard some very valuable
information shared. We've heard some very compelling stories, and
I'm wondering, given that there was some hope that going to
committee after first reading there would be some scope for us to
recommend or suggest some things that could be done by ourselves
or the ministry or others to help us bring forward for second
reading a bill that reflected some of the discussion and the
recommendations that we heard, at what point today-because I
think we need to do it today-would you suggest that those of us
who have some recommendations to bring forward and put on the
table actually in fact do that?
Vice-Chair: Let's see how the schedule goes here,
because we've got time constraints with some other things here as
well. That wasn't part of the agenda today.
Martin: Although we did, I think when we spoke at
subcommittee, suggest that there might be some time at the end of
today to talk about where we go from here. There was a
suggestion, for example, that we might want another day of
hearings when the House comes back.
Vice-Chair: We could take a couple of minutes at the
end, though, and look that over.
Martin: Yes. We've heard some very serious concerns
raised, and in the interests of time, for us not to deal with
that or at least reflect an interest in dealing with that I think
would be unfair. For us not to honour the effort that was made by
so many of the presenters, some of them at great risk to
themselves to come here by taking time to do that, I think would
be a shame.
Vice-Chair: I don't think it necessarily has to be done
today, though. If it's something that's going to take two or
three hours today, that's probably not in our agenda.
Martin: I don't think it will take two or three hours,
with all respect, Mr Chair. But it seems to me if it's not done
today, we don't meet again until the House comes back. Right now
it's scheduled to come back on April 3. There will be a lot of things
happening when we come back, and when we will get to this-
Vice-Chair: Let's just get on with the meeting, and
we'll see what happens as the rest of the meeting goes on.
Martin: So you're telling me that we're going to try to
find some time at the end of today to do it?
Vice-Chair: Depending on how the schedule goes. I'm
trying to keep the meeting to a schedule, as the agenda says.
Martin: We've had a number of people not show up today,
so we should have some room, it seems to me, to do this. I become
very concerned when I feel like-
Vice-Chair: Yes, we understand your concerns; you've
mentioned them all day.
Martin: I'm concerned that you may not be interested in
presiding over a process where we might have a chance to, even
ever so briefly, put on the table some of our recommendations at
this early stage.
Vice-Chair: Well, jot your recommendations down, and
towards the end of the meeting we'll see how much time we
Vice-Chair: Mr Brian Davy from M&M Meat Shops. Mr
Davy, the floor is yours next.
Davy: Mr Chairman, members of the committee, my name is
Brian Davy. I am the owner of four M&M Meat Shops franchises
in London. I've been with the company since 1983. The chain now
has 286 stores in Canada. I've also owned and sold three other
franchises in the past 10 years. At one time I had seven, but
I've sold three of them. I just recently opened a new store up in
northwest London, in Masonville. I was the president for seven
years of the marketing council for the chain and also president
of the advisory council for M&M Meat Shops.
My relationship with my
franchisor is probably a little different from what I've been
hearing today and what I've read recently. We've had very little
conflict, other than marketing and minor hiccups in the chain as
it has grown into a national chain. We believe that our franchise
agreement is fair. It also includes a mediation clause, which I
believe a lot of others might not have. It has never had to be
used up to this time.
Basically looking at Bill
33, as I was asked to read it from a franchisee's perspective, I
feel that it was certainly needed to protect the current
franchisees, but mainly the new ones coming in. When I got into
the system initially, there wasn't the coverage that we have now
even in the franchise agreements.
This is going to be a very
short presentation on how I felt about the bill, and that's what
I was asked to do. I thought my area might be answering questions
more than anything else. When we had a national meeting last week
of the advisory council and franchisees, we had 450 people there.
We read through the bill, discussed it and went through how the
majority of franchisees at the meeting felt. The conclusion was
that they were all similar in voice.
O'Toole: Thank you very much, Mr Davy. I appreciate
that. Just to reinforce for the record, your membership, some 450
as part of this marketing meeting you referred to, if I'm hearing
you correctly, endorsed Bill 33.
O'Toole: The provisions in there, as you know, are
certainly to have disclosure. If you want to comment in some
detail, we have heard on the disclosure part there is general
support. Certainly the intent of it would be widely supported. On
the next part, fair dealing, there has been some input with
respect to strengthening that provision and the right to
associate. It would appear that your organization already has
that right to associate. Do you want to comment with respect to
those three expected outcomes with this legislation, after
several years of consultation, in any specific or general way as
to how they apply, not just to M&M Meat Shops but to your
business experience since 1983? I'd appreciate it.
Mr Davy: I
opened the fifth store in the chain in London in 1983. I opened
the 278th store last September. It's hard when you haven't had a
lot of problems with a franchisor to pick away at anything that's
really not there. We certainly believe that protection is needed.
As a chain gets bigger, you certainly get a little bit less
voice. We have a national marketing council represented by a big
cross-section of franchisees and also an advisory council, which
is an elected body from the franchisees within the chain itself,
which works very closely with head office and a committee there.
They meet probably every six to eight weeks.
O'Toole: One of the bigger things we've heard of concern
specifically to the grocery industry was the supplying of goods
and/or services. In yours, it's pretty much the same. The only
thing is, it's frozen food, I gather. That's part of the whole
concept though, isn't it?
If M&M Meat Shops hadn't branded the name M&M Meat Shops
and had tried to live on the Schneider and McCain names, as we
did in the early 1980s, I don't think we would be here as a chain
O'Toole: You think it's the successful partnering, if
you will, and marketplace presence of a strategy and a secret
recipe; that you as a franchisee, so to speak, wouldn't exist
without the franchisor.
Basically, they have a very streamlined system in ours. Because
it's M&M, we only have one delivery centre, but we have
probably 68 to 72 suppliers that will private label M&M Meat
Shops products now. I've seen that evolve from the very small
factory at the beginning to the fair price structure that they've
been able to provide, to give us margins that we enjoy, because
as everyone knows-the people in this room in the food business
know-it's a tight market to compete with the big chains. But I
believe that had we not branded the M&M name like we did, and
gone with the suppliers and the quality that we've gone with, we
wouldn't have survived.
O'Toole: Thank you very much.
Crozier: Just a brief question. We certainly have an
M&M in my hometown. Is it strictly Canadian, M&M, their
Crozier: I guess other than some of the fast food
organizations, we haven't had too much comment on the
international part of it. M&M allows you the right to
association, I take it? There's nothing to restrict you from
belonging to another association of franchisees?
No, there's not.
Crozier: Do you, by any chance, belong?
No, we don't.
Crozier: With the testimony you've given, there's
probably not any necessity.
Crozier: Well, then my question would be redundant,
because it was one of, even if you are allowed to belong to other
associations, to what degree does your franchisor listen to the
other associations? That's fine, unless my colleague has
Vice-Chair: OK, thank you. Mr Martin?
Martin: I'm glad you came today, and indeed your story
is a good one. I've been carrying around a tome of stories that
have been written over the last five or seven years in Ontario
about franchise relationships gone wrong. Yours is actually one
of the ones where you've done some things that have ensured that
they've gone right, and I want to offer my congratulations to you
in an atmosphere out there where that's not always the case.
Do you want to share with
the group, just ever so briefly, your TSS program and what that's
about? There's a story here, and for those of you who are
interested, it's in B-51 of the manual here, written March 30,
TSS is a program that was introduced probably two years ago to
help the stores that weren't doing as well in sales, depending on
the market. It's supported by head office. Basically, through
extra marketing dollars in after-promotions-so maybe they'd run a
major campaign one week and they would support the other stores
the second week. Basically that way they try to make every store
in the chain profitable and bring the stores up. There's no big
trick to it. If you look at the Masonville area and you look at
the demographics of London, that store there is going to take me
three years, maybe even five years to build up to where we want
to be. Just because it's M&M Meat Shops and we open the doors
it's still-not that we will get the support, but there are
certain stores that do get it through this program that head
Martin: Just a question of concern here, or a note of
caution. What if somebody comes in tomorrow-for example, Pizza
Pizza, which has quite a reputation across the province-and buys
M&M? Is there anything in your contract to protect you from
their becoming exploitive or whatever? Could that happen?
We try to keep current and to update the franchise agreements we
have. You don't wait till they run out. If something good
changes, you can do a new one. I've got 10 years' protection on
all the clauses in my agreement if someone were to purchase the
Martin: Excellent. Thank you very much.
Vice-Chair: Mr Davy, thank you very much for your time
today. We appreciate very much you taking it.
PARTY LAND CENTRAL/EASTERN CANADA
Vice-Chair: Is Victor Martin from Party Land here? You
have a 20-minute allocation.
Martin: By way of background, we are new people on the
block. We don't have any franchisees yet. We should be opening
one within a month and hope to have several hundred, but I'll be
gone by that time.
This is basically my son's
business. He's an MBA out of Western's Ivey school and was
looking for something. He was in a large corporation that was
going to be taken over. As you know, when they downsize they dump
anyone and everyone. He wanted to have control over his future,
so I said I'd back him financially.
We are the franchisors
under the US agreement. The major franchisor is in Philadelphia.
We are the largest franchise operation in the world. We're in 17
countries. Why they just started here is beyond me. They have
been in foreign countries and everything. Actually, we found
them. They were looking for someone in Canada, and we went to
Philadelphia after we had read a lot of franchise books and found
them and got the Canadian rights.
By way of background, I am
a retired chartered accountant from a national and international
accounting and consulting firm. I intended to stay retired until
my son asked me if I would help him out in this venture.
I read Bill 33. As I say
later on, I haven't seen the regs. Maybe there are regulations
out now. If there are, I wasn't able to get hold of them. I have
some serious concerns about the bill. Throughout my career every
act I dealt with was always dealing with so-called public
protection, and I have always wondered why there isn't any
protection for the other side. I'm talking about all the equity,
wage equity and everything I've dealt with in 40 years of
accounting practice. I understand why it has to be there to help
some of the public, so-called. I have no question or worry about
that. I wonder why we wouldn't add, even in a heading, that
franchisors have the right to impose operating obligations on
franchisees to ensure uniform operations. The bill starts with
the main heading that this is purely to protect the franchisee.
If any agreement or contract we deal with is to work, it has to
work two ways. Otherwise, you get confrontations between the two
parties and there's no reason for that.
I looked at the bill in
this way: I analyzed it as I would if I were on a consulting job.
What bothered me initially was this right to organize. It almost
seems like this is a union bill coming from the NDP government. I
understand that. I did
audits for unions, and I understand their position. I'm just
saying that's what it looked like to me. Franchisees already have
the right to organize and associate under common law, and I
wonder why we give them special rights here.
I'm going to interject, in
addition to what I've written here. The type of franchisees we
are looking for are entrepreneurs. They can come to us with all
kinds of money and everything, but we will not take them on
unless they meet our criteria. In the party business they have to
be outgoing, they have to be willing to manage the business
themselves and they have to have a certain amount of business
acumen to run it. If you mention unionization or organization,
the type of people we want to see, and the people I've dealt with
all my life, see red. There's nothing wrong with them organizing
informally or whatever they want. We would encourage that,
because we want their feedback. But to give them a right in the
act to organize seems to me to be right out of sight.
Those items all are with
respect to the right to associate, as I see those sections of the
The disclosure document, I
think, has to be done right if this act is coming in. I think the
material facts you are talking about have to be clearly
enunciated, because this is the most important part of the bill.
If you are going to have damages or have something wrong, you
have to know what it is. It can't be a grey area covering every
scope of business. You have to know out front what it is. If that
is done, I'm sure that franchisors are going to be very careful
about what they put in the disclosure document. They're not going
to put in anything that isn't correct. I guess there are always
people who will do something against the law or against a
statute, but I think it's important to know what we're dealing
In 5(3)(b), you talk about
the disclosure document. What financial statements? It's
important to know who that is. Is this the franchisor, which in
this case is the Philadelphia head office? Is it the master
franchisor, which would be us here? Is it the existing
franchisees who are under your umbrella? What are these
statements and what are they going to do? We have to know that,
and it has to be clearly set out.
Foreign franchisors may
also be subject to domestic regulations such as the US Securities
and Exchange Commission which require or prevent certain
disclosures. In talking to Philadelphia, they are under the
Securities and Exchange Commission and they can do certain
things. I guess we would have to have some kind of reciprocal law
here that would allow disclosure in Canada similar to what it is
in the States and not offend the States if in fact you're asking
the American head office to give some disclosure. It has to be
consistent with the Securities and Exchange Commission. This
isn't unlike any other prospectus that's put out worldwide. We
have to know what we're talking about here.
As a master franchisor, we
don't own any stores and our financials will not provide any
useful data to potential franchisees, since our operations are
promotionally oriented. All we do as a franchisor is promote.
We've spent a pile of money already-all our own money, so we have
no debt. As I say later on, we're not asking anybody to put money
into our company. I don't want to issue a prospectus. I will if
it's necessary, but why would I do it? I'm not asking for
Our lawyers also advise us
that we may not have the right to disclose franchisees'
confidential information. They will be submitting information to
us on a quarterly basis under our contracts so that we can keep
track of what they are doing and be helpful to them. But do we
have a right to disclose their private and confidential
information? Is the act going to ask for that? I think that is a
question we have to ask legal advice on.
There should be provision
for providing information at a level of detail which would not
reveal to competitors important competitive secrets such as the
cost of goods sold percentage. In addition there should be
provision in the bill that the potential franchisee must
disclose-this is for our protection-if they have any association
or relationship with another company or franchisor in the same
industry, prior to receiving the disclosure document. Why can't
we be protected in this bill? Why would we want to disclose
information to a potential franchisee who really is acting as a
front person to get information from us, who is really
representing another franchisor or something like that? We have
to know that they're solid people and have our interests and
their interests at heart.
My final paragraph under
that section is, with respect to new franchisors, which might be
different-I heard M&M. They have a whole bunch of stores;
they have a history. We don't have any, so how do we disclose a
financial history if there is a disclosure statement? Just put a
big "0" and send that in? I don't think that's satisfactory. We
have to tell you something and I'd like to know what that would
be so that we can do it.
Under subsection 5(5), the
disclosure document, this bothers me too when I read it. If a
disclosure document is only filed once a year, how can a material
change be set out? It's material changes that you're looking for,
I believe, in this bill, to find out if there's a problem. Does a
new disclosure statement have to be issued every time a new
franchisee is contacted? There may be material changes between
the last one that was issued and this one. I'm not sure what they
do; I think Alberta is the only other one that has such a
disclosure in Canada. From my research, that's what I found
I'm not sure whether they
file this just once, or do they file it every year? I think it's
important for this committee to determine this so that you're not
giving one person one disclosure statement and another person
another one six months later that has different facts in it
because things have changed. I'd say this is very expensive if we
have to do it every six months or annually. It may not be
Subsection 6(2): This gives
more trouble than anything I've seen in the whole act. Rescission
for no disclosure: Two years to rescind any agreement is too long
and would hurt all parties, given the uncertainty it would introduce. A better
option would be to have a requirement that a franchisee may waive
the disclosure document at the time of the signing, at their own
risk, or make any franchise agreement void without being preceded
by the disclosure document to prevent the situation from ever
occurring in the first place. This raises the issue that there
should be a phase-in period to allow franchisors or master
franchisors to prepare the disclosure documents and to review
their documentation so that it does not impede ongoing
negotiations with potential franchisees at the time this bill is
Every time in my history of
40 years in practice that a new bill comes out there are usually
clauses, grandfathering and current, to allow the bill to work,
because everybody's in a different position at the time the bill
is passed. There are existing franchisees, there are present ones
who are signing now and there are current ones, and you've got to
catch them all in some kind of a broad wording that will be
effective for them.
Subsection 6(6): As I say,
if we change subsection 6(2), the two-year problem, this
subsection wouldn't be necessary. In any event, 6(6) is totally
impractical as it would be impossible to trace, quantify and
unwind all the transactions. I can't tell you, ladies and
gentlemen, how serious this is to the franchisee and franchisor.
After two years in business, you can imagine the number of
transactions. You can imagine the influence of economics and
other influences from the outside that neither the franchisor nor
the franchisee had any control over; totally out of their
control, and would unwind after this type of period. I say it
For example, clause 6(6)(d)
requires compensation for operating "losses." Boy, that's quite a
word. What are "losses"? Huge losses could occur due to
incompetent management where unreasonable wages were paid and
other significant operating errors were made etc. Most store
leases are for five to 10 years. If an irresponsible franchisee
had signed a lease for 20 years at $150,000 per year, you know
you've got to have $1.5 million. It may or not be brought to bear
upon the franchisor, but that's a huge item, whereas the
franchisor had nothing to do with signing the lease.
In my practice, I would
have several people in the same area, the same city or same
locale running the same operation, one doing very well and one
doing very badly. What are the reasons? That's a good question.
What are the reasons for that? I was a trustee for 15 years
during my career. The trustee is required to report why the
bankruptcy occurred. Over 95% of them are mismanagement. The same
sweet operation, with somebody who doesn't pay attention to the
business, will be run down in six months, and yet the business is
a viable business. It's management that did it. As I say, they
could take out $100,000 in wages; the other person took $25,000
for a while to build up the business. I could name you 100
factors that are going to enter into this, and yet the word says
"losses." Does a franchisor have to cover losses if a fellow took
out way too much money, paid his wife, paid his children and
entered into improper leases, has no ability to run the store?
It's going to be very difficult to determine the underlying cause
of the problem. I don't know how we can define it. That gives me
nothing but trouble.
So we get into 7(1)(c),
"Damages for Misrepresentation." This, again, I don't understand.
I'm sure we have lawyers on this committee or you get advice, but
I don't understand why an officer of a corporation would sign a
document knowing that he might be liable. I would never have
advised my clients to do this and I know the lawyers I work
closely with wouldn't either. It pierces the corporate veil and
no corporate officer would risk exposing himself to such
liability. If the bill is enacted it has to go after the
corporation, it can't go after the signing officer. If you told a
vice-president of marketing to sign this contract, if the
president did or CEO, he either signs it or he may not have a
job. If the CEO knows something that the vice-president signing
doesn't know about disclosure and he wants the vice-president to
take the knock, here's the remedy. There shouldn't be any remedy
for an officer signing in good faith. There should be a remedy
against the corporation only.
Again, when the rights
cannot be waived, this seems to violate common law and the basic
rights of the individual. If the franchisee feels they are being
coerced by the franchisor or master franchisor into waiving a
right they would prefer to keep, they should refuse to sign the
agreement and look for another franchisor or seek legal advice.
We are going to encourage our first franchisee to seek legal
advice on the whole contract. If they're not happy with it, we
might change it. If we're unable to change the wording or don't
want to, we would suggest they don't sign up as a franchisee. We
don't want them. What we want are entrepreneurs who are going to
run a business and run it well.
What's the difference, if I
could put it this way, between independent stores today running
their operation and a franchise operation? There's no protection
other than common law for any store or any business that's being
run today by an individual. So what is the difference between a
franchisee and this other party down the street who is running a
party store against us? Our advantage and why people will come to
us is our purchasing power. There are only a couple of things:
our system and our purchasing power. Our purchasing power more
than compensates for the royalty. Our franchisee should be able
to be very competitive with the fellow down on the corner who is
operating the same way, the same business. If he doesn't, if he
wants to withdraw, there are escape clauses. He can get out of
Vice-Chair: You've just got a couple more minutes.
Martin: I'm at the end.
The exemption: Again, like
the other regs I was mentioning, they should be published and
available for review. I haven't seen them; maybe they are
available. But here again, I'm reading a bill and I haven't seen
any of the regs. The
regs are an integral part of the bill. I don't know what they're
going to be.
In summary, if you feel
there's need to protect franchisees, so be it. I think we have to
protect some people. But the franchisee should be a true
entrepreneur, should want to run a business, and if there are
clauses in an agreement that prevent him from doing so, I think
he has a right of damages under common law. I don't know why a
franchisee would sign an agreement with clauses that could be
used against him by the franchisor.
I also know there are
always people who will do things against a franchisee. A large
corporation possibly has some ulterior motives. I understand
that's there. I'm not naive; I've been around a long time.
That's my presentation. I
didn't mean it in a confrontational manner. I just meant to give
you exactly how I feel about it as a franchisee. I would not want
to be a member.
Vice-Chair: We've all got a copy of it. We appreciate
that. Thank you very much for your time.
Vice-Chair: Mr Peter Dillon. You have 20 minutes, and
that includes questions, if we have time for questions. Do you
have a handout?
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
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
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
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.
You've got five minutes, Mr 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
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
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.
Vice-Chair: Thank you, Mr Dillon. We've got a few
minutes for questions. Any questions from the Liberal caucus?
Crozier: No, I don't have any questions. I just like the
idea that that judge had the right perspective.
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?
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
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.
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?
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.
What do you think is a reasonable profit?
That depends a good deal on the risk involved, but if you ask me,
off the top of my head I'd say 10%.
Do you think they tend to get it?
Mr Dillon: In my experience,
Vice-Chair: Mr Dillon, we appreciate your time today. It
was a good presentation, and we'll take everything under
Vice-Chair: Is Mr Rosenberg here?
Rosenberg: Good afternoon, ladies and gentlemen.
Vice-Chair: Before you start, Mr Rosenberg, just to the
committee: Mr Martin had some previous comments about our next
steps after this, so after Mr Rosenberg's presentation we'll have
about 20 minutes to discuss that. Thank you very much, Mr
Rosenberg: I don't purport to know as much about Bill 33
as the illustrious fellow before me. However, from the summary
I've seen of it, I have to wonder why it even exists. It gives
franchisees the right to associate. Is this not a free country?
Why do we need a bill to give franchisees the right to discuss
their business and other things? I think it's superfluous and
redundant. My feeling is the opposite to what the previous
speaker said. We need a good, solid set of laws with respect to
franchises because any franchise agreement, as the previous
speaker also said, is totally one-sided.
When a franchisee enters
into an agreement with a franchisor, he has no rights. I've been
through it. This is why I'm saying this and it's why I'm here. My
solicitor phoned me up and said, "You should come and tell your
story." I'm the fellow in the story with that restaurant. I had
an operations manager, a regional area manager, who had left the
franchisor to come to work for me. Contrary to what you were
told, I was told my store was the cleanest one in the system. So
if that's the case, then don't eat at Crabby Joe's.
There was one in Welland
that the franchisor closed up and reopened. There was in St
Catharines that he closed up and reopened. There was one on
Wellington Road in London that he closed up and reopened. Talk
about fly-by-night. In that particular instance, when you have 10
stores and 40% of your stores are constantly turning over, I
think we need to look at the franchisor as opposed to these
I agree that there should
be some consistency with respect to a franchise system. I've
worked for a major franchisor, I've owned my own franchise and
I've been a franchisee for two particular people. What I'm trying
to tell you is that it's very unfair. I was closed up because the
bulk of the information stated that my store was basically dirty
etc. I had a health department report a month previous to that,
and the London health department said everything was cool. I had
been running this operation for about a year and a half. After a
year and a half of running it, and the health department comes in
and says everything's fine, the franchisor comes along and
concocts these stories about how dirty and filthy it was and
takes pictures. I have to repeat myself. The area rep, who left
the franchisor and worked for me, told me that my store was the
most efficient and the cleanest store of any in the chain.
This particular franchisor
decided for various reasons-one of them was that I had begun to
speak with another of the franchisees. I was in the south end and
there was a franchisee in the east end. He came to me and a
fellow from Tillsonburg also came to me and said, "There are
serious problems here." I didn't start the discussions. When the
franchisor got wind of this, the result of what I told you
happened. I got locked up. I invested a ton of money in this
restaurant. I was locked up without warning. There was no
official, formal, legal warning that I was going to be locked up.
One Saturday morning somebody knocked on my door and said, "Here,
your restaurant is closed." Oh, well, it's only half a million
franchisor-talk about fly-by-night-was involved in another chain
which he converted into this chain. Again, just look at the
history: All the stores closed, opened, closed, opened. In most
instances he would pinpoint someone who had their life savings
put into a store, and he would come along and invent some
fictitious reasons for closing them up. These people had no more
means to fight, so they had to curl up and die.
My lawyer said to me: "You
have two choices. You can curl up and die or you can invest a
little bit more money in legal fees and we have a shot at it." I
had no choice. I couldn't walk away from it because I would have
been totally wiped out. Fortunately, after the first day of
court, when the injunction was filed, the franchisor's lawyer
that afternoon contacted my lawyer wanting to settle. Believe the
facts as you may, but if things were weighted so much in this
fellow's favour, why would his lawyer contact my lawyer and say,
"We want to settle"? The conclusions are yours.
All I'm trying to say is,
as the franchisee-put yourself in a franchisee's position-you're
investing all this money, whether it's McDonald's, Tim Hortons or
anyone. Yes, the franchisor has a system and he's put some money
into it etc, but I just don't think it's fair. Let's say you pick
a really good franchise like Tim Hortons. That's almost
guaranteed, but if Tim Hortons makes a mistake-for example, Tim
Hortons is now in the States; I understand they're not doing as
well as they are in Canada-I think that the franchisor should
have some of the onus on them if a venture fails. Why is it that
the franchisee puts all his faith into this franchisor and all
his faith into the system, and for whatever reason, whether it's
his fault or not-sometimes it's the franchisee's fault. I agree.
Some franchisees do not have the experience. In my particular
case, I had run a chain of 13 doughnut shops single-handedly, so
I had a little bit of experience. One restaurant was not that
difficult for me. But why should the franchisee lose all his
money and the franchisor lose nothing?
This is what I mean by
writing certain things into the legislation. I honestly believe
that if it's a partnership, as some of these franchisors say,
there should a partnership in the gain and in the loss. So if the
franchisor makes a mistake with a location or what have you, or
even in picking a franchisee-if the franchisee doesn't work out-I
think the franchisor should bear some of the weight, whether it
be to give the franchisee some of his money back, or be obligated
to maybe purchase the equipment and pay off the bank or what have
you. The problem for a franchisee is that has one shot. He has
his life's savings in it, and if he loses he's finished. That's a
concern for me.
The other thing is: One of
the discussions I had when I originally entered discussions with
the franchisor was that if I could find the identical product at
a different distributor, because I had had some experience
working with other distributors, would it be OK if I were to do
that. Verbally he said yes, but when push came to shove he denied
it. Fortunately I had a partner at the beginning, and he was a
witness to our conversation and signed a document proving that I
One of the reasons one buys
a franchise is to achieve the volume purchasing power of the
franchisor. Obviously, if somebody has 10 stores, he's going to
be able to buy better than someone who has one store. In my case,
I contacted a distributor and I could buy a case of ribs $5
cheaper through my distributor than I could through the
franchisor's "volume purchasing." This is why I could see there
was a problem. The industry standard for restaurant food costs is
32% to 33%. When I took over, mine was 40% and was in line with
the rest of the franchises in that chain. So someone was making
an excessive amount of money at the expense of these poor
franchisees, who were investing their life's savings.
Things are fundamentally
wrong. There's too much power involved with franchisors, in that
they can basically invent things. Once you sign that agreement
you're locked in. If you don't buy from him, bang, you're locked
up. You're locked up if he doesn't like you because you are
talking to other franchisees or what have you. To be honest with
you, since my situation was quoted, the problem my franchisor had
with me was that he was afraid I would associate with the rest of
the franchises, and we were discussing starting a buying group so
we could buy things cheaper.
I don't know much about the
Competition Act. From what I've read about it I think it's very
difficult to enforce, but there are certain clauses in it which
legally prevent franchisors from getting into this "You have to
buy from my distributor" type of thing. But in discussing that
with my lawyer before this even happened to me, he basically said
it's very hard to bring the Competition Act into the swing of
things here, so just leave it.
My franchisor even set up
the terms. I came in; I had credit with distributors I was
dealing with. Then I had to buy from his distributor and I had to
pay COD. Why? Because there's no risk to him. Secondly, I said to
my distributor: "If I'm paying COD, isn't there some sort of
arrangement in general business that if you pay cash you get a 2%
discount?" "No, we can't give you that. This is the way the
pricing structure was set up." I don't think I need to tell
everyone where all the money was going: 6% of sales works out to
be $6,000 if your average sales are $100,000 a month. I'm not
good in math, but without spelling it out, I think you can pretty
well do it.
I also find it very strange
that when I was a franchisee of the second-biggest burger chain
across Canada, when I had reports done by my area rep they came
in at the top achievement, my stores were clean, clean health
department reports in both places. On the other hand, this other
franchise, had a history of life's savings, closing, life's
savings, closing, new franchisee, don't buy it back, kick him
out. I'm sorry: I'm not as eloquent as the previous fellow, but
I'm just trying to get the message across. I didn't really want
to come here and say this, but I thought that if I could come
here and get this across to you people and prevent what happened
to me from happening to someone else, then at least I would have
accomplished something. That is really all I have to say.
Vice-Chair: We have a few minutes for questions. Mr
Martin, your turn first.
Martin: If you are worried about the picture that was
painted about yourself by the previous presenter, not to worry.
You are in an exclusive group of people that he targeted. I
happen to think that all of us are probably pretty good folk. I
want to thank you for coming here today and for having the
courage to share your story and to enlighten us.
It seems to me that the nub
of some of your difficulty with your franchisor is this issue of
tied buying or sourcing of product. You mention it as volume
purchasing, and we've heard this story a few times over the last
three or four days. When people who were tied into buying from
the franchisor actually went out to see the market value of the
product they were being forced to buy from the parent company, it
was much cheaper. Had they been allowed to do that, they would
have been able to make a bit more profit, support their local
economy and help out in terms of generating a bit of a customer
base for themselves.
Would it be fair to say
that some of the issue your franchisor had with you was his
inability to get you to stick to the tied buying arrangement that
he would have preferred?
Rosenberg: No. As I said right at the outset, I
specifically said to him, face to face, "If I can buy the same
product-not similar, but the exact same product-somewhere else,
would I be allowed to do that?" He said, "Yes." I didn't have it
in writing. That was my mistake; I should have had it from him in
writing. Then when I went and did it-if I had not gotten his
agreement in advance, I wouldn't have gone to buy elsewhere. I
know what the franchise agreement said etc. The problem is that
this fellow was making $1 million a year on royalties, rebates,
liquor company kickbacks and budgets. He would get a budget of
$200,000 for 10 stores and give each store $6,000.
My philosophy is, live and
let live. I was in this to make a reasonable living. I see the
industry standard of 32% to 33%, and I'm running a tight ship. He
always tried to slough it under the rug. I had a program on my
computer which gave me my theoretical food costs. He would always
say, "You're not controlling things," and I would know exactly
where I was out every week. If there was a steak missing or a
case of chicken missing or whatever, I could go to the kitchen
manager and say, "There's something wrong here." In most cases,
when a businessman runs his restaurant, if he does his food costs
at the end of the week and is out, he says: "It should have been
34, but it's 35. I don't know why the food costs are out." I knew
exactly why. The franchisor was trying to tell me that I wasn't
running a proper ship. He didn't know I had this theoretical
In answering your question,
my philosophy is, live and let live. This guy is making $1
million, and I'm struggling just to pay off the bank. If
everything were equal, that would be fine. But when my food costs
are out by 6% and they're going into his pocket, and he's just
doing that so that I cannot make any money and eventually close
up, that's not fair. Again, it's a matter of being treated
There has to be some
regulation so there's fair treatment between the franchisor and
the franchisee. If I can buy things cheaper through my
franchisor, which is how it should be, then fine. That's why I'm
buying a franchise: to get the volume purchasing power. I should
have been able to go out and buy a case of ribs for $5 more, not
$5 less. This fellow had 10 stores, and I could buy the exact
same product for $5 less.
The literature he gave me
originally said, "You're buying this franchise for volume
purchasing power, so that you can save money." If I can save
money by going out and buying it myself, then there's something
fundamentally wrong. Where's the legislation that doesn't allow
him to do that? There is no legislation. He can do what he wants.
He can come along and say: "Hey, your store is dirty. I don't
care what the health department says; I'm closing you down.
You're losing all your money."
He offered me $50,000 for
the equipment on a $500,000 restaurant. That's why I went to
court. I couldn't sit back and-that's why I spoke up and that's
why I talked to the other franchisees. I have to have a certain
amount of self-respect and I have to be treated fairly, and if
I'm not being treated fairly, then I'm not going to lie down and
die the way the others are.
Sorry I'm getting all
worked up here.
Vice-Chair: Mr O'Toole has a comment.
O'Toole: I appreciate your presentation this afternoon.
It's interesting that we'd have had the attorney here at the same
time; it seems a little bit unusual.
The purpose of this
committee, of course, is to look at finding some suitable
legislation to make sure we have fairness in competition and in
the marketplace. It's not a perfect balance, but have you looked
at, legislatively, the disclosure provisions within this? I know
you haven't perhaps read the bill, as you said at the beginning,
but disclosure, meaning making sure that those contracts are
disclosing the pertinent information-I don't think too many have
disagreed with the intentions there.
Rosenberg: To put it bluntly, what is being disclosed
does not prevent what happened to me. That's all I'm saying.
O'Toole: It would clarify, if I may-and I'm not trying
to solve your problem here, by the way.
Rosenberg: I don't have a problem any more.
O'Toole: But I think it would clarify these supply
specifics within the contract. "You said/he said" isn't really
too good for anyone, to say, "You said that I could buy it," or
"They said you couldn't." Let's go to the contract and make sure
that's in the disclosure document.
Rosenberg: This disclosure document, are you more or
less talking about a summary of the franchise agreement?
O'Toole: Yes, and I suspect it could disclose what were
the provisions with respect to buying product. As you say, you
are buying it for the purpose of getting volume discounts. From
the perspective of the franchisor, you're really trying to get
into the whole issue of product consistency and predictability;
like, you're not going to buy ribs that are inferior. Do you
understand? So there's some legitimacy in the franchisor
specifying what products you will buy.
Rosenberg: I'm not disputing that, but I'm saying that
the products that I purchased were the exact-and I didn't say,
"Can I buy something similar?" at the outset; I said, "If I buy
the exact same product." Then I shouldn't be able to buy it;
there's obviously something fundamentally wrong if I can go out
and do that. Maybe there should be some legislation in there that
says that if the franchisee is required to buy certain items,
then it has to be at the best possible price that anyone can buy.
If in fact he can buy things cheaper, then maybe the franchisor
has to be penalized. The franchisee, every time he turns around,
gets penalized for whatever.
Crozier: If you were in this instance entering into a
franchise agreement, what would prompt you to put that on the
table, the question to the franchisor, "If I can buy the exact
same product cheaper...?" What would prompt you to do that?
Rosenberg: Only that I had my own doughnut chain of 13
stores and I had a lot of connections in the food industry with
different distributors, so I thought if I could go to these
distributors and save myself money, why not do that? To me,
that's the way you run a business. The way I run a business is to
try to minimize your labour costs, minimize your food costs to
the extent that you still give good service, but if you can buy
things cheaper, that's how you make the money. Your hands are
tied when you're in a franchise. You can't do anything else,
really. You have to do exactly what they say. So I thought if I
could go out and-
Crozier: See, that's what I'm trying to get straight in
my own mind. What's the advantage to franchising if in fact one
or the other can cherry-pick as to what they are going to abide
by and what they aren't? I go back to a comment I made earlier
today. There may be the instance where the only similarity between you and a
franchisee in the next town is the name on the store. There has
to be some standard, I guess. Obviously we've all said that it
has to be fair.
Rosenberg: You're missing my point, though.
Crozier: You can help me.
Rosenberg: I did not ask the franchisor, "If I can buy a
similar type of rib, is that OK?" I asked him if I can buy the
identical ribs from the same supplier, from the same
manufacturer. If I were the franchisor and I had a clear
conscience and I knew I was giving my franchisee the proper
purchasing power, I would right off the bat say, "There's no way
you will." Sure.
Crozier: So then I could assume the same would apply not
only to the ribs, but to the napkins, to the utensils you use,
the equipment you use, the advertising you have. If you could go
out and get the exact same advertising at a better price, you
think you should have the flexibility to do that.
Rosenberg; The exact same advertising?
Rosenberg: Well, yes. I don't think it should happen. If
you've got a franchisor who has 10 franchisees-all I know is
this, OK? When I had three doughnut shops and I went to a
distributor and I said, "I want a price," it was very different
than when I had 15 doughnut shops because of volume purchasing
Crozier: And you were acting as franchisor in that
Rosenberg: They were independent. They weren't
franchised at all. They were just independent and I wasn't acting
Crozier: OK, thank you.
Vice-Chair: Mr Rosenberg, thank you very much for your
time today. We appreciate it very much. You brought some good
points out there.
Rosenberg: My pleasure.
Vice-Chair: Thank you so much.
The next deputation is on
at 3 o'clock, the Fauberts. Are they here? We'll wait till 3
anyway, but we've got some time to discuss what Mr Martin was
concerned about earlier. Do you want to bring those points up
now? We have about 20 minutes here.
Martin: I don't want to be confrontational or
adversarial. We've had four pretty extraordinary days here where
we've heard from some folks about an issue that I think has some
tremendous seriousness attached and ramification for the way that
business is done in this province and the effect that has on the
economy of the province and in particular regions of the
When we were in Sault Ste
Marie we heard about supply issues and the fact that tied buying
in the franchise industry was in many very specific instances
having a tremendously negative effect on the ability of local
producers to get their product on the market so that it could be
available to consumers and consumers could make a choice.
This was affecting the
franchisee, the small business person, because if he or she were
allowed to go out and purchase where they could get the product
at a competitive price, they could put it on the shelf and
improve the potential for them to make a profit and be
It affected the local
business community because there were people in that area who
were producing milk, for example, who were having an awful time
getting their milk into the market and on to the shelves, not
because they weren't producing a quality that was of high
standard and their prices weren't of a competitive nature, but
simply because an arrangement was made at a higher level they
couldn't afford to play at, their product is off the shelf.
That's taken its toll on
the communities within which those businesses operate and, I
suggest, on whole regions of this province, the further you get
away from the centre and the Toronto area: northern Ontario, in
particular, in my instance.
So I'm putting on the table
the possibility of perhaps the ministry, in preparing for second
reading of this bill or of a bill that they might consider
amending, or a bill they might put out that those of us who have
worked hard at this might bring in amendments to, might consider
doing an inquiry of some sort on the implications on the economy,
on local economies and communities, on small businesses and
franchisees of having 80% of the food industry owned and
controlled by two major entities and the tied buying that goes
with that reality.
I would also, as we
mentioned yesterday, recommend that the committee, through the
ministry, seek status in front of the federal bureau of
competition so that we might present some of the findings that
we've gotten here over the last three or four days and encourage
them to, with us, do the right thing to protect small business
and to protect a spirit of competition in this province,
particularly in this instance because those are the people we
heard from the most, the grocery industry. That's one piece.
The second is equally as
important as far as I'm concerned. It's concerned with the
influence that the Canadian Franchise Association has obviously
had in the development of Bill 33, and the protected image that's
out there that this association speaks for the industry and acts,
when requested, on behalf of both franchisor and franchisee to
try to settle disputes. I'm concerned that the perception that
that in fact is happening has unduly influenced the development
of Bill 33, to the point where the government may consider not
accepting amendments we might make to this bill for fear of
offending that particular organization.
We've seen, over and over
again over the last three or four days, members of the Canadian
Franchise Association-some of them members of the board of
directors, some of them counsel, some of them the president and
executive director-speak to us and very clearly indicate that it
would not be in the best interests of franchising in the province
to go any further than what's in Bill 33. It flies in the face of
the evidence that we've seen-anecdotal, however it may be-from some of the
folks who have found themselves caught up in that vortex and are
now struggling to try to make sense out of it, to try to protect
investment that they've already made and that is in jeopardy, and
in some instances to put in place something that would be
protective of others coming down the road. Not to speak of the
need for us to make sure that there is a level playing field,
access to justice etc for those who might be considering getting
into the franchising business, considering, as I've said before,
the economy that we're in that's shifting very rapidly and
sometimes leaving people out there with a package of money,
sometimes by way of severance, that they're looking to invest.
Certainly franchising presents as an easy turnkey possibility
that they may be wanting to get into.
I think that as government
we have a right and a responsibility to make sure that we have
proper regulation in place to protect those folks, as was
mentioned to me yesterday evening as we watched some of the media
coverage of the now infamous Marty McSorley case in hockey. In
business, it's been made clear over the last few days, it's tough
and you've got to be good at what you do. You've got to have the
fundamentals down, and when you go in the corners you've got to
be willing to exchange a few body checks and elbows, but a
two-hander to the side of the head is obviously beyond the pale.
What we've found here is that in many instances in the
franchising industry today, some of the little guys in the
business are getting, very clearly, a two-hander to the side of
The criminal justice system
has stepped in in the Marty McSorley case. I think that we as
government have a responsibility, in this instance, to make sure
that we're playing the game according to the rules and that
everybody knows what the rules are and that at the end of day, if
we do the right thing, we practise hard, we bring our
intelligence to the job, we have some chance of at least staying
in the game and having some success.
I'm tabling a request to
the ministry, through the committee, to explore the relationship
between the Canadian Franchise Association and legal counsel to
franchisors in legal conflict with their franchisees. Some of you
will remember that yesterday I delivered a letter to the
president of the Canadian Franchise Association here. A company
that is having a dispute-mind you, a legal dispute, a litigated
dispute-the franchisees are having a legal dispute with their
franchisor. They've tried to deliver a letter of complaint to the
association. The association won't receive it. I gave this to the
president yesterday on record and later in the day he returned it
to me, saying that because this matter was under litigation, he
couldn't receive it.
I suggest to you that is
only one example of the dismissive attitude of this association
to franchisees, which further heightens my concern that we have
conflict of interest all over the place here. The Canadian
Franchise Association deserves to be looked into to see if in
fact they're doing the job that, under the auspices of the
Ministry of Consumer and Commercial Relations, they've been
licensed to, as I'm sure they are probably a non-profit
Those are the two issues I
put on the table here this afternoon.
I think it is a question of order. I understand where Mr Martin
is going. As I read the report of the subcommittee, it says that
if the time permits on the fourth day of hearings, the committee
members may make statements and proposals for the method of
proceeding during further consideration and clause-by-clause
review. I don't think this is the forum right now to do whatever
we want to do. I think we did say that we could have more days. I
thought that number 4 was just saying that together today we'd
decide when we're going to meet again. Of course, we've got a lot
of things to say, and I want to discuss it with the critic of
this bill. I have no authority right now to do it. I thought
today we were going to decide on a date and a time that we would
meet again to go through this bill.
O'Toole: I know there's a certain dynamic around any
public forum, and I respect members' rights to express
differences in the public forum on the record. I think that's
been done. Whether it's appropriate within the approved minutes
of the subcommittee is questionable. Nonetheless my own belief is
that there is a time and a place. I believe the subcommittee
should convene. We have not had the privilege of having the
regular full Chair in attendance at any of these public hearings.
I think she would need time to review the record and the debate
and call a subcommittee meeting after April 3 between the
subcommittee members representing all parties.
The intention here is to
find that balance between the needs of all parties and the
commerce of this province, and I think we're that close to it.
I've heard in the discussions a lot of willingness to find a
balance that will help us to have a better place to live, to work
and to raise a family in this province. That's kind of how I see
it. I could be polarized as well, but I'm not. At this point, I'm
just digesting what I've heard after four days of public
hearings, much of which has been a very valuable insight that can
only add to a better piece of legislation.
Gilchrist: There's nothing for me to add save and except
to assure Mr Martin that, speaking only for myself, I brought no
bias into this. Minister Tsubouchi asked my views going back
three or four years ago based on my retail experience. I'd never
even met anyone from the CFA until the first day of hearings
Again, speaking only for
myself with a completely open mind, I think the testimony we
heard from both sides, franchisor and franchisee, gives us pause
for further consideration. You've heard already that the working
group has considered and approved five more amendments that I
hope you find favour with. I think you have already expressed
that you have, and I'd like to think in that spirit we're going
to continue to move forward.
I think we should each be pressuring our
respective House leaders to ensure there's no impediment to the
committee meeting again very quickly after April 3, the next time
we're legally allowed to come back as a group, and to move
quickly to do a clause-by-clause that's definitive enough that we
can do it once at this stage and preclude the need to come back
again after second reading.
I don't think there's
anything to be learned beyond what we've already learned today.
We'll be able to distill down, all of us, our respective
positions when it comes to various amendments. I think if they're
brought forward with a good business case, I'm quite confident
that we're going to leave that round of clause-by-clause with a
pretty harmonious feeling around this table based on how close we
are right now. If we do that, our second appeal to the House
leader should be a very fast second and third reading.
There is nothing, I would
submit to all my colleagues, to be gained by belabouring this.
We've heard of issues that are outstanding right now,
particularly in the grocery sector, where there are negotiations
taking place that might very well be positively impacted the
moment this bill is passed. I think to indulge in our traditional
propensity for more talk at Queen's Park simply adds an
impediment to those people getting the kind of justice and
fairness, in both directions, that I would hope is the goal of
all the members on this committee.
I'll give you a personal
commitment that not only in the appeal to the federal government,
I would certainly join with my colleagues opposite in suggesting
the Competition Bureau has a big problem that they should be
confronting in a far more public way, but also in terms of
pressuring our House leader. You certainly have our commitment
that we will move expeditiously to reconvene, do
clause-by-clause, then debate this bill and hopefully bring it to
a mutually agreeable conclusion as quickly as possible.
Vice-Chair: That sounds good.
No problem with that.
Vice-Chair: I don't know if the Fauberts are coming or
not. We have to wait around for about five minutes in case they
do show up. A five-minute recess.