Wednesday 8 March 2000

Franchise Disclosure Act, 1999, Bill 33, Mr Runciman / Loi de 1999 sur la divulgation relative aux franchises, projet de loi 33, M. Runciman

Dr Gillian Hadfield

Mr Alex Konigsberg

Mr Tony Vankiotis

Mr Mark Connolly

Mr Kelly Welch

Canadian Franchise Association
Mr Richard Cunningham

Mr Normand Tremblay

Mr Vijay Kawatra

Mr Marco D'Angelo

Mr Charles Gibson

Algonquin Travel Corp
Mr Ron Greenwood


Chair / Présidente
Ms Frances Lankin (Beaches-East York ND)

Vice-Chair / Vice-Président

Mr Garfield Dunlop (Simcoe North / -Nord PC)

Mr Gilles Bisson (Timmins-James Bay / -Timmins-Baie James ND)
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 Steve Gilchrist (Scarborough East / -Est PC)
Mr Tony Martin (Sault Ste Marie ND)
Mr John O'Toole (Durham PC)
Mr Richard Patten (Ottawa Centre / -Centre L)

Clerk / Greffière

Ms Anne Stokes

Staff / Personnel

Ms Susan Swift, research officer,
Research and Information Services

The committee met at 0936 in the Delta Ottawa Hotel, Ottawa.


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 franchiseurs.

The Vice-Chair (Mr Garfield Dunlop): Good morning, everyone. Welcome to Ottawa.

I have a couple of quick announcements.

For committee members, on this piece of technology on our desks, turn to channel 1 if you want the English translation and channel 2 for the French translation. I want to point out that we will be recessing for the lunch break at 11:40, and that will give you about 20 minutes to check out of your rooms if you haven't already. There is a 12 o'clock deadline here.

This agenda differs somewhat. We have moved a couple of people around. So committee members have a different agenda than some people in the audience may have.


The Vice-Chair: I'd like to start the meeting with Dr Gillian Hadfield. We have until 10:20 for your presentation, Dr Hadfield, and that includes any questions the committee may have. If you want to take the full time for your presentation, there will be no time for questions. If you give us a few minutes, we can have an opportunity to ask you a few questions. The floor is yours.

Dr Gillian Hadfield: Thank you very much. I'm going to try to keep it as brief as possible so we do have lots of time for questions. I have prepared some overhead slides, which Les Stewart is going to help me with, so that we can get through this.

I'm delighted for this opportunity to address the committee, and commend the committee for its attention to this issue. I started studying franchising 15 years ago, and often find it's a good way to bring a halt to a conversation to say that I'm interested in franchising, because it doesn't sound like something terribly exciting to study. But it's actually quite a complex, interesting and very important relationship in our economy.

I'm here today to talk to you as an economist. I am on the faculty of law at the University of Toronto. I'm currently on leave, on sabbatical at Stanford University, but my permanent position is with the University of Toronto. I have a law degree and a PhD in economics. I'll tell you a bit about my background in just a moment.

I am the current president of the Canadian Law and Economics Association and former director of the American Law and Economics Association. I am a Canadian. I did my bachelor of arts in economics at Queen's University, where I was awarded the medal in economics. As I said, I went to Stanford for my PhD and my law degree. My PhD was in economics. My thesis topic is predictably long and obscure, but I thought I'd mention it to you, so you can see how franchising connects to the broadest set of interests I have continued to work on to the present time. The title was "Long-term Relationships and Commitment and the Design of Long-term Relationships, Applications and Limitations of Contracting."

My interests generally are: What does it take to make a long-term economic relationship a valuable one, what is the role of contracting, and where are the points at which contracting needs additional support from legal rules? I have written a number of articles on franchising, some of which have "franchising" in the title and some of which do not, because I view franchising as an example of a more general set of issues related to overcoming problems of commitment and productivity in long-term relationships.

I teach contracts at the University of Toronto, and teach an advanced contracts class in which franchising is a dominant part. I have continued to work on related issues, as they arise, in design of legal institutions and consumer protection. Enough about me. Let's talk about franchising.

My plan for this presentation is to speak to you as an economist and to try to bring out what, in my work, I have identified as the important things to pay attention to about franchising. There are fairly simple things you can know about franchising that give a lot of guidance to thinking through the problem of what you do about franchising. Do you leave it alone completely, or is there any role for legislation?

Franchising, as you may already have discovered, is a term that has a lot of different meanings. The type of franchising most of us are interested in, and are focusing on here, could more specifically be called "business format franchising." That is a type of franchising where a franchisor is selling a small business package to somebody who wants to operate a small business. Franchisees are individuals who are buyers of that package. They can be characterized as people who respond to an advertising pitch. Franchisees, in fact, will go out and identify themselves as: "I'm interested in buying a franchise. What are my options? What are my possibilities?" They respond to the pitch: "Own your own business. Follow our rules and you'll succeed." It's very important to keep in mind that that's who franchisees are and that is the nature of how this relationship gets started. There's nothing wrong with that; that's what is being sold.

I want to emphasize that the industry is franchising and not hamburgers. Franchising is sometimes described as a method of distribution, but it's not. It does distribute products, but it's an industry in and of itself, where the product is the small business package for somebody who wants to operate their business. In order to be successful a franchisor has to figure out that if they haven't established internally the structures for serving franchisees and providing them with the kinds of support they need to be successful, they're not going to survive as franchisees. This hard lesson was learned, for example, by the founder of Domino's. When Domino's Pizza decided to go into franchising, they failed quite dramatically because they hadn't realized they were no longer selling pizzas but were now selling franchises. That's one of the things you look for in identifying a sophisticated franchisor. They have figured that out.

To give you a sense of this as an industry, I went on to the Web site, which is a Web site to which anyone could go who is looking to buy a franchise or looking to advertise a franchise. It's billed as a worldwide directory of franchising. You can enter, "I'd like to know by country or I'd like to know by investment level what my options are," and it will spit those out. I just pulled out a fraction of the "H's" to give you some sense of this as a market for franchises and also to give you a sense of the wide range of areas in which franchising occurs.

Franchising is not just McDonald's and Domino's and Hampton Inns, but is also Hair Club for Men, Hakky Instant Shoe Repair, Hammerle-I don't even know what that is-H20 Plus, a lot of different areas. It's now a very large fraction of the retail market. People who are going into franchising look for something they might be interested in doing, but they are not coming to it and saying, "Look, I'm an experienced motel operator, and I'd like to operate one of your motels." They're looking for an investment opportunity, they're looking to be their own boss and they're looking for a good package.

If you look at this Web site, some of them have more specific information. For example, Häagen-Dazs, in their pitch to prospective franchisees, provides information about how long they have been franchising, ie, giving some indication of how sophisticated they are and whether they know what franchising involves in terms of supporting franchisees; what the investment levels are; how many units they have; how many company-owned units they have, which is important information for a franchisee to know both in terms of what ground-level information does the company have, but also, are they coming in and buying up the franchisees. Häagen-Dazs here is showing they've been this since 1974 and their number of company-owned units is two. That indicates there is probably not a situation where they're buying up their franchisees who are successful, which is something that happens in some systems.

The franchise relationship has a very distinctive structure, and if you can get a handle on this structure, it's an excellent key to figuring out how to think about what we do with franchising in terms of legislation. Franchising is characterized by a separation of ownership and control over the assets in the business. Franchisees own the assets; the franchisors control them. That is something we see in lots of places in the economy. We see that in securities markets. We see that in corporations. Shareholders own the assets, own the company; managers and directors control those assets. That separation of ownership and control is something, in all of these settings, that is a source of great value. I may have the assets, own them, but not be the best person or organization to determine what to do with them. So you give your money to a stockbroker and ask them to invest it on your behalf, or the fund manager. Invest in a company and have the managers make the business decisions and the corporation purchase the assets of a franchise and have a franchisor determine what is the best way to deploy those assets. That is a source of value and that's why franchising is valuable.

That separation of ownership and control, however, also creates vulnerability. The fact that somebody else is controlling your assets means that you've got to be a little bit worried about whether they're going to be putting them to the best use for you, or whether they're going to be taking advantage of them.

The types of risks that you face up front when you separate out ownership and control-and we can see this in franchising as well-is a problem of misrepresentation, misrepresentation as to what the individual or organization that has control over the assets is going to do with them. Some of them are fairly standard things: fraud, misleading advertising or where you're paying for nothing. This is not something that is special to the franchise industry. This is something that arises throughout the economy in lots of different places. Telemarketing is another example where we can see that, and the fly-by-night stocks are another example, where you invest in a company that actually doesn't have the capitalization that it may represent. You can be defrauded by scam operations. I want to draw that comparison.

The previous slide was about risks at the outset of a franchise relationship. The risks I want to emphasize in franchising have to do with ongoing risks. Ongoing risks arise because of something that economists have labelled opportunism. Opportunism is formally the extracting of the value of the sunk investment that somebody has made in a relationship, taking advantage of the fact that someone is locked in to a certain extent. I'm going to give you an example of it in just a minute to make it quite clear, because this is the source of the vulnerability, the way in which the vulnerability in franchising arises.

It's hard sometimes for people to understand how it could be that franchisors would ever take advantage of franchisees, because it appears at first glance that they must have the same interests: everybody wants this business to succeed. To some extent that's true, but there are ways in which their interests diverge.


One of the most important ones is in terms of where their returns from the franchise are coming from. Franchisees at the end of the day are collecting the profits from the franchise. They've got their revenues, they take off all their costs, they take off their royalties to the franchisor, and what's left over are their profits. Franchisors collect their money from a franchise from an upfront franchise fee, if there is one, and generally from royalties. Royalties are collected on the basis of revenues before any costs are taken off. So if all those revenues are there, the franchisee is paying attention to the level of costs because he wants to know what's left over at the end of the day. But his costs are not of the same concern to the franchisor unless they're impinging on revenues or the ability to sell other franchises. So there's a way in which their interests can diverge. A franchisor can be interested in generating volume and not too concerned about costs; franchisees are concerned about what is left over at the end of the day.

Because of the separation of ownership and control, franchisors are making outlet decisions when they're deciding where to open up other outlets, whether to go ahead with the renovation of an outlet or a change in a marketing approach, whether or not to introduce new menu items or put on a promotional plan. All the decisions that the franchisor is making, which, remember, are the reasons that a franchise is valuable-it is not a bad thing that franchisors are making decisions about how to run this outlet. This is precisely why people want to be franchisees, because they want franchisors making those decisions and not themselves. But they're making those decisions with the franchisees' money. So the question is, to what extent are they taking into account, when they're making those decisions, that it's not their money at risk but the franchisees' money at risk?

This risk is not something special or unusual in terms of franchising. I go back to the analogy to the securities market or a corporation. We know that in our corporate law, if we have investors handing their money over to the managers of corporations, there's a risk of self-dealing; that is to say, the managers directing the assets of a company to ventures or suppliers that are owned or controlled by the managers and making profits from the fact that they're in the position of management. We know there's a risk of insider trading, taking advantage of the fact that they have the information before the investors, the owners, have it and trading on it. We know that we can't have a productive, vibrant economy with a productive, vibrant securities market or corporate structure without protections against self-dealing and insider trading, and that's what we do have in those areas. The things I'm talking about in franchising are just exactly the same.

I wanted to give you a specific example of what I mean by opportunism, just to make it a little bit more graphic for you. Suppose you had a $100,000 investment in a franchise, and within a year that franchise generated $200,000 in revenue. Remember, that's where the franchisor's royalties come from, off that $200,000. Just suppose the costs of operating the franchise outlet were $120,000 and that the franchisee paid himself a salary of $50,000, which I just want you to assume. I'm an economist; we're making a lot of assumptions here. That $50,000 is what that franchisee was making and could make if they gave up the franchise and went back into whatever their employment was before they became a franchisee.

Those numbers-$200,000 minus $120,000 minus $50,000-gosh, I think I added wrong. We have a return of $30,000. Sorry. This is actually good. You know people are paying attention.

To correct the record-I'm a theorist; I was never any good at the numbers-the return on the investment is $30,000. That's an even better return on the investment than I was anticipating here in this franchise. That looks pretty good, right? You put your $100,000 down, you make the same salary you made in the non-franchise setting and you're making a $30,000 return-I'm just assuming this is in one year-on that $100,000 investment. This is not a representation of what is going to happen to you if you open a franchise, by the way.

So there's that $30,000 sitting there. Suppose the franchisor comes in in the second year and says: "You know what, we've decided we need to overhaul the outlet. We've just discovered that the aisles are too narrow and we need a different marketing approach. We need to make certain kinds of changes." The franchisor can increase the cost of operating that outlet by as much as $30,000 a year before you're going to say, "You know what, I'm out of here, I'm done."

Here's what I mean. That could be through legitimate decisions about needing to change the outlet because that's what we need to do to maintain competitiveness. It could be that if we don't pay that $30,000, next year those revenues are not going to be $200,000; they're going to be $100,000 or lower. But it could also be that that money is sitting there and the franchisor has opportunities to extract that value: They could raise royalties, they could make investments they would not make themselves if those were their own assets at risk. So the point here is the notion of opportunism and the vulnerability of that $30,000 sitting there. The franchisee is going to stay in business even if that is gone. If that $30,000 is pulled out by the franchisor, the franchisee now faces these two choices: "I can stay in the business, I've made my $100,000 investment, but if that's a sunk cost, if that is gone, I can't recoup that. I get $50,000 a year in salary if I stay, I get $50,000 a year in salary if I leave. I've lost my $30,000 return on my $100,000 investment but there's nothing I can do about that." That's what makes a franchisee vulnerable.

You can look at that risk of opportunism and you can think a lot of things about it, like it's unfair and shouldn't be allowed, it's outrageous, whatever you want to think in terms of that risk. I'm going to focus on why we should be concerned about it, what is the public interest in doing something about the risk of opportunism, which I should say is a standard risk in many long-term relationships. The reason we have contract law is to deal with the problem of opportunism.

I want to talk a bit about what the efficiency considerations are with respect to doing something about opportunism and those risks. Franchising is what modern retailing looks like. From varying statistics, I think it's about 45% of the retail market in Canada and it has the potential to become even more so. The reason that franchising is the way of the future, the way it has been for some time now as well, is because franchising takes the value you get from having a large-scale operation, the returns to scale of bulk buying, of collecting information, of being able to manage inventories, of large-scale advertising, it takes all of those benefits that are available to a large-scale operation and parcels them out to small-scale operations. That's also why you want to be in a franchise, because the franchisor can do the marketing studies and do the research and analyze the data and come up with the fancy advertising campaigns that a single operator can't. This is going to be especially true in our brave new world of the digital age where information has become terribly important in retail in particular.

The reason we have the large, big-box stores is because the large stores can aggregate massive amounts of information they collect from those UPC codes that are flashing through the checkout machine. They're keeping track of the inventories, they're keeping track of how demand is shifting on a daily basis and they're moving product around in ways that dramatically reduce costs and respond much more quickly than has ever been true in the past to shifts in demand.


That's a value that comes with large scale, and that's where franchising comes in. That benefit of large scale, aggregating all that information, can then be parcelled out to small operators who can't compete otherwise. The days in which you could open up the local store and not have access to that information and not be able to respond in the same ways are very, very quickly disappearing. That's also true, of course, with Internet sales.

The risks that franchisees face, the risks I enumerated earlier, the risk of misrepresentation and the risk of opportunism, are costly for the economy. When franchisees end up getting into a franchise that doesn't deliver on its promises and invests those funds, and those funds then disappear, that's wasted investment funds in the economy. That's not a good thing. That's one of the reasons we don't want that in the stock market. We don't want people taking their investments and putting them into fly-by-night stocks. We'd rather have those investments in legitimate businesses and operations that are going to be around. We want people to be able to make wise investment decisions. This is really emphasized by one study. Francine La Fontaine, another Canadian, although she's at a US university now, demonstrated there was a 77% failure rate for franchisors over a five-year period in the United States; that is to say 77% of the franchise operations systems that came into existence disappeared within five years. Now, of course that means the franchisees' investments went with them.

The risks of franchising are also costly because even though it's at 45% of the economy now, we may be looking at too little franchising in the economy. If franchising is risky and potential franchisees understand those risks, they understand the risks of misrepresentation, but more importantly they understand the risk of opportunism, that they're going to be vulnerable, that $30,000 is going to be vulnerable, they can be kind of over the barrel-"Well, what can I say? I can't walk away from this thing even if that amount is being extracted by decisions the franchisor is making"-then some people are going to decide not to become franchisees, not to get into this relationship. That can mean, from the point of view of the economy, we don't have enough of it going on. By "enough," the technical way of thinking about it would be, we don't have the efficient scale. The volume of franchising can be too low because we don't have enough people going into it because they don't get enough protection against the risks and they know they can't protect themselves through their contracts.

It may also be that we're not getting the right mix of people in franchising, we're not getting the best potential franchisees, which is to say we're getting people who have few opportunities on the outside but not the people who have better opportunities on the outside who nonetheless may be the most productive people as franchisees. And, in fact, you hear franchisors speak frequently about the difficulty that they feel they face in identifying good franchisees.

One of the things I talk quite a bit about in my work in a lot of different areas is-and this is one of the main lessons of this combined field of law and economics that I'm in-it's frequently the case that people see law and free markets as being opposed to one another, that introducing law into markets disturbs free markets. It's important to really focus on the fact that free markets require a legal structure. This is the mistake that has caused a lot of problems in eastern Europe and Russia, to sort of say, "OK, let's open up to free markets," but there wasn't the legal structure in place to support those free markets and they haven't taken off.

You need legal structure to support free markets. You need contract law, you need property law, and as I've been drawing the analogy, with securities, regulation and corporate law. In securities you need a way of protecting owners and investors from the abuse of their funds by managers and brokers through their control. By doing that, that's what makes that free market start to work. The New York Stock Exchange promulgates a thick book of rules and regulations privately, overseen by the securities commission, but privately generates those rules because they know that those rules are what will attract investment and that's how you get the efficient scale.

Corporate law establishes that there are fiduciary duties on the part of managers and directors so that when managers and directors are handling those funds of the stockholders, they're under an obligation to manage those funds in the interests of the stockholders. That's law that generates and supports an efficient market. In the sort of comparative work these days, one of the reasons it is thought that the US and North American markets are doing so well is because the securities regulation and corporate law have developed in much better paths than in Europe, for example, and it's the legal structures that are supporting the growth in these areas in North America.

I've mentioned the types of risk that are out there in franchising, emphasizing the opportunism problem. There are a variety of places in which you can come in and regulate, structure the market, the various types of things you can do to support these relationships. One is basic contract law. Obviously, you need basic contract law. The second one is disclosure law, like we have in Bill 33, which I think is an essential and very important component of that proposal. This is also what you see in the Federal Trade Commission rules in the United States-that's federal law-in California and in Alberta. California disclosure law has been there since 1971. You can then move on to registration law, where you require franchisors to register with an agency of the government. That has been true in California since 1971 as well, and is an aspect of Tony Martin's Bill 35.

You can then take another step down, or up, and introduce substantive relationship law, by which I mean rules and regulations about behaviour within this relationship once it has started so we can deal with the misrepresentation problem at the outset through disclosure law. Registration law also addresses that kind of problem.

But then we've got this relationship that's now supposed to last for 15 or 20 years. What do we do about the opportunism problem? That's where we start looking at substantive relationship law. That's where you start looking at putting in provisions that govern or can impinge on termination and non-renewal decisions, such as requiring that there be termination or non-renewal only for good cause. That's where you can find legal provisions requiring that there be notice of a potential default under the franchise agreement and an opportunity for the franchisee to cure that default. This is where you find phrases or obligations set in terms such as "good faith and fair dealing."

Substantive relationship law has been around in the US in the auto and petroleum marketing area since 1956. The Automobile Dealers Day in Court Act was 1956 in the US. In California it has been around since 1981. Again, it is an aspect of Tony Martin's bill, which actually contains a lot of the best features of what you can find in North America in terms of thinking about how to handle franchising.

Good faith and fair dealing terms are in all US contracts. It's an implied term in any contract in the United States, in any industry, no matter where you are. There's an implied duty of good faith and fair dealing. So it's nothing special. You don't need it in a piece of legislation; it's always there. In fact, when I started doing research on franchising back in 1986 or 1987, what I was doing at the time was reading thousands of franchising cases and looking at how the term "good faith and fair dealing" was being interpreted in those settings, and to what extent was it addressing the problems of opportunism, to what extent did the courts understand what was happening in a franchise relationship, and therefore what "good faith and fair dealing" might mean in that context.


The Vice-Chair: You have about 10 or 11 minutes left.

Dr Hadfield: Yes, OK. You have the modes of enforcement in the handout there, so I'm just going to move on to the next one so that I can talk specifically about what I think is necessary here.


Dr Hadfield: There should be one that says, "What's necessary?" It's missing from the pile. That's too bad. This is the one I think is most important.

There are different ways in which you can achieve the goal of getting the kind of commitment you need in franchising. One of them is through reputation, and for a lot of people who feel that there's not a need for any kind of regulation here that's what there's an appeal to: "We don't need to worry about franchising because franchisors won't treat their franchisees badly because it's bad for business to treat their franchisees badly." To some extent, that's true. What that requires is that the information about what franchisors are doing to franchisees has to be free-flowing, available and low-cost.

When I put on my last slide here, which you can look at in the handout, there are two main things I think it would be a good idea to focus on in terms of what might be added to Bill 33 to better achieve the goal of supporting franchising as an economic activity. This isn't exhaustive. These are just the two I've chosen to focus on here that I think are most important.

One is this term of "good faith and fair dealing," a substantive obligation as to how the franchisor can exercise discretion. You can call it whatever you want. Currently, we have the term "fair dealing" in Bill 33. You can call it "good faith and fair dealing." You can call it "commercial reasonableness," as has been suggested by some other people who testified before you.

What's important here is not what you call it but what you understand it to mean and what eventually courts or other enforcers understand it to mean, including what franchisors understand it to mean. What I'm going to suggest to you is that what it needs to be understood to mean is that franchisors are explicitly obligated to exercise their discretion as if it were their own assets at risk. Because if they're not, that means they're taking advantage of the fact that there is a separation of ownership and control and making a decision that, if they were the ones who had to renovate the outlet, would not be a good business decision. Sometimes it will be, but how do you decide if it's a good business decision or if it's advantage-taking? You ask, "Would the franchisor have done it with their own outlet?"

The second thing I think you need to focus on is low-cost enforcement because all the legal rules in the world are not going to make a difference unless there's an ability to make use of those. I've suggested a few ways here in which you can achieve low-cost enforcement. One is to give associations a class standing in civil litigation. That's a feature of Tony Martin's bill which I think is important to look at in terms of making it possible to hold the franchisors to that obligation. Again, why do you want to hold the franchisors to the obligation? Because that's how you generate efficient volume of franchising. That's how you get people in franchising.

Another way of getting some low-cost enforcement, and take the emphasis off "enforcement" there, is to put in place dispute resolutions that are low-cost, like mediation, non-adversarial approaches, to say, "Wait a second. I don't really understand why you're asking me to renovate like this," or "This is high-cost," or "Maybe you don't understand how this is going to impact on the outlet."

Third, and I want to emphasize this one in particular, government can do something important in supporting the private mechanisms that are out there to give franchisees the kind of commitment from franchisors that they need, and that franchisors want as a whole in order to generate interest in franchising. They can support the reputation mechanisms and can do that by supporting the flows of information, by allowing information to flow. It's important for the stories about what franchisors have done and what franchisees have experienced to be out there and available at low cost to potential franchisees, so that they can make judgments about what to do, because that's what provides the check on franchisor behaviour that will in the end probably be most effective. That's really what makes the reputation mechanism that says, "Look, a franchisor's not going to cheat their franchisees because they won't be able to sell franchises." For that to work, that information has to be flowing. That's what you want franchisors to be doing, is paying attention to that.

For example, I think there should be a real push for the government to make sure that information is flowing, that it's not made confidential by confidentiality agreements, that franchisees are protected against lawsuits in the event they talk about what's happened to them as franchisees.

I'm not going to go into detail because of the time, but there are ways in which the government could play a role in structuring these mechanisms; for example, by mandating participation in an Internet Web site that publicizes information about the experience of franchisees with particular franchisors, that prospective franchisees could then access in order to assess, just as they're assessing investment levels and how you've been in this, so that the information is there. At the end of the day, I think that's one of the most effective things we can do. Thank you.

The Vice-Chair: Thank you very much, Dr Hadfield. We've got about five minutes for questions here. First of all, the Liberal caucus.

Mr Richard Patten (Ottawa Centre): First of all, welcome to Ottawa Centre. I gather you've had a good trip flying down from Sault Ste Marie. I guess you're ready to-

Mr Tony Martin (Sault Ste Marie): Another fine city.

Mr Patten: Another fine city.

Thank you for that presentation. I thought that was excellent. I'd like to come back to one thing you mentioned, and that was that one of your colleagues pointed out the 77% failure rate for US franchisors. (1) I wonder if you have any more recent information on what the situation is in the Canadian context and (2) could you elaborate on your comment that perhaps there's "too little franchising" in Canada?

Dr Hadfield: I don't think there's more recent information in Canada. This is not an industry that's been studied very extensively at all in Canada, so that data has just not been collected.

In terms of there being too little franchising, the only way we could know what the amount of franchising could be is to say, "Theoretically, have we made this as attractive as it could be?" We know that in any industry, in any economic relationship, if there's a risk of opportunism, of being taken advantage of, then one of the things that's going to happen is fewer people will go into it. Saying that there could be too little franchising is to say that to the extent that there are unaddressed problems of opportunism and it's risky, people will stay out of it.

Anecdotally, you can know that because, for example, I would say that I wouldn't go into it because the risks are there. It wouldn't be that I would worry that I was getting in with a fly-by-night operator. I just know there's no protection against the exercise of that control power in those ways. It's just not there, and you can't write it into the contract. It's not going to work to write it into the contract. So that's where the prediction comes from.

Mr Martin: We do have a couple of articles written by Professor Hadfield that we'll make available to the committee and to the people who are here today. One is Problematic Relations: Franchising and the Law of Incomplete Contracts; the other is The Price of Law: How the Market for Lawyers Distorts the Justice System. There are a couple of pieces of research that I've had done-Richard, I've been handing this stuff out as we've gone along-by Susan in legislative research. It's a summary of an article on franchise contract terms, like what it says and what it doesn't say, and another article that was put together by the American Franchisee Association, Avoiding the Traps-Boilerplate that Bites: The 10 Most Dangerous Contract Terms. I'll be handing those out in a few minutes.

I wanted to ask Professor Hadfield to maybe expand a little bit on the issue of mediation and dispute resolution mechanisms. There's been the suggestion that what's already in place in Ontario that forces people into mediation before they go to the courts would catch this and deal with it. What's your view on that?

Dr Hadfield: The problem with mandatory mediation as it's now structured-and this is happening throughout; there's nothing special about franchising here-is that it is done in the context of lawsuits that have already been filed and an adversarial structure that's already been put in place. You've hired lawyers. You've filed a complaint or made an application; you've had an answer. So the positions have generally been hardened at that point, and most franchisees are probably not taking that step until things have gotten to an extreme point, like they've been terminated.


The idea of a low-cost form of resolution that supports this relationship would be a mediation mechanism that would kick in at a point at which the relationship can still be saved, at which we can deal with problems at an early stage so that the mediation would be low-cost and would not involve lawyers and legal suits. It might involve calling up, for example, the mediation arm of a private organization and saying, "I've just received this letter that says I have to make these changes to my outlet or the royalty rate is going up 2% next year, and I don't like this," doing nothing ahead of time other than getting that information out and then having a structured way in which you can talk with the other side.

As a way of comparison in a very different setting, in family law, the less legal structure that you have up front, the more likely it is that the mediation is going to be effective, because the positions haven't been hardened. You want to keep this out of that adversarial approach, really, to think about doing something quite different, very problem-solving oriented rather than litigation oriented, which is the way mandatory mediation is structured right now.

The Vice-Chair: We have a quick question by Mr O'Toole.

Mr John O'Toole (Durham): Thank you very much for your expert presentation. We've heard from a couple of people slightly different interpretations of some of this stuff. I think we all understand that there are sort of dominant-subordinate roles with the franchisor and the franchisee. Some have clearly described it as, "One takes the money out of the top and the other takes the money out of the bottom, if there is any." It's an unusual, rather risky position to be in.

I'm more interested in having you explain the way we've described fair dealing. That is something I'm interested in. I'm surprised that you would say that it's implied, so why put it in there? In most contracts, people would want to be going in with unencumbered integrity, so there's an implied element to it. The presenters on previous days asked us to strengthen it. One of them suggested putting "commercial reasonableness" in its place and said it's very much defined in case law. It's not a case that it's ambiguous or untested in court. You've said quite the opposite. You say that not only is it not necessary-it's implied-but it's no stronger than "commercial reasonableness."

I'm not in a position academically to question you, but I want that clarified. If we moved at all to improve it, I would suspect that might be one thing, to clarify fair dealing and not end up with a whole book of regulations of what fair dealing is and wait for the courts to define it. They said "commercial reasonableness" has gone through the discipline of being defined in property matters and other issues.

Just one other thing, and this isn't related to what I've just said. The right to associate-

The Vice-Chair: Where has that one-minute question gone?

Mr O'Toole: She's an expert. We've got to hear from them more importantly than the others, perhaps.

If you looked at the Internet and you had these associations-and just think of what's actually going on today at the academic level. You can get your PhD on-line. Do you understand? It's emerging as one way of chatting around the world about McDonald's. You don't have to be too brilliant to figure out that whole exposure will be part of the right to associate. They'll say: "This is my horror story," and "This is my success story." You figure it out. I would think that would be automatic and implied. The right to associate would imply the technology association as well. But I think more important is the commercial reasonableness question.

Dr Hadfield: Let me clarify what I meant when I said it's implied. In the United States, it's part of contract law that it's implied. That is not part of Canadian contract law, so it is not implied in Canada. I don't mean to say that it would not be a good move, if that's where you're going. To strengthen the language to put in commercial reasonableness would be better than just saying "fair dealing." These are terms that have some legal meaning.

My point was to say that if what you're hoping to accomplish by putting language like that in there and then potentially strengthening that language-if your goal is to deal with this problem of opportunism, because that is what is costly, that's the risk that we need to address in franchising-then "commercial reasonableness," all of these terms, when they get interpreted by the courts-I remember what I did when I did this work 15 years ago. I would go and look at, what does "good faith" mean in the franchising context? Even if you've seen it in other areas, it ends up having an industry-specific meaning.

In the US cases, for example, what "good faith" and "fair dealing" came to mean was that the franchisor could exercise business judgment. That is to say, the franchisor could make the decisions without taking into account the impact on the franchisee, and the reason for that was the courts did not understand the nature of this relationship. They saw it like an employment relationship. They said: "Look, the franchisor is the one in charge. They're the company. They're the one that makes the decision about whether to change the number of lines of automobiles in this dealership or whether or not to discontinue this branch of the business." They were missing the opportunism problem. They were missing the essential feature of the franchising relationship.

My concern would be that you could strengthen the language, certainly, from "fair dealing" to "good faith" to "commercial reasonableness," but what's going to happen in the courts is the term of "commercial reasonableness" will be defined in the franchising industry, in the franchising context. That is not currently there in the law; there isn't an established meaning for that. My suggestion to you is that the best thing to do to deal with this problem would be to make explicit what that means in this setting, and what it means in this setting is the franchisor should be making decisions with respect to those assets as if they were their own; that is, to take into account-you can fill in that, whatever language seems to work from that point of view.

To be clear, I would say, yes, "commercially reasonable" would be a better term, would give the courts a little bit more to work with in accomplishing this. But again, if you don't want to just leave it up to the courts and then 10 or 20 years from now say, "What have they done with that term?"-they could take that term and it could end up being exactly the same as it is now, with that problem having not been addressed.

The Vice-Chair: Thank you very much, Dr Hadfield. It's a pleasure to have you here with us this morning.


The Vice-Chair: We will now go on to our next witness, Mr Alex Konigsberg. I'm trying to stick to a 20-minute schedule, Mr Konigsberg, for presentation and questions. You may start whenever you want.

Mr Alex Konigsberg: My name is Alex Konigsberg. I'm an attorney practising in Montreal. I've asked that my CV be distributed to you, not to tell you how brilliant I am but to tell you that I probably have more experience in dealing with franchise legislation throughout the world than probably any other person. I have been consulted by most governments dealing with legislation. I have been consulted by most franchise associations dealing with legislation. I have been the only non-American to be invited to appear before the Congress of the United States on their franchise legislation. I think I've been the only non-American to be invited to appear before the Federal Trade Commission on the FTC franchise rule. I have been invited to go to Australia to meet with industry and to meet with government, to Mexico. Frankly, I think I've been invited by nearly every country of the world that deals with franchise legislation, other than the province of Ontario.

I would also like to talk at length, but later on in my conversation, about the efforts that are being undertaken by Unidroit, which is an organization in Rome in which Canada, as a country, is a very prominent member. I think it would be very important that this group understand what is going on in Unidroit as it pertains to franchise legislation.


Although I've spent most of my life representing franchisors, I'm not here to speak on behalf of franchisors, I'm not here to speak on behalf of the franchise associations; I'm hear to speak on behalf of franchising. I also want to underline the fact that I've appeared as an expert witness in Ontario courts on behalf of franchisees in the leading litigation cases that have come about in the last number of years before the courts of Ontario. I underline the words "I've appeared on behalf of franchisees" in these litigation cases.

I would also like to say to you categorically, because I've studied this at length for 35 years, that there's absolutely no correlation of any nature whatsoever between the existence of franchise legislation in a particular country and the number of bankruptcies or the amount of fraudulent activities on behalf of franchisors. Frankly, the country that has more lousy franchise practices, that has more bankruptcies, that has more fraudulent activities, is the United States of America, which is by far and above the most regulated country, when it comes to franchising, in the world. There is no reason whatsoever to conclude, based on the experience of any country that has adapted franchise legislation, specifically, that the enactment of such legislation will result in less fraudulent practices or better franchise practices. There is absolutely no correlation.

There's a tremendous amount of misinformation that is spread. I came in a few minutes early and I listened to the learned professor and, frankly, she and I are in different worlds. My experiences are totally different, and on many issues I would challenge some of the statements that were made if I'm given the opportunity. They're just not the case.

Notwithstanding that, I am a proponent of disclosure legislation. I believe that we should have disclosure legislation. I would also caution that the disclosure must be meaningful because, if it's not meaningful, it's a waste of time. It must serve to make the relationship between the franchisor and the franchisee more transparent and it must be simple. If it's not simple, no one is going to read it. That's one of the problems with the Australian legislation. The franchisor is literally required to repeat every provision of the franchise agreement and then explain it. You end up with a document the franchisees do not read.

I would like to mention one issue, because I am here to plead on behalf of franchising and to plead on behalf of a better community of franchising. There is one issue that I think a disclosure document should deal with, and deal with at length, apart from the obvious, apart from the reputation of the franchisor, apart from his experience, apart from the litigation, apart from any of the classical things that, frankly, are contained in Bill 33. But there is one particular issue that impacts on the franchise relationship that is causing a lot of problems to franchisees, and that deals with the supply of goods and services by the franchisor to the franchisee. This is the lightning rod. To the extent that there are a lot of problems going on within this industry, I would venture to say that most of these problems trace back to this particular issue.

I would strongly urge this committee that, in their regulations dealing with disclosure, this issue be dealt with up front. What is the policy of the franchisor vis-à-vis prices or products or services if he or a related corporation is the supplier of the product and service? If they're designated suppliers, what is the policy? If the franchisor is allowed to charge for goods and services, if he has no policy, then let him disclose that he has no policy. Let the franchisee beware that there is no policy, that the franchisor is free to charge what he wants. If it's cost plus 10%, then what is the definition of cost? If it is the retail selling price less a certain percentage, what is that? If it's a designated supplier, does the franchisor take commissions? Does he take volume rebates?

I am not suggesting that the amount of these volume rebates be disclosed. I don't think it's important that it be disclosed. It's the principle that must be disclosed. This is the one area that I would suggest, because to me this is the lightning rod of problems the franchise industry is facing: If things are disclosed up front in the disclosure document, then the franchisee has a very fair idea of what he's involved in.

I would very strongly urge this Legislature not to get involved in relationship issues. The United States of America, including California, has relationship issues, and all that they have is more litigation and more litigation and more litigation. I challenge anyone to bring forth any type of information that there are fewer fraudulent practices, few bankruptcies and fewer bad franchisors in the state of California than anywhere else.

I am concerned with the amount of misinformation that is being put before this group. Someone sent me an e-mail recently in which they talked about Iowa. They asked that empirical evidence be given as to what is happening in the state of Iowa. There's a bill presently pending before the state of Iowa to repeal much of their legislation. All that it has done is hurt franchising.

Most countries of the world today that have adopted legislation, whether it be Mexico, Brazil, Spain or France, have adopted disclosure legislation. They have not adopted relationship legislation. The one glaring exception is Australia, and Australia is paying the price. There has been a study that recently came out in Australia, pointing out that since the adoption of their law, this has damaged franchising severely.

Frankly, I don't believe it. I don't think it has damaged franchising severely. But what it has done is increase the legal costs dramatically. You read the Australian legislation and you will see that they have relationship issues dealing with termination. It works for 90% of the franchise systems. It doesn't work for 10%. If you try to adopt relationship law you will solve nothing other than, to put it bluntly, to fatten the pocketbook of many lawyers practising in this field.

I have seen material go out that talks about Europe. The only countries in Europe that have legislation are Spain and France. The block exemption regulation on franchising which is issued by the European Community does not regulate franchising. It does not regulate disclosure. It does not regulate relationships. It deals with competition issues because of the particular intricacies of the Treaty of Rome.

There are problems facing this industry; there are very significant problems facing this industry. I have two suggestions, but before that I want to deal with one other statistic. I've heard a statistic thrown around-I hope I'm wrong-of a 70% failure rate of franchisees in the States. That was put on the table and has been debunked on numerous occasions. I've also heard that 80% of all franchisees are successful. That too is extremely misleading. It's a very misleading statistic even though it may be true. At one level, where you have serious, mature franchisors-McDonald's or Tim Hortons or whatever it may be-the failure rate is incredibly small; it may be 1%, it may be 2%. At the other level, with start-up franchisors, the failure rate may be 50% or 60%. To extrapolate from that the industry decision that 80% of all franchisees are successful is misleading too. It may be 95% for mature franchisors; it may be 50% for start-up franchisors. People have to be aware of this.


There are two things-and I have given this a tremendous amount of thought over the years because it's something that has intrigued me. On the few occasions when I represent franchisees, they bring their agreement to me. I put it aside and say to them, "I will not agree to take you on as a client and I will not read your franchise agreement until you get into your car or get on a train or a plane and go and talk to other franchisees." One of the beauties of franchising is that the information is public. The best information possible that a prospective franchisee can get is to go and talk to other franchisees in the same system. They don't do it. They don't read their disclosure document, and most of the time they don't understand their disclosure document.

Every franchise association around the world puts out a publication, "Investigate Before Investing." There is no other industry, no other category of law where that information is out. I have yet to see one case anywhere in the world where a franchisee was prosecuted or sued because they had a conversation with a prospective franchisee. Franchisees are more than willing to talk. They're more than willing to give the truth of whether the franchisor is good, whether he's competent, whether he's not competent, and anything can be done. Because just having a disclosure document, if nobody reads it, is not going to help the situation. I know the franchise associations have tried their best, but prospective franchisees do not do it. If they did, they would be able to sort out very quickly who are the good franchisors, who are the competent franchisors and who are the reasonable franchisors.

The second one is even more insidious. Most prospective franchisees, and most lawyers and most consultants, for some reason believe that if you buy a franchise from a start-up franchisor, somehow you are getting in on the bottom floor and are getting a better deal. The reality is the opposite. Most start-up franchisors charge a higher royalty than most mature franchisors. The fees are generally higher, and they just can't supply. They don't have the infrastructure, they don't have the training facilities, they don't have the advertising clout and they don't have the purchasing clout.

I'm generalizing. I'm aware of several start-up franchisors who have all those things, because they have made it their business to become serious franchisors. But many of them don't. If a person who is going to buy a franchise goes into the relationship understanding what is going on, there's no other industry like it where this information is available. It comes down to educating potential franchisees. You cannot legislate competence. There are a lot of incompetent franchisors, a lot of incompetent lawyers, a lot of incompetent doctors and a lot of incompetent business people. You cannot legislate it.

On the issue of good faith and fair dealing, it is now accepted by the jurisprudence in the United States that good faith and fair dealing cannot overrule the specific terms of any agreement. That has been litigated to death in the United States, but I think it is now accepted that good faith and fair dealing will not overrule the specific terms of an agreement.

On the issue that franchisors, in exercising their discretion, should treat the franchisee as if it was their business, that is an open invitation to unmitigated disaster. I am not suggesting to you that a franchisor shouldn't do what is good for his business. But if you understand the franchise relationship, the duty on the franchisor should be what is good for the franchise network. What may be good for a franchisee might be a disaster for the network. It is very important that you understand this distinction.

A franchise agreement is a one-sided agreement, and there's a reason for that. There are really three parties to a franchise agreement, not just the franchisor and franchisee. There's the entire network of franchisees, and somebody has to protect the integrity of the franchise system. It's either the franchisor or the franchisees, and I think even franchisees will tell you that they have to leave this to the franchisor. But in exercising his discretion, it should not be to protect a franchisee or to protect himself. It should be for the protection of the entire franchise system.

I'd like to spend two minutes, if I may, on Unidroit.

The Vice-Chair: That's all you have left anyway.

Mr Konigsberg: Unidroit was an offshoot of the League of Nations, which was disbanded with the League of Nations. Then in the 1940s, by multilateral agreement, a number of countries put Unidroit back together. About 65 countries in the world are now members of Unidroit and have agreed to be bound by the terms of Unidroit. Unidroit stands for the International Institute for Unification of Private Law. What Unidroit has been charged with is harmonizing private law around the world. Unidroit, in the last number of years, has taken an extremely close look at franchising. About 18 months ago they appointed a four-member committee to prepare draft legislation on franchising. The committee met in Rome approximately one year ago and came up with a draft model law that deals with disclosure only. It does not deal with relationship issues. This was discussed ad nauseam by some of the finest practitioners, judges and professors, and after examining legislation from around the world, they came to the conclusion that disclosure legislation was something that would be supported by Unidroit.

The draft model law that has been put out by Unidroit was substantially based on Bill 33-Bill 33 of the province of Alberta, la loi Doubin in France, Australia. These countries were carefully analyzed and they have come up with a draft model law. It is not yet public. In the model law a decision was made after a great deal of discussion that good faith and fair dealing would not be dealt with because that deals with a relationship. If you were going to do a model disclosure law, it would be advisable not to deal with relationship issues. Australia has tried to define fair dealing by being negative, by talking about unconscionable conduct, and they've gone into a very long definition of what constitutes unconscionable conduct. Any lawyer could just pick it to pieces.

I repeat in my last few words: A lot of misinformation is being brought before this organization. I heartily support franchise legislation that is limited to disclosure. If it goes beyond, into relationship issues, all you will do is damage the franchise industry.


Mr O'Toole: Mr Chair, on a point of order, if I could, for the members of the committee: You mentioned a model disclosure law. If you could file that with the committee that would be very helpful.

Mr Konigsberg: I'm sorry?

Mr O'Toole: You mentioned in your presentations that Unidroit has developed a draft model disclosure. If you could leave that with the committee, I would appreciate it.

Mr Konigsberg: Yes. It has not yet been made public. I will seek permission.

Mr O'Toole: Seek approval for that?

Mr Konigsberg: Yes.

Mr O'Toole: It would be helpful.

Mr Konigsberg: Yes, I have a copy actually of the original one that I worked on myself. That is available, but there have been many amendments made since then and that has not yet been finalized. I might add that Canada is a very active member and once the country approves it-for example, the United Nations convention on the sale of goods; Canada has approved that-that becomes a governing law. That takes precedence to any provincial legislation dealing with sale of goods internationally.

Mr Martin: On another point of order, Mr Chair, if I might: I just find it unfortunate that the obviously experienced and learned gentleman didn't leave a minute or two for some of us to challenge some of the statements that he's made and ask some questions about some of the aspersions-

Mr Konigsberg: Well, I very much appreciate it.

Mr Martin: -that he cast on some of the presenters who have come before us over the last few days. They came in good faith, told their stories, told their truth as they knew it. To be dismissed in such a curt way this morning is, in my view, very unfortunate.

The Vice-Chair: Thanks for your time this morning. I appreciate that very much.


The Vice-Chair: Our next presenter will be from Country Style Donuts, Mr Tony Vanikiotis. We have 20 minutes for your presentation, and that includes any questions. So if you wish to have any questions, and the committee does like to ask a few, we'd like to have a few minutes there at the end at least after your presentation.

Mr Tony Vanikiotis: I sat down and put basically in letter form my presentation today so that I can touch on as many things as I can in as short a period of time as possible. Hopefully, there'll be time for a few questions afterwards. I'll read my letter to the committee.

Thank you for affording me the opportunity and privilege of addressing your committee with regard to my personal experiences as a previously licensed franchisee in the province of Ontario, and more specifically in Ottawa. The franchisor in question in my case was Country Style Donuts-I'll refer to them as CSD from now on-a division of Maple Leaf Mills.

Prior to expressing an interest in acquiring this franchise, I had been a nine-year restaurateur in Ottawa, having owned and operated a l40-seat licensed LLBO establishment in downtown Ottawa. I had been looking for a new challenge after a two-year hiatus from the food service industry and was quickly sold on the idea of a CSD franchise that was available in Ottawa on Prince of Wales Drive. It was known to CSD as store number 143.

After several meetings with CSD management, I was chosen as the successful applicant. I was led to believe that my application was selected from among a number of others and that CSD felt I was the right fit for this store. I later found out that I was the only applicant and that the store had been on the market for some time since the previous franchisee had walked out.

The franchise was being marketed at $225,000 as a resale store, which meant that it was being operated by CSD head office until it could be sold. We settled on a purchase price of $140,000 with $50,000 down and the balance financed, as arranged by CSD through the Bank of Montreal on my behalf. I passed the bank's financial requirements and secured a small business loan using my home and my personal guarantee as collateral. I also had a working capital fund of $20,000, which was both a bank and a CSD requirement to complete the transaction.

Of course, there were all the fancy brochures and financial projections provided me by CSD based on sales figures that were obviously inflated and profit margins on sales that later proved to be not only unrealistic but also definitely unattainable. It was quite the sales pitch and I fell for it hook, line, and sinker.

Next came the prerequisite three-week training program at CSD commissary headquarters in Richmond Hill. There, it was drilled into us about CSD bulk buying power, and the virtues of CSD-authorized product and suppliers only in order to ensure the best possible price on the best possible product, thereby maintaining the integrity of the CSD chain and quality. I, like many others, bought into the CSD program almost like buying into a cult following. I was later to discover first-hand that the only integrity to be maintained was to be that of lining the CSD coffers at the expense of their franchisees, a practice which I am sure continues to this day.

When I got to my store and took control, profit margins were much lower than previously presented by CSD, and sales drastically lower than those shown to me for store 143. In less than three months, I had lost my $20,000 reserve and found myself scrambling to find new working capital. My father loaned me $20,000. By this time it was Christmas, which was a very slow period. By March, I knew I was in trouble again. The money my father had loaned me was now gone and I was at a loss as to what to do.

I asked CSD for assistance. Their solution: Run the store in the morning alone with one helper-my peak busy time-get rid of my weekend baker and do the bakes myself. In other words: "Instead of working 80 hours per week, work 96. In short, drop dead so we can take over the store and resell it yet again." That is when I looked to save some money by using my previous connections to local food suppliers and investigate some pricing on the same authorized product that was available locally.

These same products were available in Ottawa for between l5% and 30% less than what CSD was selling to us through their own out-of-town authorized suppliers through supposedly bulk buying power. What an eye-opener. Everything from Sunpac bottled juices to Dough Delight frozen croissants and bagels, to Chef Francisco frozen soups, to boxed Sultana raisins and walnuts. I think you get the picture.

I wrote a letter to Mr Gary MacDonald, the president of CSD, thinking he might want to know. Of course, he already did know and wanted nothing to do with my complaint. From that point on I was branded. My store was frequently visited by operations managers who sought to eliminate these items from my fridges and freezers, at one point even threatening to put product not bought from CSD into the dumpster outside. It was the same authorized product bought cheaper from local suppliers. Simply put, CSD was not milking me any more.

In my 20 months as a CSD franchisee, we switched authorized suppliers three times and authorized product too many times to remember. Obviously, CSD got better deals from new suppliers. Whatever happened to the company line during training on consistency of product and price? Eventually, CSD also boxed and labelled their own line of products, so a claim could now be made that anything non-CSD labelled was a non-authorized product. We then no longer had the ability to shop for price with local suppliers. We in fact were now boxed in as franchisees as to where we could buy legal products.

But there is more. Country Style unilaterally decided to eliminate the small size coffee cups both for take-out and drink-in. That was fine except that we would now sell the medium for small pricing, large for medium, and a new extra large for large pricing. It was an effort, they said, to compete with market forces such as Tim Hortons. Only one slight problem: Our cost had now gone up by almost 30%, but of course there was no price break afforded us by CSD head office. In effect, our one money-maker was now profit reduced by the same 30%, and we were forced to buy new ceramic mugs at over $12 each for the new in-house large. Our existing stock of both ceramic and paper cups and lids was now obsolete, and we had little or no notice other than an in-house memo delivered to us with our order from CSD warehouse.

By this time I had seen enough. A legal battle ensued, and I eventually gave over peaceful possession of store 143 back to CSD. I was tired of fighting. I was plain tired, period. I had lost my $50,000 original investment, my $20,000 working capital and my father's $20,000 loan. I almost lost my home and everything I had worked for all my life. When CSD took over the store, I owed them $70,000 in back rent, supplies, franchise fees and advertising percentages on sales. All other creditors were paid. I even arranged to pay back the Bank of Montreal over time.

In the over nine years I have been away from CSD, my store is now on its fourth owner. All previous franchisees after me have come and gone. One I know personally lost everything. In between franchisees, CSD head office runs the stores. Do they lose? Certainly not. They are not in the business to help franchisees succeed; in fact, they want them to fail. During the short period that owners like myself last, CSD makes buckets full of money from subleasing to us, while they hold the head lease with the landlord, from supplies we do buy from them and from the original cash investment given them in order to acquire the franchise. But the ultimate reward to them: They resell the franchise to some other poor, unsuspecting soul for another $140,000-plus.

They help put you in business, set you up to fail, and then, when reacquiring the franchise after you have failed, they palm it off again. This is where franchisors truly make their money: by reselling franchises that franchisees have left behind. Nice business practice, isn't it?


You are forced to buy into their CSD insurance program-for fire, theft, liability etc-that benefits no one but head office. A case in point was Mr Kuldeep Singh, the past franchisee of the Ottawa Russell Road store. His store had a fire and was gutted inside. It needed to be rebuilt. Of course CSD did the work, but installed used equipment and fixtures that had been removed from stores that were being renovated in other parts of Ontario to the newer, more modern CSD style. Shortly after Mr Singh reopened for business, he was told that he now had to renovate to the new style, of course at his own cost. I'm sure you get the idea of what I am saying. Needless to say, Mr Singh closed down for good, as did at least one other area franchisee. These stores remain closed to this day, with no visible CSD signage. There were no further franchisees to bilk.

In short, let me recap my presentation: glitzy brochures, along with unrealistic sales and profit projections on sales, in order to hook prospective franchisees; inflated pricing on authorized products supplied only by authorized suppliers or CSD themselves; reselling of franchise stores after inevitable failure of previous franchisee; insurance scams and forced renovations to comply with new CSD criteria; inflated rents on subleases as CSD holds head lease with property owners.

My story is not fiction but fact. I am to this day still paying back my debts in the form of a second mortgage on my home. I stiffed no one other than CSD, which stiffed me much worse. For this I feel no remorse. They ruined my financial health for 10 years. They did not suffer financially but in fact have made their money many times over from the same store. If you can help to stop this from happening to even one more person by way of enacting some form of legislation controlling franchisors, then my appearance before you today will have been very gratifying.

Please keep in mind that I stand to gain nothing from my appearance here today. I hope that by attending and making my views felt I can do my small part to stop franchisors like Country Style Donuts from taking advantage of people like myself for whom there is presently little or no protection.

In closing, I would like to thank Mr Ronald Dagenais, my lawyer and personal friend, and Mr Charles Gibson, who assisted me greatly as my legal counsel during my battle with CSD, and who I understand played a large role in the establishment of this committee. They are with Vincent Gour Gibson and Associates here in Ottawa. Without their tireless efforts on my behalf, at a fraction of what I should have paid in legal fees, I would have been bankrupted and CSD would have won without a battle.

You can help to make a difference, should you so choose. Thank you for listening. I just care to add that I am out of the foodservice industry, I do not have the resources to get back into the foodservice industry and I am not here as somebody who is planning to get back into the foodservice industry. I'm here to present my case, let you know how I feel, what happened to me personally, and hopefully that will have some effect on the decision you take as a committee.

The Vice-Chair: Thank you very much. We have about 10 minutes for questions on this one.

I want to make it clear that when I introduced you at the beginning I thought you were representing Country Style Donuts, and actually you're a past franchisee. I want to make sure that's clear for the record.

Tony, your turn.

Mr Martin: First of all, I want to thank you for coming and telling your story because this is exactly what this exercise is about: hearing the truth, the reality, of what's going on out there and listening to some of the people who have become victims of, I would suggest, bad systems. They're not all bad systems, there are good ones out there, but certainly your story presents a picture that is quite troubling and presents some challenges to us here.

It takes quite a bit of courage to do this. One doesn't just wake up one morning and decide to come and speak publicly, as you did. The unfortunate circumstance in many instances is that people have signed confidentiality clauses when they've gotten out of their agreements and they've moved on to other things, so they can't come and tell their stories because legally they feel they're under threat or exposed.

I have a question for you. The speaker before suggested that the problem was, if I might put it crudely, that franchisees are just too stupid and can't read or don't read the material that they're given before they get into the agreement, and if they did we wouldn't have the problems we have. What's your response to that?

Mr Vanikiotis: I certainly am not a stupid man. I ran a business for a number of years. I have a college education. I think I can read. I know I can write. I had legal advice. It's the way that the franchise opportunity is presented to the prospective franchisee, at least in my case. When you are presented sales figures that are a little over 50% of actual figures, when you move into the store and start operating it's very difficult. You assume the figures they're giving you are warranted and that the figures they're giving you are correct. You assume the profit margins are correct. You assume that pricing is correct as has been described to you. You assume you're getting what you paid for and you're going to be getting what was promised to you.

There are probably a number of franchisees out there who may not have the capability to understand the English language as well as I do or as well as many others. They are probably few and far between. I think most franchisees are very aware of what's going on around them. I just think they fall victim to circumstance, like I did. I didn't hear the previous gentleman's full speech, but I did hear that particular comment and I can't disagree more.

Mr Martin: Given your experience and the fact that you had disclosed to you probably as much material as you could get your hands on and had explained to you by your legal adviser and accountant, would a dispute resolution mechanism of some sort, a table that you could have gone to that would have had a third party, an arbitrator or a mediator, have been helpful to you in resolving some of these issues early on that so that you might have been more successful, or was the franchisor in this instance just so devious that even that would have been somehow ignored or used to their advantage?

Mr Vanikiotis: Let me explain to you that I can only speak for the Ottawa market. I'm born and raised in Ottawa. I've lived here all my life. There were four or five, maybe six Country Style Donuts stores here in Ottawa. Every single Country Style Donuts operation, every single Country Style Donuts franchisee in the city of Ottawa has gone through what I've gone through. Every single Country Style Donuts store in the city of Ottawa, in Nepean and in the region of Ottawa-Carleton has gone through the same thing. They have gone through a number of owners. They have had owners turn their stores back. They have had Country Style Donuts turn down prospective buyers in order that they themselves could take over the store and resell it. That's happened to at least two people I'm aware of.

I don't believe a dispute resolution process would serve any purpose. I believe the best thing is the fact that you people are looking at putting in some type of legislation to make it very clear up front what the conditions are and what both parties' responsibilities are.

Bottom line: If you would like to go into business, they will not change one word in that particular franchise agreement to your benefit. It's take it or leave it. If you like the business opportunity as is presented to you, you will take it. That's the trap I fell into and that's the trap that I believe many others fell into.

Mr Steve Gilchrist (Scarborough East): Thank you very much, Tony, for coming in today. It's certainly a very painful story that you've recounted to us here, and I do appreciate your taking the time and displaying the courage.

I find it more than passing strange the complete apathy of the media in dealing with not just these hearings but this issue. I guess they get their advertising dollars from Country Style Donuts so perhaps they don't see the merits in talking about the failures.

Let me explore a little further. I appreciate your last comment, and I think you were very candid with Mr Martin. If in fact at the outset you had been given, for example, a price sheet, a cost sheet of all of the supplies, something you could have gone to the Price Club, National Grocers or any of the other food wholesalers in Ottawa with and been able to compare costs, you would have discovered, presumably even before you'd signed on the dotted line, the markup that your supplier had got. If you had received quotes for the mandatory insurance costs, you'd have been able to call and get competitive quotes out there. If you'd been given a complete history of the site and of all other franchisees specifically of that site, the real history, and if the data that they had told you represented the honest sales figures were made part of the contract and therefore would be seen as misrepresentation if in fact they proved to be untrue, would that have changed your perspective before you signed on the dotted line? Would you have bought that franchise knowing those sorts of details?

Mr Vanikiotis: Knowing what I know today, based on what I've detailed in my presentation to you, no, I most certainly would not have.


Mr Gilchrist: But back then, if you'd been able to go and very quickly see that, "Wait a minute, by going through their supply, I'm going to pay 30% more," would you intuitively have thought, "This is something I should at least try and tack down during the negotiations to see if I can get it changed"?

Mr Vanikiotis: Very honestly, I wouldn't even have tried to tack it down. I would have walked away. It's that simple. As a businessman and as a person making a business decision based on an investment that I was making, I simply would have walked away.

Mr Gilchrist: So in a nutshell, if all the material details about running that business-not just the glitzy brochure-if all of the meat and potatoes had been available for you, it's your considered opinion that you would not have suffered that loss and you would not have bought that-

Mr Vanikiotis: It's not even an opinion. I would have walked away. It's that simple.

Mr Gilchrist: I absolutely am committed, and I can assure you for all three parties, that our goal in this is to build a bill that has that sort of protection in there. How anybody could disagree with disclosure-just an honest, upfront presentation of the facts-is beyond me. So I really think your time has been well spent in coming here today, and I appreciate those comments.

Mr Vanikiotis: There's one thing you have to consider in disclosure. Disclosure is all fine and dandy, and yes, it will definitely help because some people like myself will probably walk away. The problem with disclosure and with anything else is that when you as an individual need to get into a battle at some point in time with a company like Country Style Donuts or Maple Leaf Mills or whoever the franchisor may be, you will lose. You cannot afford to fight companies like that as a franchisee. They know that all of their franchisees, myself included, have limited financial capabilities. They do not have limited financial capabilities. They have lawyers on staff; they have people on call. They don't have any problem taking you to the wall and they will take you to the wall, and they will either make you walk away or they will break you financially for the rest of your life. It's that simple.

Mr Gilchrist: Scary prospect. Thank you.

The Vice-Chair: One final question. Mr Patten.

Mr Patten: Thank you very much for coming here today. It sounds to me like the legal framework provided the franchisor with the ability to make ongoing decisions that were a disadvantage to you. Did you consult with a lawyer-obviously, I guess you did, when you signed on the dotted line. But what information were you able to get about the company, the franchisor?

Mr Vanikiotis: We got their full franchise package. There were a couple of things that my lawyer cautioned against. Country Style wouldn't change a word in the franchise agreement. It was that simple. Looking at the franchise agreement and looking at the opportunity there based on the figures and things I had been made aware of-profit margins, that type of thing-with the potential that I thought was possible for that particular store, I didn't see a problem.

Mr Patten: It sounds to me like you had a case, a legal case, but you had run out of the resources in order to carry it out and go to court.

Mr Vanikiotis: There's no doubt about it. Mr Dagenais has been my personal lawyer and friend since 1980, when I got into the restaurant business. He has done many deals for me from a business standpoint. He made himself available to me at three different phone numbers, and this is a gentleman who has been in the legal profession for 30-plus years in the city of Ottawa. He made himself available to me basically 24 hours a day and put me on to Mr Gibson. Without their help, and without their help at very minimal costs, I wouldn't have been able to even walk away. I'm certain I would have lost my home and everything else; I guarantee it.

Mr Patten: My last question, just quickly. It seems to me that it might have been helpful if you had had some kind of registry that gave a profile, like you call the Better Business Bureau. People do credit checks on you. Why should that not also be available for companies in terms of their reputation or in terms of particular sites if it's not a new operation?

Mr Vanikiotis: I also think possibly a list of past franchisees for the particular area locations in this region, for example, so that if there is nothing to hide and they are marketing something that's a legitimate business that people can make a legitimate living from, then why cannot we, as prospective franchisees, contact previous franchisees to find out what happened? Did they leave? Were they forced out? Did they sell? What happened?

The Vice-Chair: Thank you so much for your time this morning, Tony. It was a pleasure to have you here.


The Vice-Chair: Our next witness will be Mr Mark Connolly. You have 20 minutes, Mr Connolly, including questions. The floor is yours.

Mr Mark Connolly: I most certainly won't take 20 minutes. I have to get back to work. We're in the process of training somebody new.

I am Mark Connolly. I am a two-franchise store owner for Mail Boxes Etc here in the Ottawa area. We just took over our second store on January 13. I have to say that when I started in Mail Boxes Etc-it was five years ago-they had just opened up in Quebec. I'm originally from Montreal. I walked into one of their stores and I was blown away by the service I got and the whole atmosphere.

When I started investigating the franchise of Mail Boxes Etc, it carried on. I was blown away by the way I was treated. I was very impressed with the amount of information I was forwarded about the decision that I wanted to get into of buying a Mail Boxes Etc store. I made that decision five years ago this week. I had a store open within three months and the rest is history. I've bought my second store. I think franchising is great. I think full disclosure is a necessity. I had everything disclosed to me.

Hearing the last gentleman, I can believe the horror stories that are out there. I have heard some horror stories. In our own system we have a few horror stories as well. I would like to attribute these not to the franchisor but to the individual franchisee. Franchising is not for everybody. Owning a store is not for everybody. If you're not a people person, you won't succeed. That's not to take away from the previous gentleman.

That's about it. I think full disclosure is a necessity and I think that Bill 33 is an excellent bill.

The Vice-Chair: Questions first of all from the PC caucus.

Mr Raminder Gill (Bramalea-Gore-Malton-Springdale): Mark, thank you for coming here. I just want to find out: In this original experience you had five years ago, was there anything negative in the disclosure documents they gave you-marketing documents, whatever you want to call them? Was there anything you might have been alarmed about but you said it's OK, you still wanted to make that decision, or was it all glorified and you still-

Mr Connolly: It was certainly all glorified. The presenter we had at the initial franchising seminar that I went to-the fellow's name was Ron Weston, a very dynamic speaker, a tremendous man-cut to the chase, saying: "This is what our franchise is about. If you're interested, pursue it. If serving the public and serving business people is not for you, leave the room now. Don't get involved."

In the secondary material that was given to us after we had initially said, "Yes, we are interested in Mail Boxes Etc," there was a pro forma statement given to us with regard to sales per year. That was all open. I have to admit that my own store went above and beyond those figures.

I've been in retail ever since I graduated from university. I am a people person. I'll be handing out my business cards afterwards, so you're all welcome to come to visit me.

Yes, it was glorified, of course. It has to be glorified, I think, to sell franchises.

Mr Gill: You said that in your system some people have failed.

Mr Connolly: Yes.

Mr Gill: In your original presentation, did they mention that?

Mr Connolly: Yes, they did. They mentioned I believe a 2% failure rate, either 2% or 5%. It goes back five years ago. Since then, we've more than doubled the number of stores we have in Canada. Mail Boxes Etc is a worldwide chain, and I'd like to believe a very reputable worldwide chain. That's my stand.

The Vice-Chair: Madame Boyer.

Mrs Claudette Boyer (Ottawa-Vanier): Thank you for your presentation. You knew what you were coming to say. I guess you were coming to tell us that you are in favour of Bill 33.

Mr Connolly: Yes, most certainly.

Mrs Boyer: But you think that disclosure is a very important issue in this bill. If you've read or heard about Bill 33, is there any other fact that you would like to bring in? Do you think that it goes far enough? Do you think it should be stronger in the statements that we make in the bill?

Mr Connolly: With regard to being able to network among franchise owners, associating with franchise owners, we've always had that. In our franchise agreement we must belong to an advertising association of our peers. So on a monthly basis we're getting together, discussing not only advertising but our sales, the good things about the franchise, the bad things about the franchise, how we can collectively get together to improve the franchise. We've always had that, so I don't know the other side of the coin. I've always had it, and that's why I feel that any franchise that is not offering that, it's as though they're not only holding back information; they're holding back their franchisees from being successful. You've got to have a peer group, and to hold somebody back from joining a peer group, there's something wrong with that. So yes, we should be able to associate with our peers.


Mrs Boyer: I understand the point. What you're doing is good. But do you find that Bill 33, the legislation that will be coming up, and that's why we're doing these hearings, is going far enough as far as protection both for the franchisee and the franchisor?

Mr Connolly: Can you define "far enough"?

Mrs Boyer: Have you read Bill 33?

Mr Connolly: No, I haven't read it. I was just told about the hearings.

Mrs Boyer: So you were just coming here to say that disclosure was very important.

Mr Connolly: Most certainly.

Mrs Boyer: And then, yes, protection is important.

Mr Connolly: It should be paramount.

Mrs Boyer: You're in favour of saying that the protection should be both for franchisees and franchisors, for both parties?

Mr Connolly: For both parties, yes. I think if there's full disclosure, it would protect both. My situation has been a very positive situation with my franchisor, so I don't know what some of the other stories are. I don't see how a franchisor could be damaged by a franchisee, however, short of them selling off their stores.

Mrs Boyer: Thank you.

The Vice-Chair: Mr Martin.

Mr Martin: I must say up front that I'm happy for you, that your story has been successful and hopefully will continue to be.

Mr Connolly: Let's hope, store number two. We hope to get store number three eventually.

Mr Martin: That hasn't been the case for a whole lot of people, including the presenter before you. The Canadian Alliance of Franchise Operators and myself have documented two tomes of stories that have appeared in the press over the last seven years in Ontario alone, 4,600 families who have been damaged by a franchise relationship.

In fact, one that I'll point to involves Mail Box Etc, if any of you brought your stuff with you. I know it's heavy to carry around. But it's tab B-31, and it's the story of a Peter Thomas, who actually sat in on the hearings in Toronto on Monday. He didn't get on the list because the list was too long. He lost his business. He claims it was primarily because he was sold a location that had no parking for him and it turned out to be a failure because of that. He wasn't told that before he got into the business. That little piece of information would have made all the difference for him. He lost $170,000 and now he's struggling with cancer, he's on chemotherapy, and some of that is driven by the stress of this whole circumstance. He's been threatened. He was threatened particularly when he went to the press with his story, over the phone. His life was threatened, and it's just not a pretty picture.

If your company should get sold, and that's happening every day now-we just heard the other day that 241 Pizza bought out Robin's Donuts, and I suggested a scenario to the Tim Hortons gentleman when he was before us in the Soo yesterday. If Pizza Pizza, for example, which has this terrible reputation, continues to have a franchisor who was criminally convicted in Florida and is now continuing to operate in Ontario, bought out Mail Boxes Etc, is there anything in your contract to protect you? And is there anything in legislation that you think we should be doing, in an instance such as that, to make sure your investment was protected?

Mr Connolly: I would certainly hope there is some legislation to protect me. In my own franchise agreement, which is signed with Mail Boxes Etc Canada, I would have to reread my franchise agreement to see if I am protected. It was five years ago that I read that. That's a horrific thought, if somebody came in and bought us out. Presumably we would still maintain our same name-

Mr Martin: I would hope so.

Mr Connolly: -and carry on the same business. My philosophy has always been that I am my own boss. I drive my store; I promote my store; I do everything to get the customer into my store. I have the backing of Mail Boxes Etc, with the name and with their nationwide marketing as well. If somebody came in and bought the name Mail Boxes Etc and started dictating certain rules and regulations, I am hopeful that my original franchise agreement would save me, because that is the agreement I signed.

Mr Martin: Check it out, because in my own town we had a couple of grocers who were model corporate citizens, Loeb. You had them here in the Ottawa area too, and you probably remember the story. It was in the mid-1990s. Provigo bought out Loeb and they lost their stores overnight. They literally slept in their stores for about two weeks while they negotiated an agreement that at least gave them some return on the investment, the work and effort and goodwill they had built up over a number of years.

But I'd go back and read my agreement if I were you, and get some advice on it, because that's the day in which we live. We're here today considering some legislation that might protect people like you who are hard-working, dedicated and committed, and just want to be successful business people. Thank you very much.

Mr Connolly: Let's hope all the legislation gets put into place so we can sleep at night.

The Vice-Chair: Mr Connolly, we really appreciate your time this morning. Sorry to have kept you waiting; we were a little bit behind schedule.

Mr Connolly: That's fine. I've got another two minutes of parking left.

The Vice-Chair: Thank you for your participation.


The Vice-Chair: I now call on Mr Kelly Welch for our final presentation of the morning. Mr Welch, the floor is yours for the next 20 minutes if you wish.

Mr Kelly Welch: Mr Chair, honourable members, ladies and gentlemen, my name is Kelly Welch. I and my wife operate a small IGA in Marmora, Ontario. Marmora is a small town of about 1,600 people situated north of Belleville and east of Peterborough on Highway 7. My family has operated this business for 29 years. I'm a second-generation grocer. We are one of the three largest employers in our town. We employ about 40 people. Our business does about $5.5 million a year in sales.

We are currently dealing with Sobeys. Previously we dealt with the Oshawa Group. I don't know how familiar you are with what's going on there, but currently we are renegotiating our franchise agreement, which we signed back in 1980. The gentleman who was before me, who said that he wasn't sure what would happen if he got into that situation, would have his eyes opened very wide if he went through that process now. I'm one of 30 stores out of 140 that have refused to sign the agreement. I feel very strongly that the agreement that has been proposed to us is slanted very heavily in their favour.

As a family business, we're very active in our community. We spend a lot of money and resources supporting our community. If there's a hockey team or a ball team or any kind of sport, we're there supporting it with money. Personally, I coach hockey. My wife is involved on the library board, committees of council, volunteer firemen. We feel very strongly that without this commitment to our community, our business will not grow and it won't be successful.

Over the past number of years, starting probably around 1990, we started to notice a change in the way our franchisor dealt with us. It was very subtle, but it was definitely a change. Our ability to support our business and our community started to deteriorate. The reason was that our franchisor was starting to take advantage of their very powerful position within our marketplace. At that time there were actually three wholesalers or franchisors that we could deal with. There was National, Oshawa Foods, at that time, and Lumsden. Currently there are only two. If we don't like what's going on at Sobeys, as an independent grocer I have absolutely nowhere else to go. They are very aware of that.

In this month's Canadian Grocer there is an article on the franchise agreement and it says that the problem is almost over, there are only 30 stores left, and Doug Stewart, president of the Empire corporation, states that if you don't want to buy through Sobeys, you shouldn't be in IGA. Well, if I had an option, I'd certainly be considering it. But right now, as an independent grocer in our market, Sobeys and National are controlling a huge portion of the market and aren't really interested in dealing with independent grocers.


Our relationship with our franchisor has deteriorated because they have not honoured their obligations under our current franchise agreement, the old one we're staying with. In addition, currently they're attempting to increase their power over us with new agreements that do not reflect the nature of our ongoing business and ignore some of the basic business etiquette that requires them to deal with us fairly as a business partner.

I'm really pleased, and actually excited, about this legislation that's coming forth. It couldn't be more timely. I've read the bill. I'm a member of the Canadian Independent Grocers Alliance, Sobeys stores that have grouped together. We have talked about this legislation with our lawyers and what's in it today will really help soften some of the imbalances that exist today in our marketplace.

This legislation allows franchisees to associate with each other and exchange information. It's really funny: around 1991 a group of four IGA dealers attempted to form an association. Within two to three years, none of them was in the business any more. So although maybe no store was ever prosecuted or put under the gun, it was handled very subtly and very quickly.

The legislation also requires franchisors to produce information and pro formas that have some meaning and substance. It's a wonderful thing. It's hard to make a decision with information that isn't accurate and substantial, and I really applaud the efforts and I'm quite excited about it.

One thing that I am concerned about is the fair dealings, as some of the speakers I've heard this morning have brought forth. I'm not a lawyer, but through my view of things the current bill doesn't define the term "fair dealings." There's no definition given with regard to its meaning or its intent. Accordingly, there are no consequences stated for those who overstep those bounds or don't honour their obligation. I'm concerned that this statement, without proper definitions or consequences, will have no legal meaning and will not really help deal with the day-to-day problems that you run into that are interpreted within the franchise agreement. I'd like to give you quickly a few examples of some of the things we've run into over the years.

Fidelity programs: Fidelity programs require us to buy a certain percentage of our purchases from the franchise or warehouse, or we will be penalized. Currently, my old agreement requires us to purchase 100% of our products through the house. The proposed new agreement offered to us by Sobeys increases our costs on a sliding scale, depending on what your fidelity is, ranging from about 80% or 85% up to 95%. This is beneficial to the franchisor simply because they can force manufacturers and producers to pay listing fees and other inside monies. It forces everything through the house and gives us very little control outside the house. If you would like some information on that, the standing committee on industry-I think it's Dan McTeague-has produced a report and there are some real insights in that paper on the operations of our business, on inside monies.

This type of system for me, though, a small-town grocer, ignores the obvious benefits of dealing locally. We have a local small dairy and there are people in our community who work at it. I can't support that dairy because I'd get put into a situation where I'm disadvantaged price-wise. The same with eggs. We have a local producer of eggs. There're nothing more I'd like to do than deal with them and we can't. Fidelity programs put my business at a competitive disadvantage if I support my community. It goes as far as equipment-to everything. It covers everything in our agreement.

Disclosure and pricing: A portion of our business comes from what we call direct shipments. Typical products that come direct would be milk, pop and chips, probably the three largest. Sobeys or wholesalers, whatever, restrict manufacturers from dealing directly with us on pricing of these products. We actually order through the manufacturer or producer and they deliver it to us. Our franchisor never touches the product. My cost on a bag of milk is $3.48. Rumours on the street and from talking to my associates-and nobody will ever come forward because of fear of repercussions-are that the Sobeys cost of that same bag of milk which they never touch is somewhere around $3.10. That means that if I'm competing against a corporate store, a YIG or a No Frills, they're making money inside the house. I can't; my cost is that much higher.

Other issues are volume rebates and co-op money. My current franchise agreement requires my franchisor to pass on all volume rebates and co-op monies in the form of reduced product costs. Over time, it's amazing the change in the definitions of what volume rebates and co-op monies are. We've got published co-op. There's just a whole array and what we were getting previously has been slowly chipped away at. The problem with this is that there's no way for me to audit their books to see if the monies that are owed to me are coming. There's no disclosure, yet they can come in and audit my books completely to make sure I'm being true to the program or keeping my fidelity rate current, which to me just doesn't seem fair.

Subsidies: Stores in similar competitive markets are being subsidized at different rates. We have situations where the profits from our programs are used to subsidize some stores but not others. If a traditional dealer, like we are, one that owns your property, business etc, suffers a loss, we suffer a loss. If I lose $100,000, it comes out of our pocket, out of our business. There are situations where non-traditional dealers or the new franchise dealers who make an investment into the business, as we say-and this may be a little terse, but they buy themselves a job-if they run at a loss, it's washed out. It just comes back to zero and we start over again. So it makes it very difficult for us to compete and to keep our money or to compete with other dealers and other franchise sort of dealers.

Those are some of the things that we've run into, conflicts that come up over and over again. That's why I think Bill 33 should make some sort of definition of what is meant by fair dealings, that the disclosure clause should include products and prices and all that kind of thing. It's good for us. It's fair. It's what the franchisors say they're doing anyway, and it would help me in my situation keep more money locally, where it should be spent anyway, because these are my customers, and keep it out of that large corporate bank account.

Thank you very much for letting me have my say. If there are any questions, I'll try to answer them.

The Vice-Chair: Thank you very much. Probably we'll have questions for sure. The Liberal caucus.

Mr Patten: Could you elaborate on the four stores that slowly went out of business? What really went on, in your view?

Mr Welch: This was when we were with Oshawa Foods. Again, a lot of this is speculation, but it's very interesting. At that time we were not fighting but there were many, many questions about these direct shipments, this inside money that was supposed to be being passed on in the form of volume rebates and that sort of thing. Four stores got together and decided we wanted to form a dealers' association, in which we were all to put in I believe it was $500 and have an association that would deal with some of these issues that were over and above. A lot of different personalities in the stores, blah, blah, and it had a little trouble getting going, but it did start. But over time, about a two- to two-and-a-half year period, these four dealers disappeared. I believe at that time a new president came in and spoke some truth and it kind of settled back down.

What I'm trying to speak to here is the thing of being able to associate. Although they say they allow it, sometimes, in my mind at least, it gets handled in a very subtle way, and it's nice to have this legislation that gives us that right.


Mr Patten: I thought your comment on not being able to support your own community was a very powerful statement.

Mr Welch: We feel, as family and a business, really strongly about that. We go to extra lengths. Our business will only grow with our community. Also, just on the other side, I live in that community, my children grow up in that community, and we need to be there. It's hard, if the monies aren't available for us to invest. If I want to renovate my store or whatever, we use all local, and that type of thing, and that's what that's about.

The Vice-Chair: Tony, from the NDP caucus.

Mr Martin: Thanks for coming. We've all heard stories in the grocery industry. Many of us remember the Loeb situation of the mid-1990s where Provigo came in and between 20 and 30 franchisees-these small business people in my community, just first-class corporate citizens-were gone. We're not going to hear from them because they signed confidentiality clauses, so we don't know the story. So it's good that you're here today telling us your story.

Yesterday, we had in Sault Ste Marie about six local producers, mostly agricultural, such as dairy and beef, and they talked to us about the challenges that they're facing. It's killing our local economy.

Mr Welch: It's certainly hampering the small independent business person, that's for sure. No question.

Mr Martin: I hear you asking here for something in the legislation that defines and gives you some protection as far as the ongoing relationship is concerned. We've heard that over and over again, particularly where we've heard individual stories, that there needs to be something in the legislation that speaks to the ongoing relationship and regulating that so it's fair. At least you'd have, if nothing else, a table you could go to, some kind of an arbitration process where it doesn't cost you an arm and a leg for lawyers and doesn't get you into the courts, because that's not where you want to be and you want to work this out.

I sense some resistance to that. I would ask the members of the governments to think about it and consider it, with all due respect. Maybe you could comment?

Mr Welch: My only concern with an arbitrator and mediation is typically what happens-and understand, I don't know a lot about this, but when I perceive it-the arbitrators and the mediators are probably dealing with the large franchisor on a more regular basis than they would be with us. It's very hard for a small-town grocer like myself or like anybody to come and make a presentation in front of an arbitrator who probably has dealt with a lawyer from that company on three or four occasions, and you really have trouble trusting that. Maybe that's not a reality. I don't know.

You asked me-there seems to be a bit of hesitation. When they start talking about mediation and arbitration and whoever the chair happens to be or the arbitrator, I would want to make they were a third person who really had no relationship. That would be my personal concern.

Mr Martin: That's what I'm suggesting, a third party. Thank you very much.

The Vice-Chair: Steve, any questions?

Mr Gilchrist: Thank you for coming in. I hope it's not a conflict of interest that I've actually shopped in your store.

I do appreciate the local perspective you bring to this. Coming from a Canadian Tire background, I share some of your perspective on how things evolved over time because, as good as that franchise was and is, there was certainly a change in the decades that I was there between completely trusting-everything done with a handshake-to something far more disciplined. Maybe that's necessary with the onslaught of American retailers and what have you, but I think something has been lost in the relationship.

With the greatest respect to Tony, I'm a firm believer in giving people all the tools up front before they make a decision, truly believing that that would resolve an awful lot of the problems. You talked about pricing. You talked about access. If all of those details were known to a prospective IGA dealer today, do you think that would solve a lot of the problems, of the kind that are reported in the press, and the kind from that gentleman you may have heard earlier this morning from Country Style Donuts, if you know you have a limited range and if you know the volume rebates are going somewhere else?

Mr Welch: Yes. Any information helps. It also has to be not just at the beginning. In our situation, it's an ongoing thing. If a new merchandising program is introduced-an example we had was signage a few years ago; they wanted us to re-sign our stores and it was a very expensive package, ranging anywhere from $10,000 to $30,000. A year and a half, two years later, "Oh, we've changed packages."

We had the same with our computing system: "This is going to be our platform for the future." I invested in that. Just in hardware, it was over $20,000. I didn't have to change my tills. We actually tested it at our stores. At the time, I wasn't thinking; it was supposed to come already tested and working. I probably spent, with man-hours etc, double that. It never came through on what was promised, and we've got a different system now. Those kinds of things are hard to handle. I think at the time they actually believed they were doing what was in the best interest, but you get a change of regime, and all of a sudden everything changes, and we bear the expense of that.

Sobeys and Oshawa Foods have been very good to us in the past. Don't misunderstand me. We've been very successful. My fear is what's coming and what's happening now. Most of the changes occurred for us around the end of Ray Wolfe's era. He was sort of the beginning of it. That's when you started to get into presidents who weren't family. Now we're into a corporation-style environment and we have no protection from that.

Mr Gilchrist: What sort of volume would it take to justify setting up a third wholesaler again, if those 30 of you who have said no-

Mr Welch: To hit critical mass, you would probably need around $1 billion sales.

Mr Gilchrist: Outside of your 30, looking at all the others that are similarly constrained right now-I'm just curious to know why the marketplace hasn't sorted that out, or even within subcategories.

Mr Welch: The problem is that you have two wholesalers, actually vertically integrated retailers-they're not even wholesalers; there are no wholesalers any more-who control such a huge percentage of our market that even if somebody else came in, and I don't know who that would be, but they'd have to have a ton of capital behind them; they would probably get purchased if they were allowed to, and then to amass that many stores. Although there are 30 stores that haven't signed, there are probably only eight that could give their 30 days' notice and move. We can do that. My biggest fear is that they're going to give me my 30 days' notice. I have nowhere to go. That's why a number of these are probably done in quiet. I can't do that. I have to sign my name to newspaper articles.

Mr Gilchrist: Thanks again, Kelly. I appreciate it.

The Vice-Chair: Thank you very much, Kelly, for your presentation. It's a pleasure to have you here this morning. I'd like to thank the committee for the good work this morning. We'll adjourn now.

Mr Martin: I might suggest this just for some thought for Mr Gilchrist, Mr Gill and all of us. More and more the issue of competition comes in here; right now we've just heard of two big grocery giants who control. This might be worth considering, and I don't know how you do this. This is the first time we've gone to public hearings after first reading of a bill, and I don't know whether this fits or not, but we might want to, at some point, make application to appear before the federal Competition Bureau to ask them questions or to lay on the table some of what we've heard. I would suggest that we think about that and find a way to see if that isn't something that would be helpful to us all in this, because the two things are sort of integrated, it seems, or have some connection.

The Vice-Chair: We can't let the gas-busters look after that for us, can't we?

Mr Gilchrist: Tony has raised an interesting point there. There wouldn't be one consumer in 100,000 who knows that the evolution of the grocery business out there, the concern that's out there right now, because the media has decided it's finally fashionable to talk about it. So all of a sudden it becomes an issue. But we still have four major gasoline refiners and distributors.

If we're down to two food distributors, something that is indispensable-I mean, you don't have to have a car and buy gas, but you do have to eat-why has there been no federal inquiry on that? Why did the Competition Bureau allow that restraint of trade to take place-all very quietly, to be sure? But when Lumsden disappeared, that was the last of the independent, non-vertically integrated wholesales that was gobbled up.

Tony, at the end of all of this, depending on the conclusions we come to, one of the things this committee might very well be advised to do is to make either a formal representation or to seek standing before that committee and compel them to answer some of the questions we come up with. I appreciate your raising it.

The Vice-Chair: Thanks, committee. We'll adjourn, and we're back here at 1:30.

The committee recessed from 1151 to 1334.


The Vice-Chair: Ladies and gentlemen, we'll call the meeting back to order.

Richard Cunningham from the Canadian Franchise Association.

Mr Richard Cunningham: Good afternoon, everybody. As you heard, my name is Richard Cunningham-no Happy Days jokes, please. I'm the president and CEO of the Canadian Franchise Association. I have held this position for seven and a half years. I was also one of the four founding members of the World Franchise Council, and served as its first chairman. The WFC is an international body, currently with over 30 country associations working together to assist the franchise community and promote franchising on a global basis.

I have also been a member of the Franchise Sector Working Team since its inception. For the record, I have not been a franchisee or a franchisor, but I have owned and operated my own small business, which required investing my life savings. So I am familiar with many of the problems, stresses, daily issues and hurdles that a small business owner faces every day.

I also think I bring a unique view to this table. Unlike most presenters you have heard from, who represent one particular group or interest, my position and exposure to the public brings me calls and meetings with happy franchisees, franchisees who are upset and have locked themselves in their stores, excellent franchisors and those I have to call and tell that I have declined their membership. I am pleased to be here today to offer our association's and my personal views and experience on Bill 33 and to answer any questions you might have.

Let me begin by congratulating the government on the introduction of this legislation. As you have heard repeatedly, this is a huge step forward for franchising in this province. The effects it will have go beyond Ontario. Most franchise businesses operate interprovincially. I want to commend you and my fellow members of the Franchise Sector Working Team for the years of work that have been done to date and the efforts that have been made to address the concerns of franchisors, franchisees and, of course, those who are considering a franchise opportunity.

I'd like to begin by giving the committee a background of the CFA and the interesting role we play as a trade association. The CFA was founded in 1967 and is the national trade association for franchisors and the suppliers and professionals who are involved in this industry. We are the second-largest association of this kind in the world, and although our members consist of most of the larger systems in Canada, most importantly we count many new and emerging franchise companies in our numbers as well. We encourage these newer players to join so that they can learn, network and meet with other icons in the industry to achieve excellence in franchising.

The CFA's role is unlike that of most trade associations. Membership in the CFA is not automatic. We put all new members through a review process, similar to the process that we suggest a new franchisee perform. Memberships are scrutinized by lawyers, bankers, consultants and franchise peers for eligibility. We provide a 1-800 number service, accessible from anywhere in North America, to answer questions and provide information about franchising. We have a Web site, where those doing research can find the names of lawyers, bank contacts, seminars and CFA trade shows across Canada, as well as suggested questions for franchisees to use when they are checking out a new system. We own and offer two trade shows in Canada, and those shows are limited to franchisors only. No business opportunities, vendors, etc are allowed to participate, and we do not allow closing rooms on site, which means that we discourage franchisors from trying to take deposits or take franchisees any closer than an introductory meeting at our shows.

These shows also have seminars presented by the pros in the industry on how to buy a franchise, including presentations, most importantly, from franchisees who have gone through the process and can talk first-hand on what they did and how they did it before they made their decision. Almost all of our print material at the CFA has been developed to assist potential franchisees. We have information kits, directories which we produce nationally, and a list of businesses and stories, again written by professionals, all in the name of giving good advice.

Our television show, which airs nationally and has been on the air for seven months, has segments talking about the process of starting a small business and the steps people should take before they buy a franchise.

We are the only association in Canada that offers seminars in five cities in five different areas of the country on the process of investigating a process-again, three-hour seminars, three speakers, lawyers, bankers and again a franchisee. We make them very accessible and keep the cost down. They virtually run at a break-even for us or a small loss.


My office and I personally answer hundreds of calls a week with the aim of trying to assist the public. Although we can't tell them what to do, we can direct them to many resources that will help them make the right decision.

You have heard from previous presenters that many individuals are excited and make decisions from their hearts instead of their heads. I see this every day. For many, the word "franchise" has become a symbol of large, long-standing companies that seldom have failures. But the reality is that there is risk, there is failure and the buyer needs to be aware of that.

I have been asked over the last couple of days why we are primarily a franchisor organization and why, as such, we would spend so much time and effort working with potential franchisees. The answer is simple. As in industry, one bad player can harm the reputation of the entire industry. The more we can do to police this industry and assist buyers in making the right decision, the better it will prove to be for everybody. But we do have to understand that we are a trade association and, without any legislative authority, we only have moral suasion. Anybody who participates in our events is doing that strictly on a voluntary basis.

We have all heard the horror stories: the failures, the unfair practices and the losses suffered by some franchisees. But one thing I have learned in my seven years with this industry and in getting into the middle of a lot of these disputes is that there are two sides to every story.

I would also like to set the record straight about numbers thrown around this table and provided to media. No one, including myself, can substantiate any of the claims about franchising success or failure rates. Statements made by the CFA about success rates are based on information provided primarily by the banks. As you've heard, the banks are very involved in franchise business and their statements to me are that franchise loans to franchisees are better performing loans than to independent businesses. It might be prudent for the committee to consider asking a franchise specialist from one of the major banks to comment further on this area.

The study of franchises, by its nature, is difficult because of the cross-section of sectors. In fact, franchising crosses 42 sectors of the economy. The stats you heard earlier in the week from the US, under more careful examination and review by an economist, were taken on one industry sector and from the smallest franchisees in that sector. Obviously the success rate for a new system may not be as good as that of an older system, and that brings another twist to the complication.

Let's face it: If the franchisor-franchisee relationship is marred by excessive fees, inadequate services and poor support from franchisors, then it is extremely difficult to explain why, both in the US and Canada, franchising has continued to expand much more rapidly than the economy over the past 25 years.

During the 1980s, a proliferation of franchises were being sold and bought. A lot of people were downsized, had money in their hands and were out looking for something to do with it. Franchisees and franchisors had more locations available to them and were busy selling and buying without really checking each other out. The CFA did not have the presence in the public that it has now. We didn't have the trade shows, the television show and the Web site. Trade shows were run by privately run companies and had biz ops, vending machines and a number of other businesses involved at the same time as trade shows, but the quality wasn't being watched.

A lot of the problems with the franchisees that you have heard over the last couple of days, including the Pizza Pizzas of the world, are a product of that time frame. You've heard from Mr Javor and others that franchisees are far more careful today than they were back in those days, in the 1980s. They do their homework. Our checks and questions of franchisees have found that they take an average of six to nine months before they make a decision and actually sign on the bottom line. Also, because they don't have these packages and the money and aren't being downsized at the rate they were in the 1980s, they are giving up a job rather than having left a job, and that makes the whole process a very different one from their perspective.

Franchisors are also more careful. Franchisors are now using systems to evaluate if the profile of the potential franchisee meets with the successful franchisee and their system, and they're providing more information.

Following the introduction of this legislation, all CFA members were sent a copy of this bill, asked for their feedback and encouraged to take part in these public hearings. Our position on these issues has really not changed since August 1998, when the government introduced the draft legislation.

This submission combines the consensus of opinion from our members, the positions we have historically taken on key issues and the need, in our view, to provide consistency in Ontario with the existing legislation in Alberta.

Let me briefly state our position on Bill 33. First, disclosure legislation is the right thing for the public and the industry. Our association initiated disclosure rules four years ago on a voluntary basis and two years ago on a mandatory basis, and it has proven to help both franchisors and franchisees.

Second, no legislation is a substitute for "Buyer beware." Giving new franchisees information will only help them if they use the information provided to them by this bill. A level playing field that offers franchisees certain protections without driving up the price of entering the business through expensive and excessive over-regulation offers the best balance.

Third, we feel that statistics must be gathered in the bill before considering anything beyond what the Franchise Sector Working Team has proposed. As many of you know, this area is very important to us, and something we've been trying to work with ministry officials to implement. As an organization, we feel that we have the resources and expertise to perform this function and will continue to push for this important mechanism.

Fourth, the ministerial exemption process that is in place needs to be easy and simple, and must be available to mature franchisors prior to the bill taking effect.

Finally, we understand that it's necessary, in order to shorten the length of a bill, that a number of the elements dealing with the legislation be left to regulation. It's always difficult to assess the real value of a bill when important components will be defined later through regulation. But I'll touch on some key areas that we feel are very important and should definitely be included in the bill.

The broad disclosure requirements proposed by Bill 33, as well as the terms and conditions proposed to ensure timely transmission of the disclosure documents: We believe the format of disclosure documents should be harmonized across all Canadian jurisdictions that currently require or may introduce future requirements for pre-sale disclosure to potential franchisees. The proposed disclosure legislation is an appropriate and judicial regulatory response based on what we accurately know about today's franchise industry.

The review engagement letter and/or commercial credit reports, we feel, are the optimum tools to allow potential franchisees to accurately assess financial viability of a franchisor system. Audited financials can be confusing. Commercial credit reports actually provide more potential franchisee information in plain English.

Exemption from disclosure should only be given to franchisors who meet criteria which clearly demonstrate that they are financially and organizationally able to assure prospective franchisees that they are stable and that this is a viable investment. Of course, we strongly support the issue of fair dealing requirements in this bill and the right to associate.

The CFA looks forward to continuing our support and involvement in the drafting of those regulations. We believe that with our experience we have an important role to play in ensuring that the regulations benefit both franchisors and franchisees. We're pleased the minister has already assured us that we will be consulted, and look forward to working with ministry officials on this in the future.

Disclosure provides an enormous wealth of information to potential buyers. When introduced, our members said that the CFA disclosure document was the best selling tool they ever had, because it started the relationship in an open and friendly format.

Think about this one element alone in Bill 33: A list of all franchisees in the system and those who have left. I have personally called and spoken to franchisees in a system. We do this as part of our review process for new members. I can assure you that after a few calls to a franchisee asking some simple questions like: "How do you enjoy the system? Were there any hidden costs? Is the training accurate?" you get a very clear picture very quickly of what that system is, where its problems are and whether or not it's one you want to join. If I provided you with a list of Pizza Pizza franchisees, present and past, and you called David Michael, what would your decision be regarding that purchase, regardless of the information you got anywhere else, from anybody else?


This is a good bill. It takes franchising a long way in one big step. Franchising does account for $90 billion a year in sales across Canada, 60% of which are in Ontario. It would be irresponsible for this government, or anyone, to move away from what the Franchise Sector Working Team has unanimously agreed upon and proposed and is supported by virtually everybody you've heard in the last two and a half days.

On behalf of the members of the CFA, I would like to take this opportunity to congratulate you on opening up this process through these public hearings. You've given franchisors, franchisees and, more important, the general public the opportunity to study this bill and offer their comments.

The CFA looks forward to continuing their work with the government and the officials and the members of the opposition in ensuring that this legislation is workable and fair.

The franchise industry is an exciting one. It has offered profitable business opportunity to thousands of people. One million people work in franchises across Canada. We support this industry and the efforts of this government to make it better.

Thank you.

The Vice-Chair: Thank you very much. The first questions are from the NDP caucus.

Mr Martin: I appreciate the work that was done by the working group in getting to where we are today, and with myself and others encouraging the government to move forward and take this out to public hearings so that we might hear directly from some of the people who are caught up in the system-some doing well, some obviously struggling and others badly damaged. We've heard from a significant number, I think, over the last two or three days, and you've been with us and you've heard the stories too.

As a franchise association claiming membership across the country and claiming to have the best interests of the industry at heart, and in listening to the stories that are brought before us-and these aren't people who are looking at getting into a franchise; these are people who have already been in the franchising industry and have had certain experiences. Most who have come before us have had some very difficult experiences. Does that not cry out to you for something in this bill regulating the relationship after the contract is signed so that there is recourse for them to solve some issues before they end up bankrupt or not well from a health perspective? Does it concern you for them personally, and doesn't it concern you that this has a bad impact on the industry itself? If you listened to Professor Hadfield this morning, when the reputation of the industry isn't good, the efficiencies that could be had by more people investing are limited.

Mr Cunningham: I'll answer the first question, which is, what are my feelings about people who are in the system now and how can legislation help them? As I understand it, first of all, legislation is difficult to enact retroactively. For you to put legislation in place now to go back and try to deal with situations that started 10 years ago or five years ago or whatever, we'll be wading into a situation that would be complex, difficult and probably, as we've heard before, a field day for lawyers.

No one wants to see franchisees in trouble with their franchise. As I said earlier, I own my own small business and, when you're into that and you're up to your armpit in alligators, you're always looking for someone to help you out of the that situation. In this case, as I would understand it, certainly fair dealing would come into play immediately, as would the fact that people can associate, have the right to associate. Those two elements in themselves, aside from the other issues, I think would be of great benefit to people already in systems. I think there needs to be more education so that people who are in systems know where to get help, not necessarily just from lawyers, but where they could seek more advice even from each other as franchisees which, as we've heard in some cases, they can't, especially in bad systems.

Mr Martin: How many franchises belong to the Canadian Franchise Association?

Mr Cunningham: Directly, none.

Mr Martin: OK. You're quoted in an article in this tome that I've been carrying around, and for those who have it with them it's B55: "By the time [franchisees] have a problem, they're probably out money, if not out of the store, and they're too far down the road." These are small business people. These are the people who are the heart and soul of many communities. By the comment you just made a few minutes ago that we can't do anything about that, are you willing, as the spokesperson for the Canadian Franchise Association, to cast them into the wind?

Mr Cunningham: No, that's not my intention at all. What has to be defined here is, of those people, who as you say have lost their money or are about to lose their store, how many were a result of the franchisor's doing, the market's doing or the franchisee's doing? Those are the kinds of statistics we don't have. You don't have them and I don't have them. If it's a result of market force, the market played a force on my business too. In the case of franchisors who are mistreating their franchisees, one of the options we opened to people when I made that statement was a mediation service which the association has available across Canada for members, non-members, anybody who wants to use it.

Mr Martin: How many times has it been used?

Mr Cunningham: It has only been used a couple of times. To talk to that issue, we feel that the problem with that has been partly lawyers, because mediation is something which can be done quickly and for far less money than going to court.

Mr Martin: Could it possibly be that you don't want to take it on because the members of your association somehow bring pressure to bear? I've got a letter here from Bulk Barn franchisees that has been delivered I think two or three times to your office and has been refused, I'm told. Is Bulk Barn part of your organization?

Mr Cunningham: Yes, they are.

Mr Martin: I'm going to deliver it to you personally here today so that you will have it and hopefully respond to them, because they're looking for some resolution to a very difficult circumstance they find themselves in. I suggest that there are a lot more like Bulk Barn out there who are going to find themselves in the same circumstance, particularly if what we've heard these last two or three days continues and escalates.

It seems to me that what we need in this bill is some dispute resolution mechanism. I'm not convinced of what that vehicle could be or should be, but we need to be taking seriously the need for this. If there's one area that I would challenge you in, in terms of your presentation here today, it's in that area. We need something that people who are aggrieved at this particular point in time, and who will be aggrieved down the line, whether it's franchisor or franchisee, can go to without having to get into a very legalistic vortex with lawyers and the cost that represents. Perhaps we can resolve some of these things so that the franchise industry, which is very important in Canada and the US, stops developing the reputation that seems to be growing here now and creates those efficiencies that Professor Hadfield talked about this morning.

The Vice-Chair: The next speaker is Mr O'Toole.

Mr O'Toole: Thank you very much for your presentation. I have just a couple of quick ones, and maybe other members have a question as well.

I agree with your advice that getting a bank franchise loan officer to present to the commission would be helpful. Whether that will happen now or in the short term, they can always write in a report. If you know of any, it would be helpful.

We also heard of the shortage of franchisees. If you want to respond, you can, but I don't see that as a problem, technically. I just think it's something we heard from somebody.

There are a couple of other good pieces of advice I'd like you to comment on. The ILA, the independent legal advice, was referred to yesterday in Sault Ste Marie. If I were to sign off, saying that I had done that due diligence piece-you referred to it as a commercial credit report; I'd refer to it as an independent financial advice. If those two requirements were put in here in a sort of regulation and they sign off on those-I agree with one of the previous presenters here that most people are so eager to cook that first pizza, they don't read anything. I honestly feel they get the buyout from the company they're departing from, $200,000, and they rush right out and get that urge to be in business. I think there's some due diligence with that as opposed to me, the taxpayer, being somehow hooked into this, "Jeez, I got taken advantage of." You could say that happens every day at the casino or at the racetrack.


I want to refer to something that you did reply to Mr Martin on. I'm quite sympathetic to the supply issues that we heard about yesterday. On some of those there should be some strengthening.

The other thing is the dispute mechanism, and I'm not convinced. In your report, under "Alternative dispute resolution (ADR)" on the second-last page, it says: "It is noteworthy that the discussion paper does not include a proposal for alternative dispute resolution. Nevertheless, the CFA recognizes ADR is an important conflict resolution mechanism, and one which can provide benefits to all players in the franchise sector." Do you think it should be included? You've also got some stuff here with respect to your own code of ethics.

Mr Cunningham: There are two issues with this. First of all, it's in our code of ethics, so obviously we encourage our members to use any other method than litigation. As I understand it, now it's even built into the civil court system, so mediation is available there. We've looked at the idea of having a different type of system than we have now, but the problem with mediation historically, both in the US and Canada, has been that there's still a stop-gap for using it, both in the case of not understanding it and the legal community not willing to participate in it. As a method of resolving disputes in franchising it can work; not in all cases, but it can in some. Again it plays to the issue that both parties must be willing to participate.

Mr Gilchrist: I have a couple of points that I wonder if you could elaborate on. Given that the CFA believes the commercial credit reports are valuable-and we've heard similar comments from other groups about getting independent legal advice-as part of your code of ethics or a pro forma prospectus, would you support the express statement by a franchisor that they "recommend," "strongly suggest"-words to that effect-that before proceeding with the application the prospective franchisee get both independent legal advice and obtain a commercial credit report?

Mr Cunningham: It's currently in.

Mr Gilchrist: Both of those?

Mr Cunningham: It is in our code of ethics. We encourage them to encourage the prospective franchisee to get advice from professionals. In some cases, not all-and unfortunately not across the board-to protect themselves franchisors have put in this clause so that a franchisee would go and sign off that they've seen a lawyer, an accountant and so on.

Mr Gilchrist: Many isn't all. Forgive me; I was finishing up a phone call at the start of your presentation, trying to listen at the back of the room. Is the code of ethics applied scrupulously? Can you get close? Can you say, "I chose other wording," or do you have some kind of review that you would go through and check off a list, and in this case if they did not have that as part of their prospectus, what would the repercussions be?

Mr Cunningham: If we have a complaint from a franchisee saying that they were not abiding by any part of our code, we have a complaint procedure which we put into place and review it. The only decision we can make, the only option we have as a trade association, is to rescind their membership.

Mr Gilchrist: That doesn't sound like too onerous a penalty.

Mr Cunningham: In fact it does have quite a bit of effect to it because we own the trade shows, the directories and a lot of the marketing tools they have, and they can't be in those. If they are in the business of selling franchises and they do not belong to the association any longer, they can't participate in those vehicles.

Mr Gilchrist: Forgive me, I may be too picky in my interpretation of your language. You said "if they weren't following any of the terms." Does that mean "any one of," or the only time you would get mad is if they didn't follow-

Mr Cunningham: Any one of.

Mr Gilchrist: OK, that's different.

The second is the right to associate. We can say you have the right to associate. If there's nothing expressly provided for, I guess the franchisor could say, "Sure, they have the right to associate and I have the right to harass." What should we explicitly be stating are the consequences of saying that we allow a right of association? How far should we go down the road in the regulations to say, "There will be extraordinary repercussions if you do any of the following things," or should we be silent on that?

Mr Cunningham: It would be unfair for me to answer that at this point because it was never discussed at the Franchise Sector Working Team. For me to answer that on my own, and not having had time to consider it, I don't think I'd be giving justification to the answer.

Mr Gilchrist: I appreciate your candour, but does that mean they embraced the concept but didn't talk about any of the consequences of putting that clause in there? It was my understanding that right to associate was part of the approval.

Mr Cunningham: That's right. It was part of the approval.

Mr Gilchrist: But no one discussed what that meant.

Mr Cunningham: The focus at the time in those meetings, for whatever reason, was what would happen if you did not, the consequences for not disclosing properly, or at all.

Mr Gilchrist: Again, I don't mean those questions to sound harsh. You and we have heard over the last couple of days that disclosure seems to be the key. I must admit that my bias is giving people as much information up front. I think part and parcel of that is saying, in a clause that says you have the right to associate, what that means.

I would encourage you, if in fact it hasn't been discussed. Recognizing that the next step for this committee will be at some point after April 3, we've got a bit of time. If it's possible to seek counsel from any of your colleagues on that subject, I'd be grateful and would welcome your input.

Mr Cunningham: Of course.

Mr Patten: Thank you for your presentation. I haven't heard all of the presentations in the different locales, but I'm intrigued by this and the role of your association. I asked a question this morning about the need for a better business bureau, perhaps the model that you have here in that it can have some clout in the sense that it is used as a cornerstone for people to say: "Has this franchise been a member? Are they a member? If they were a member, have they had any complaints against them?" If somebody phoned up and there were complaints against a particular franchise, would you be free to disclose, not necessarily the particular-first of all, would you say, "Yes, there were four complaints in the last two years with such and such a company"?

Mr Cunningham: We wouldn't disclose the background on any of the complaints but we would probably say their membership was in review. The reason for that is there are sometimes cases where a franchisee will phone in or file a complaint which has no basis to it. To give out details of such a thing when we haven't been able to fully investigate it wouldn't be fair to either party.

Mr Patten: Have you taken action to revoke a membership?

Mr Cunningham: Yes, we have.

Mr Patten: So someone would be able to know that?

Mr Cunningham: Yes.

Mr Patten: Good.

Along the lines of Mr Gilchrist, but not necessarily on the disclosure issue, which seems to be almost unanimously agreed to, what I've heard is, "Well, it's very difficult to get into the relationship between the franchisor and the franchisee." However, as time goes on there seems to be significant representation that says the franchisee continues to get squeezed somewhat. What's your experience and observation? Is that a general pattern? Does it vary with poor business practice and from business to business, or is there a pattern there?

Mr Cunningham: This is where the problem with statistics is. When we talked about supply issues, what might be a supply problem for grocery stores couldn't possibly apply for hamburger stores. When you talk about, "Where are the problems, are they in certain sectors and not in others?" you might say that in the food business, for example, territories become more condensed and are becoming more of a problem for them than they are for people who are working in home-based businesses.

The problem with dealing with an industry, if you can call it that, in so many sectors of the economy, and dealing with everything from a $20,000 to a $10-million investment, without proper statistics is that it puts us all in a situation where we're groping for answers with nothing to base them on.

In answering your question as best I can, I don't see any one problem that goes across all the lines of franchising other than the lack of consistent information for a potential franchisee before they buy, and this answers that.


Mr Patten: My last question: You do periodic checks with franchisors and franchisees. If you uncover something, what do you do with that? Let's say no one has initiated a complaint to your association. However, in doing surveys of satisfaction you discover certain information. Do you take that back to your executive?

Mr Cunningham: It goes back to a membership review committee and they would make recommendations. In some cases we go back to the franchisor. I call the president of the company personally and say, "You've got these problems, fix them," or in some cases we would terminate their membership.

Mr Martin: I'm following up on the question that Richard asked a few minutes ago in terms of who you've actually kicked out of the association. I'm led to believe that, in fact, you've only revoked the membership of one and that was Pizza Pizza. Is that correct?

Mr Cunningham: I'm not at liberty to say, I believe. That would be privileged information of the association and I don't think it's appropriate to make any of that public here.

Mr Martin: You're not going to give me any numbers even?

Mr Cunningham: No.

Mr Martin: Then just to query as to the membership in your group and who you speak for, I'm led to believe that you have 220 out of about 1,300 franchise systems in the country. Is that correct?

Mr Cunningham: I don't what the date of that paper is, but our franchise member list is just over 300 right now because some of our member companies, like CARA, for example, would have eight brand names.

Mr Martin: And 80 of your members are lawyers, accountants or consultants?

Mr Cunningham: Correct.

Mr Martin: Also there are some big systems-and we heard from one of them today-that don't belong to your association. Do you have any auto dealers?

Mr Cunningham: No.

Mr Martin: Do you have any food stores?

Mr Cunningham: Yes.

Mr Martin: How many?

Mr Cunningham: One chain.

Mr Martin: Petroleum stations?

Mr Cunningham: Yes, Petrocan.

Mr Martin: What about hotels and motels?

Mr Cunningham: Yes, a number of them.

Mr Martin: You made a statement earlier about the information I shared with the committee that the perception out there is that there's lower risk by going into a franchise than the independent small business route. I have a study that suggests that's not the case, that the incidence of failure in franchising is greater than in going the independent route.

Mr Cunningham: I don't know your study so I can't comment on it.

Mr Martin: It's a study called Survival Patterns among Franchisee and Nonfranchise Firms Started in 1986 and 1987. I can give you a copy of the report. It was reviewed by Ms Susan Swift from our legislative research branch, and it's actually quite interesting. It has a number of findings that I think maybe your association might find worth looking at because it challenges very seriously the contention-and I suggest it's something that needs to be perhaps looked into further. If we're offering franchising in the country as a more secure way to get into business, particularly in an environment where there are a lot of people who are being restructured and walking around with severance packages looking for someplace to invest them and they are thinking that franchising is a bit more risk-free than actually setting up an independent business, then we may be sending them down a road that will result in stories such as the ones we've heard over the last two or three days here.

Mr Cunningham: Can I respond to that?

The Vice-Chair: Go ahead, sir. We're just about out of time here now.

Mr Cunningham: Even if these statistics are out there, and as people are being told that franchises are more successful than non-franchises, the disclosure is going to give them the information and the ability to contact people in the system. If they call up XYZ system and talk to 10 of the franchisees and they say, "I'm not allowed to associate," "I'm not making any money," "I've been in this business five years and I've lost money," or "I'm not in the system any more because I lost my life savings," I think that in itself is going to tell those people, regardless of what any statistics are, not to buy.

Mr Martin: The problem is, though, that a lot of the people that they should actually talk to have signed confidentiality agreements and they can't talk.

Mr Cunningham: They wouldn't be able to do that, though, with this disclosure legislation.

The Vice-Chair: Richard, thank you so much for your time today and for the presentation you left with us.


The Vice-Chair: We'll now go to Mr Normand Tremblay. Mr Tremblay, we've allotted you 20 minutes, and that includes the time for some questions.

Mr Normand Tremblay: Good afternoon, everyone.

My name is Normand Tremblay. I am a former franchisee of the Loeb grocery chain. I left the business about three and a half years ago following a dispute with our franchisor. At the time, Loeb was owned and controlled by the Provigo corporation in Montreal. Today, as you probably all know, it is owned and operated by the Loblaws corporation.

The store I had was the Loeb St Laurent on St Laurent Boulevard in Gloucester, which is now part of Ottawa.

My reason for being here today is to offer my opinion on the proposed Franchise Disclosure Act, Bill 33, based on my personal experience in a franchisor/franchisee relationship that went wrong.

The end result of the dispute was that myself and approximately 18 other franchisees were bought out by the franchisor as part of a settlement agreement that was reached following an extensive legal battle. Part of the settlement also stated that, at the request of the franchisor, all franchisees were prevented from discussing any details about the dispute. The only comment permitted was to say that "our differences were settled on an amicable basis." So I have to be careful as to what I tell you today on the basis of what I can say is a gag order following the settlement.

The only reasons we were able to secure an out-of-court settlement were that, first, there were 21 of us who had joined forces to fight for our rights and to cover the legal expenses. Second, we had extremely competent attorneys who also sincerely believed in our cause. Third, our customers, the public, the media, local politicians as well as many provincial politicians were all on our side. Fourth, our franchisor eventually realized that it had more to lose than to gain by continuing the legal battle, from both a financial and a public opinion perspective.

During our fight with our franchisor, we also lobbied provincial politicians very hard for some form of legislation to regulate the franchisor/franchisee relationship. Although we knew at the time that very little could be done in time to help our own situation, our primary goal was trying to make sure that what was happening to us would not happen to other franchisees in the future; that the kind of misrepresentation and bad faith that we were battling would one day be prevented by having franchise legislation that would outlaw such an abusive process in the franchisor/franchisee relationship.

The things that we were looking for in the legislation were full disclosure of information, good-faith bargaining, dispute resolution, and some protection when it came time to renew our franchise agreement.


What the proposed Bill 33 is currently offering is the right to associate; full disclosure; a rescinding right for the franchisee; and finally, damage for loss due to misrepresentation in disclosure documents.

Although the proposed Bill 33 is a step, in my opinion, in the right direction in trying to prevent misuse and abuse from franchisors, I personally believe that it falls short on key issues that always surface in a franchisor/franchisee relationship. Let me try to cover some of them here today.

First, the right to associate: The right to associate was never an issue in our own dispute with our franchisor. What was the issue rather was the franchisor's steadfast refusal to (a) recognize our association as an established entity and (b) hear from or deal with our association or its duly elected representatives.

Giving the right to associate is meaningless without providing as well the right of the association to represent the interests of its members, the franchisees, before the franchisor. Giving only the right to associate is like giving employees of any organization only the right to form a union, but not giving that union the right to the bargaining process. It is also as useless as giving someone a brand new car with no engine; it looks great but you cannot take it anywhere. It is only good for lamenting in it, just like the association that we had, with no right to the bargaining or negotiation process. We had an association, but our franchisor refused to hear from the association, refused to hear from its representatives, even refused to acknowledge it. They never opposed the fact that we had an association, but the association was meaningless.

Second, disclosure documentation: This is a laudable effort at trying to make sure that the franchisor puts all its cards on the table before the franchisee enters into the franchise agreement. This also means, however, that franchise agreement documents will go from being two inches thick to four inches thick from now on, and that instead of one lawyer required to advise the potential franchisee, you will now need a battery of attorneys to make sure that all the i's are dotted and that the t's are crossed, plus you're going to need a battery of accountants to make sure that everything that is being said in the document is valid for the franchisee.

Third, a rescinding right: Although I am not a legal scholar, I believe that, should one party fail to deliver the information required by that contract or should such information be different from what was previously agreed upon, there already exist legal alternatives to rescind such a contract. As such, Bill 33 does not seem to offer additional protection or add value in this regard.

Rather than including the right to rescind, Bill 33 should address the right to renew a franchise agreement and provide some form of protection to the franchisee when the time comes to renew the franchise agreement. More specifically, the following issues need to be addressed in one form or another.

Option to renew and term or duration of renewal: An initial franchise agreement must address a renewal process that recognizes that the franchisee is entering into a long-term business partnership whose financial success often takes more than one franchise agreement term. There has to be some type of protection to prevent the franchisor from discarding a franchisee at the end of his or her first term, especially after the franchisee has worked so hard to build the business and also before he or she has had a chance to make a profit or build equity in that business. Often we do see that the franchisors are enlisting new franchisees and, as they become profitable or before they have a chance to make money, then they discard the franchisee at the end of the first term. There is no protection and no guarantee that they will be renewed for another period of time.

Renewal condition: There must be some protection from the franchisor making significant material change to the original agreement at the time of renewal, especially when those changes are made in an effort to get rid of the franchisee through the imposition of a financial burden such as increasing the amount of advertising fee, the percentage rent, the sign rental, the accounting fee or the franchise fee that the franchisee has to pay the franchisor, or by making significant changes to the franchise program that would preclude the franchisee from a reasonable expectation of making a profit in the future. From our own experience within our franchisor organization, we saw time and time again where the franchisor, before agreeing to renew the franchise agreement, imposed major expenditures on the franchisee so that even if he was renewed for another four or five years, his chance of making a profit at the end of those four or five years was nil. There has to be some kind of protection that there will not be any significant material changes in a renewal process.

The next item is goodwill. The franchise arrangement is a business partnership agreement where both parties play a key role in the success of the venture-both parties, not just one. However, most franchisors claim that the goodwill associated with a franchise operation is their doing and theirs alone. This belief cannot be further from the truth. The reason for this claim is that franchisors historically have refused to concede that the success of the business had anything to do with the franchisee's efforts, his or her dedication, the family commitment; hence, no recognition at all of the goodwill improvement the franchisee has brought to the franchise business.

Franchisors firmly believe that their name or sign alone is responsible for the business's success, which is not entirely true. There has to be a way to force franchisors to recognize the efforts of the franchisee who has successfully launched a new franchise location or promoted an existing location. Imposing some form of requirement for franchisors to recognize the goodwill contribution of the franchisee would achieve that.

The next item I want to speak about is risk and reward ratio. Franchisors have often claimed that the franchisee has made a minimal financial investment in the business and therefore bears very little risk compared to the franchisor. However, from a franchisee's perspective, this minimal investment may represent everything he or she has worked for all his or her life. As such, the franchisee's contribution to the venture is probably much greater than whatever investment the franchisor may have made, and the size of the amount at risk bears a much greater significance for the franchisee than for the franchisor. Furthermore, if the franchise location fails for whatever reason, the franchisor's representative, unlike the franchisee, is not suddenly out of work and does not have to rebuild his or her life.

The next item I'd like to speak about is acting as a prudent business person. No franchise agreement or franchisor should be allowed to force franchise program changes, either during the course of the existing agreement or as a new requirement at the time of renewal, that would prevent the franchisee from acting as a prudent business person. What I refer to here are things such as the franchisor imposing financially unjustifiable renovation or equipment changes on the franchisee, and changes that negatively affect the original profit potential structure of the franchise business, such as increasing rents or various fees and the like or a reduction in gross profit margins to promote sales for the franchisor, often at the expense of the franchisee.

Good-faith bargaining-as I walked in earlier, I heard about good-faith bargaining. There has to be a provision in Bill 33 to enforce the requirement for franchisors to deal in good faith with franchisees, both during the existing term and at the time of renewal of the franchise agreement. The franchisor, with the size of its organization, its bag of experts and its financial strength behind it, is really in a position of power over the franchisee. There has to be something in the legislation to bring the negotiations and bargaining process to a level playing field. Mandating good-faith bargaining would certainly help achieve this.

Dispute resolution: When things go sour and the relationship appears to be failing, there has to be a reasonable recourse that the franchisee can seek in order to resolve the dispute, outside of an expensive and often unaffordable court battle. Bill 33 must offer this kind of protection, otherwise the franchisee has almost no chance of having his or her side of the story ever heard. Litigation between a single franchisee and a franchisor is rarely a fair playing field due to the uneven amount of resources, time and funding each side can afford to throw into the battle. Mediation or arbitration certainly are better dispute resolution alternatives for a franchisee than litigation. However, franchisors are well aware of that, and they know their chances of success are better with litigation since they have the people, the time and the money that the franchisee seldom has.


In summary, the proposed legislation is a step in the right direction, but unfortunately it appears to fall very short of addressing the kinds of problems and issues faced on a day-to-day basis by franchisees across Ontario. It certainly would not have helped the Loeb franchisees or myself to resolve our differences with our franchisor, or prevented our franchisor from pursuing and promoting its personal interests and objectives at the expense of the franchisees.

If the intention of Bill 33 is to introduce "fair dealing between parties to franchise agreements," then it must be broadened to include the issues I have just discussed. Franchisees need protection from abusive franchisors. Such protection can be provided by addressing:

The right of the franchisee association to bargain and negotiate with the franchisor on behalf of its members;

The right of a franchisee to renew the franchise agreement with equal or better terms than the original one;

The right of a franchisee to have a reasonable expectation of profit provided he or she acts as a prudent business person;

The right of a franchisee to be allowed to act as a prudent business person in the business development and operation of his or her franchise operation;

The right of a franchisee to be treated as a business partner and investor rather than as a subservient employee whose termination can be justified provided the franchisor has respected the Employment Standards Act;

The right of a franchisee to claim goodwill for his or her contribution to the success of his or her franchise business;

The right of a franchisee to expect a good-faith relationship with the franchisor, especially when it comes time to discuss renewal and the future business prospects of the franchise venture;

The right of a franchisee to participate equally in the short- and long-term business development of his or her franchise operation as any prudent business person should be allowed to do and is obligated to do as well;

Lastly, the right of a franchisee to seek an alternative to an expensive and, most of the time, unaffordable legal battle with the franchisor through some form of dispute resolution that is fair and affordable to both parties.

In conclusion, I want to thank you for giving me the opportunity to express my views on the proposed legislation, Bill 33.

I am sure many franchisors will come and tell you there is no need for such legislation and that the industry should be allowed to regulate itself. Unfortunately, franchisors of all stripes, with very few exceptions, have demonstrated time and time again that they have absolutely no interest in the business success or financial well-being of their franchisees. If one does not meet their expectation or challenges their authority, they simply get rid of him or her through whatever means they have at their disposal. When there is a dispute, the cards are always stacked in favour of the franchisor.

The government has an obligation to protect citizens from being subjected to misuse and abuse by unscrupulous businesses and corporations, in the very same way it protects the environment or guarantees health care and social security to those who need it.

Franchisees in Ontario need protection from irresponsible franchisors. Let us hope that Bill 33 will deliver the kind of protection it was intended to deliver. My biggest fear is that if it passes without the changes discussed above, the franchisors will claim they have been dealt a serious blow and yet will still be allowed to do as they wish with their franchisees, provided they disclose their intentions to do so at least once in the original franchise agreement. Thank you very much.

The Vice-Chair: Thank you very much, Mr Tremblay. We don't have any time for questions right now because you used up the 20 minutes, but could we get a copy of your presentation?

Mr Tremblay: By all means. I wish I could have made it faster to take some of your questions, but I had so much I wanted you to know.

The Vice-Chair: OK. Thank you very much.

Mr Patten: Mr Chair, might I suggest that you notify each one, that you give them a five-minute notice. Some may not be aware that their time is being fully used.

The Vice-Chair: OK, I'll do that from now on.


The Vice-Chair: Mr Kawatra is the next person in our presentations here. Mr Kawatra, you have a 20-minute time allocation, and I'm going to tell you at five minutes if you want us to ask you some questions.

Mr Vijay Kawatra: First of all, I would like to inform you that the notice I was given was really not ample for me to a prepare lengthy commentary like the person who just left has made, although I tend to concur with many of the observations the previous speaker has made.

Let me first inform you that I am honoured to be present here to talk to you today. I would like to thank you for inviting me and giving me this opportunity. My special thanks go to Claudette Boyer for making it possible for me to come and express to you my concerns.

It's an important subject and I have a lot to say on it. Given the time, however, I would like to present only a summary of some of my thoughts now and leave more comprehensive discussions for later, if you so desire.

May I point out that although I am speaking as a former franchisee of a system, my thoughts are based on much wider knowledge and observations than just my personal experiences with one system. I have held discussions with other franchisees from other systems and other regions. Also, I have read the contemporary literature on the subject. I operated a franchise myself for about seven years.

To summarize some of my principal thoughts, I've just jotted down some ideas. They are not really all that I would like to talk about, but just to express to you some of the things that I have on my mind.

First of all, the proposed legislation is a very good start and is urgently needed to help Ontario's franchising industry grow in an orderly fashion. I would like to take the opportunity to commend you for the initiative you have taken, but my feeling is that the proposed legislation in its present form will do little to protect current or future franchisees who are the main victims of the industry. For example, the legislation is not directed to post-sale agreement activities, the area where 90% of the damage is done and where the main victim is the franchisee and not the franchisor. The proposed legislation intends to deal with pre-sale disclosures. It is important, but it will fall very much short of addressing the issues at hand in any significant way.

Also, it does not consider some very crucial areas of concern in the field of fairness, transparency and justice. The industry is riddled with myths like "90% success rate" and "recession-proof business opportunities." However, no conclusive data or empirical evidence is available to support these kinds of promotional and seductive claims. Often US industrial observations are circulated to attract franchisees in Ontario without Canadian references, and you probably know that the often-quoted US data has not been confirmed yet.

It might come as a surprise to you that a whole lot of abuse is taking place in some segments of the Ontario franchise industry. I think something must be done to address it, because the situation, to my knowledge, is very serious and it affects a large number of people. It's having an impact not only on their financial well-being but also the families are affected because of the financial difficulties that these franchising businesses are bringing about to those families.

I don't have the details in writing. They are of course in my mind, and I have several examples I could cite if need be. I would be prepared to talk to people in confidence if they want to discuss specific examples where I know, from my personal experience and the experiences of other people in Ontario, that they have not been dealt with fairly, and it is mostly the franchisor that derives the benefits of the transaction, not only at the time of consummating the sale but even throughout the entire life of the franchising agreement. There are many, many shortcomings in the present system, and I'm kind of surprised that we have taken so long to actually initiate the legislation to govern a segment which I believe is very important to Ontario.


A whole lot of information is required before we make any sensible remarks, and I think it's been stated in your own proposed legislation that there is a lot of research required to be done. I'm not sure how much work has been done yet. But to cap my information to you, I would say that it is a good start. It's urgently needed. It does very little in its present form, and even in the case of pre-sale disclosures I can think of some points that can enhance its application and utility. However, it does not really address more than 10% of the problems associated with the franchising industry, because I would say 90% of the industrial problems actually take place in the post-sale area rather than the pre-sale area.

Those are all my observations at this point in time, and I'll be very happy to discuss it with you should you like to do that.

The Vice-Chair: OK, thank you very much, Mr Kawatra. The questioning this time starts with the PC, then Liberal and NDP.

Mr O'Toole: Thank you very much, Mr Kawatra. I have just a couple of questions. I guess you had short notice, but if you have written comments you can still submit them to the committee. That would be accepted.

What franchise did you operate and for how long? Seven years, you said?

Mr Kawatra: I operated a franchise in the fast-food business, and I'm not sure if I would like to disclose the name at this point in time.

Mr O'Toole: OK, that's fine. You said it's a good start. I'm just wondering, do you believe that the disclosure portion, which is perhaps the strongest portion of it, as we have not got a template for what that disclosure would require, could deal with some of the escalating pass-through clauses or with respect to provisions to address additional costs or royalties? You're talking about a post-sale agreement. I'd love to have one. In fact, I won't have one until the year 2003, the next time I get to review my franchise for my riding. Nothing's for sure, you know. I was going to say, life is full of-

The Vice-Chair: You call it a franchise, do you?

Mr O'Toole: Well, I'm trying to make it into one.

In a more serious tone though, what I mean is nothing is forever, not even life, unfortunately. The thing is, if I knew I was going to make on a certain stock I'd retire now and just get it all. It's interesting. I really don't understand how that could ever be defended. Do you understand? This is what exists and then I suspect if there's some association that says, "This association will review all cost increases through royalties, whatever," that would be a way to, as a collective, address it. Do you understand what I'm saying?

Mr Kawatra: Sort of.

Mr O'Toole: If we attempt in this legislation to make sure that people live happily ever after, sort of like Goldilocks, that ain't happening.

Mr Kawatra: No.

Mr O'Toole: It wouldn't matter. We heard one person here today read off a litany of prescribed rights that people would have, while we just move to a two-box contract. Do you understand? So I suspect that's what I'm saying. We should be realistic here in disclosure, and if you have something to add to that from real-life experience that would address in some cases after-sale, pass-through costs, I'd be happy to make sure that it's fair in the ultimate intent of the legislation here.

Mr Kawatra: I may have some points, actually, on pre-sale disclosure that, to me, would help. It's not going to answer everything you want to answer; however, I think I could come up with some specific issues that you would like to consider as part of the pre-sale thing. That's what I can say at this point in time.

Mr Patten: Welcome. I have two questions you might want to respond to that relate somewhat to the gentleman who spoke before you, who is living under a gag order, he tells us. But if I recall the situation in those circumstances-and you may have a comment-some of the franchisees were in competition with franchises that were owned centrally by the company, and they'd have a sale and put the squeeze on and the others weren't a part of this particular promotion, for example, or they'd add other franchises nearby that would eat into your marketplace without any particular agreement around what your market really is. Do you have any comments on both those things?

Mr Kawatra: From what I remember, I think they are both plausible and I have seen that happen. There are other issues you might like to consider in the same bag, where you find that some of the advantages which rightfully should go to the franchisee as part of the system are actually siphoned out to the franchisor; for example, in relocation. It's not unusual. I've seen many franchisees relocated over a period of time, between five to 10 years. That opens up a whole lot of opportunities for franchisors to actually carve out the profitable area in terms of location and place or re-place the existing franchisee in a location which is not preferred.

On an associated topic, if I may, I would like to point out that the issue of transparency that I mentioned earlier could be associated here, and that is when the landlord requests a relocation. Some landlords are not too bad, in the sense that they consider the hardship it will cause to the franchisee and the potential sales changes that might result from it, and within limits they offer some compensation, monetary and otherwise, and I have seen franchisors reap those benefits directed to them and not pass them on to the franchisee. Those are some issues that you might like to consider. Others are associated with the suppliers, how often they change suppliers. One other thing-I don't know if it has been brought to your attention-is repossession of the store. The same store is repossessed by the franchisor. Time and again they kick the franchisees out and they sell the same store a few times.

Mrs Boyer: Thank you, Vijay, for your presentation. I know it was short notice, but at least you got a sense of being heard.

From the very beginning you said that Bill 33 was a very good start, that it was a bill that was urgently needed. But then I heard you saying: "Are we really ready for it? Is it strong enough? Is it ready to go?" Why would you say that? Do you find that in this form right now the bill is not ready to be voted on? That's exactly why we are having these hearings, so that we can take up the recommendations that different presenters have given us. We hope you will be able to give us the recommendations you've talked about. You've talked about transparency and you've also talked about fairness. In this present form, do you think it's ready to go on as a bill?

Mr Kawatra: I would like to see a few additions to that. One is some kind of organization of structure or infrastructure. It might be the Canadian Franchise Association or some body that is an independent body of the franchisors and franchisees that has at least an observation role if not a judicial or mediation role. I have seen statistics on how many cases go to the courts from among the industry and franchisors. To my knowledge there are several that don't go to court, and they are settled not to their mutual advantage but usually to the unilateral advantage of the franchisor. There is no recourse available to franchisees for many reasons.


One, you likely may have noticed-I don't know if there has been any study done on the franchisees' profile-many of them are immigrants, like myself. They are not aware and not strong enough to exercise their legal rights. Some franchisors have actually gained, if you like, quasi-judiciary positions vis-à-vis their franchisees and they've terrorized them. I'm sorry to say that. I'm not exaggerating. I've seen situations where that continues to go on, and the franchisees, because they have invested their life savings, even though they're incurring losses and borrowing and begging money from other people just to hope that at some time they will recover, many times they don't. They keep the business going simply because of the fear of the franchisor and the fear of losing everything they ever owned.

What I am trying to tell you is that there is a definite need for another party to be present, at least. I'm not saying that we want to move from free market conditions into some highly regulated industry, though many industries in Canada are regulated and this is not. To me, it's a big surprise.

However, for the bill to go ahead to my liking, I would like to see some kind of body that has an independent point of view of reporting to whomever it wants to, and observes and takes confidential information and treats that so and is available for consultation. If you can incorporate something like that, that will go a long way, in my judgment.

Mrs Boyer: Thank you.

Mr Martin: I certainly hear loud and clear what you're saying, that we need something after the contract is signed, by way of dispute resolution mechanism that we can go to, that's third-party, that won't cost an arm and a leg for lawyers' fees and all that kind of thing, that will resolve a whole lot of the issues that come up on a regular basis.

But that's not what I want to ask you about. I want to go back to some comments by my colleague Mr O'Toole on this issue of nothing lasts forever. We have a fundamental philosophic difference of opinion here. I believe there are some things, if we do them right and we're careful and we're respectful of each other, that could last forever-like my marriage; that's a contract that I signed. I hope he's not saying that won't last forever.

Mr Kawatra: I'm really glad to know that.

Mr Patten: Don't go there.

Mr Martin: I would think that when we make business relationships, investments, we think they will last forever; that when I build a home, it'll be there for me and I'll be able to pass it along to my children or sell it and have a retirement, that when I go into business and make an investment in a community, all things being equal, if conditions are relatively normal, it'll be a business that I will be able to work at and make a living at and perhaps pass on to my children. But what we're finding more and more in Ontario-I was brought into this in my own community by about three families I knew personally who lost all that. They had worked very hard over a long period of time to build up their skill and their understanding and knowledge, they made the investment, they were working hard and overnight the company that owned them changed and the sand shifted.

What I've heard you and so many others say over the last two or three days is, "Put something in place that at least gives us a fighting chance, that keeps going what we've put our time and energy into so that we get something out of it," so that it isn't always the big guy walking away with the bone.

Somebody mentioned the other day that it was a dog-eat-dog world out there. But in this instance, where franchising is concerned, it's more like a dog-eat-goldfish reality, and that's what I'm beginning to hear and see, so I'll be supporting very much your call for a dispute resolution mechanism.

Perhaps you want to talk a little bit about this philosophic "nothing lasts forever" comment.

Mr Kawatra: First of all, I am delighted to hear what you just said: one, the perceived intention of something lasting. I think philosophically we should not enter into everything in our lives just from the hope that it's going to last only today, because that tells a lot about us as a society and the value system we place in our transactions.

Having said that, if you ask the franchisee as a party to this negotiation, to my knowledge, they always come forward with this intention and hope. Believe me, most of them have put every penny they've earned over the last 30 years into this thing, so they're not going to accept anything short of having this last for another 30 years, if not more. So your point is well taken and I encourage that.

In business, of course, the risks are there in the globalization of markets, and now centralization and standardization, and many other things are acting upon us, which keeps us at the edge. They want new technology, new skill sets and so on, and many of the people in the franchisee group, unfortunately, are not necessarily on the technology edge. The pressure may be-it's not coming out as clearly but I think that's happening underneath, the standardization. In other words, the franchisor would like to have control over the supply system; they would like to have control over advertising; they would like to have control over every segment of the thing. The franchisee doesn't have any control at all.

From many of these points of view, I think to some extent we should try to encourage some kind of legislative or institutional framework whereby the length of the transaction can last longer than just two or three years, certainly five to 10 years, which is the minimum for most franchisees to recover the return on their investment to compensate for all the money and the sweat equity they have put in place. That's one thing.

The other thing, if you want, I can discuss with you at some point in time. Suffice it to say that I'm really glad you're here and you're listening to people like myself. I hope, before you actually announce the legislation, that you give serious thought to some of the things you have heard here today and in other proceedings on the topic.

The Vice-Chair: Thank you very much, Mr Kawatra. We're over time now. I had another questioner written down here but I'll get him later. We appreciate your time.


The Vice-Chair: Our next presentation is from Mr D'Angelo. Mr D'Angelo, we have about 20 minutes.

Mr Marco D'Angelo: Good afternoon, Chair and committee members. I'm here today to discuss some of my concerns with 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.

Franchise business accounts for billions of dollars of Canadian retail sales annually, something in the neighbourhood of 40 cents of every retail dollar spent. I am here as a concerned citizen who is a former employee of a franchised store, and also as someone who knows many franchisees who are not able to speak here for fear of legal reprisals from their franchisor.

I have lived in the west end of the community of Ottawa for a number of years now and I must say that in that time many businesses have opened and closed their doors. I have known several families who spent years saving a little money each paycheque so that one day they could leave their jobs and be their own boss. What happens to many of these families is that they are presented by franchisors with something called a turnkey operation, which I am sure the committee has heard about already. These turnkey operations are presented as an "instant, just add water" type of business. They are told that all they need to succeed is to simply work hard. Unfortunately for many of these working families, it is far more difficult to achieve that.

The franchisees often sign contracts hundreds of pages in length. This is how long a franchise contract can be. Can you imagine being presented with a contract like this for a small business? It's impossible to expect franchisees to read, let alone comprehend, all of the details and fine print in this contract. They often do not question many of the details in the agreement because they trust that the franchisor wants them to succeed. The franchisors often say: "We want you to do well. If you don't do well, we won't do well. We want you to operate that business. We wouldn't put you in a position where you would fail because if you fail, we too will fail."

After a few years of tough times most small businesses do ultimately fail, not because of a lack of work or commitment, but because they are forced out by their franchisor. There are many ways that franchisees are forced out of their businesses. The first reason for failure occurs if the franchisee does not understand the type of franchisor he or she is taking on.


Bill 33 calls on franchisors to provide their clients with a disclosure document that contains the company's financial statements. Where Bill 33 falls short is where it fails to recognize that there is more to a franchisor than their financial statements. Bill 33 should include details pertaining to the business experience of the franchisor's management personnel, litigation history, and insolvency records if applicable. Franchisees have a right to know what they will be dealing with before they sign on the dotted line. They have a right to know the rate of failure or success of the franchise. They have a right to know if nearby franchises are thriving or barely surviving. For the franchisee, the disclosure of this information can protect their family from potentially losing their life savings.

In order to visualize the kind of relationship that I'm describing, I've decided to personalize some of the examples. Throughout the presentation I'll be referring to a franchisee named Brenda who has entered into a contract with a grocery franchisor named FoodMart. After Brenda's family decides to agree to act as a franchisee, their problems begin to become apparent. In most franchise agreements, there is usually a provision for forced buying. Through forced buying, FoodMart is the exclusive supplier of all necessary products to Brenda's business. She now finds herself forced to purchase products from the franchisor which are marked up or can be of lower quality than products that are available locally.

This example was played out in a grocery store in my community. This grocery store wished to purchase produce from local growers after customers had lobbied the franchisee to do so. The franchisor threatened the franchisee with the loss of their franchise if they persisted in doing this, despite the franchisee finding a local producer who offered a better quality of produce at a lower price.

Bill 33 on the surface wants to promote fair dealings, but there is nothing fair about forcing franchisees to buy supplies at unnecessarily high prices. In my community, successful small businesses have helped to build a strong community. Bill 33 needs to offer an option to opt out of these purchasing deals so that franchises can support other local small businesses rather than allowing franchisors to continue to drain money out of our communities.

In my conversations with some franchisees where I live, I asked why they stayed in these agreements when they clearly did not benefit them. The answer was that the franchisor often uses equal parts of fear and intimidation to keep many franchisees in their system. Brenda's family, seeking an opportunity for success, has invested her savings, her RRSPs, and mortgaged her home in order to start up her FoodMart store. Franchisees, by virtue of investing most of their financial worth into their business, become tied to its success or failure. Franchisors use this dependence to achieve greater power over their franchisees. When faced with the prospect of losing her life savings or her home, Brenda will fear the actions of the larger, more powerful FoodMart organization. When she attempts to question the actions of FoodMart in areas such as increasing royalties, she will be reminded in no uncertain terms that FoodMart controls her store, not her.

When Brenda wants to inform other FoodMart franchisees of her situation, threats of legal action by FoodMart soon follow, thanks to confidentiality agreements that she was forced to sign prior to being awarded her franchise. These so-called gag orders act as legal muzzles over franchisees. Brenda is prevented from disclosing the misdeeds of FoodMart to other franchisees and, worse, cannot inform potential new franchisees who are about to sink their money into a FoodMart operation. The removal of these gag orders is something Bill 33 does not address.

Even worse, Bill 33 does not include regulated standards of conduct. Prohibiting the inclusion of gag orders in franchise contracts, termination of a franchise contract without cause, and allowance for the use of independent suppliers should be included in this bill. Simply putting the words "fair dealing" in the title of Bill 33 will not ensure that dealings between franchisees and franchisors will be any fairer than they are today.

If this committee wants to look for examples of how to incorporate substantive measures that would ensure fair dealings, they would need to look no further than Bill 35, a bill introduced by your colleague Tony Martin. Bill 35 outlines minimum standards of conduct and protects the rights of the franchisee. If the intent of Bill 33 is to protect franchises, then it should contain strong mechanisms for enforcement. While Bill 33 does extend the right of action to sue franchisors if they misrepresent themselves or do not allow franchisees to associate, the only means for the franchisee to enforce these provisions is to sue for damages. This sort of legal action is expensive. It can financially ruin the franchisee's business.

If Brenda, whose life savings and investment are at stake, refuses to accept FoodMart's conditions, she has a choice, for lack of a better word. She can walk away with nothing or, if she attempts civil legal action, she is faced with the prospect of walking away with less than nothing, that being the loss of her business and some huge legal bills.

Many franchisors have the means and are content to stall cases in the courts until the franchisee can no longer afford the cost of justice. In order to protect the over 5,000 franchisees who take civil action against their franchisor each year in Canada, an alternative form of arbitration needs to be proposed. The most accessible and equitable way to do this is through a dispute resolution process. Bill 33 is silent on this vital point. However, details on dispute resolution can be found in sections 28 and 29 of Bill 35.

That dispute resolution process establishes a mandatory process of mediation where both sides are able to express their differing opinions to an impartial mediator who will be able to provide constructive ideas for resolving the dispute. This forum would provide an affordable alternative to lengthy and expensive civil court proceedings.

An argument put forward against this is that the dispute resolution process would act as a layer of red tape, an imposition of bureaucracy on small business. Nothing could be further from the truth. This is about protecting and encouraging independent franchisees and improving their chances for success.

In order for any new law to have meaning, there needs to be a reward for compliance or a penalty for non-compliance. A contravention of Bill 33 is not considered an offence. To protect franchisees from potentially unscrupulous franchisors, I suggest that a breach of this act be a public offence. Positive examples of some measures of consequence can be found in sections 57 through 60 of Bill 35. Offences such as willful misrepresentation, interference in an investigation or selling pyramid schemes should be against the law. These sorts of offences deserve more than a civil judgment, because they are very serious.

Only the threat of heavy fines will dissuade franchisors from being able to financially afford ignoring this law. If we want to seriously consider protecting franchisees, we also need to consider enacting penalties that will tell franchisors that taking advantage of working families and their life savings is not a civil action or a business tactic but a crime.

Some areas of concern that are not addressed in Bill 33 include the rights of employees of franchisees. Employees of franchises often find themselves in positions that fall woefully short in areas such as wages, benefits and job security. Today's minimum wage of $6.85 an hour is lower than the minimum wages across the United States after the currency exchange. The extension of benefits, even to the very few who find themselves in full-time positions in a franchise, is rare. Franchisees often want to reduce employee turnover and attract better skilled workers. Unfortunately, because of the schemes of royalties and licensing fees, franchisees are being squeezed so tightly that even if they wanted to, they are unable to pay their workers a better wage.

In order for workers to be able to earn better hourly pay, laws governing the organization of employees need to be visited, and perhaps changes to help workers should be incorporated in this bill at a later date. Many franchisees that are forced into bankruptcy often have significant amounts of wages owing to their employees. The possibility of giving employees and local creditors priority over the franchisor should also be looked into as a possible amendment of Bill 33. Provisions forcing the franchisor to guarantee the payroll of franchisees that go under is another possibility.

In summary, the problem that franchisees face is having to deal with a very powerful franchisor. It's a case of small versus big. This bill has a real chance to provide serious changes to protect franchisees and allow them to be independent, as promised, and able to reinvest in their community. In my view, franchisees are in need of protection, which they don't have at the moment. As it stands, Bill 33 does not go far enough to be provide that protection. Only going part way to assist small enterprises is a disappointment to small family businesses.

Please consider some of the ideas I have presented to you today, and hopefully bring forth some amendments that will truly assist franchises in a more meaningful way.

I want to thank the members of the committee for allowing me this time. I look forward to any questions you might have.


The Vice-Chair: Thank you very much, Mr D'Angelo. The first questions will be from Claudette Boyer.

Mrs Boyer: Thank you for your presentation. I thought that was a different way of going at it with the scenario.

When you started, you said that Bill 33 is well intended and can offer franchisees the protection they need but fails to do so. Do I make out of that that what you say Bill 33 fails to do and should do is the amendments you would like us to potentially look over and bring around to have it more forceful?

Mr D'Angelo: I believe that Bill 33 is a good first step in helping to protect franchisees. I think it's very fortunate for this committee that there is another bill, Bill 35, which addresses many of the concerns I have. Perhaps some of the amendments to Bill 33 can be found in Bill 35, in some of the sections I outlined that pertain to dispute resolution and that sort of thing.

Mrs Boyer: Of course you know this is not our first day of hearings; this is our third day. You did bring up a lot of points that we were reminded of Monday and yesterday in Sault Ste Marie. You bring up the question of community involvement, and I have to let you know that this has been a point, especially with local businesses, that you could encourage. You talked about Bill 35, as far as amendments are concerned, and I think you've mentioned some of these. So yes, we will look into them. I thank you for your presentation.

Mr Martin: Thank you very much, Mr D'Angelo. I thought your presentation was quite thorough. I want to focus my questioning on a new perspective that you put on the table today. Yesterday in Sault Ste Marie we heard of the impact of some of the direction franchising is taking on local economies in the province and the ability of small producers to get their product on the store shelves so they can get it sold and consumers can have a choice.

Today you mentioned the impact of the changing world of franchising on employment. A lot of the service that is now delivered by franchises used to be locally owned, mom-and-pop operations that supported families and provided, in some instances, some full-time work that had fairly decent wages and was fairly stable. We note more and more, and we've heard from some of the people who came before us, that because of the diminishing margins, we now have a lot of part-time employment, and a lot of it, if not minimum wage, fairly close to it.

Are you suggesting that protection of the franchisee would go a distance to improving that circumstance?

Mr D'Angelo: Yes. What has been happening is that a lot of small businesses that are community-oriented and owner-operated, and that do provide some full-time jobs at decent wages, are often being replaced by larger, very corporate-oriented franchises that focus on paying their workers the lowest amount they can and investing not as much into their community as the local businesses sometimes do that are supported by the residents of the neighbourhoods they serve.

Getting back to my point that successful small businesses build successful communities, being able to pay a worker a decent wage ensures that the person who works for you can afford to buy the things you sell in your store and the things that are sold in other stores. It serves the community better to have workers who are well paid, who have job security and who can work full-time as opposed to some of the things offered by franchises, where it's part-time hours, casual work, minimum wage and that sort of thing.

Mr Martin: Just to follow up on a comment that was made by the previous speaker on the question of: "Nothing is forever, so what are we worried about? You make an investment; you take the risk. Some win; some lose. That's life." We're also told that young people are OK with that. You're a young person in front of us today, making a case for franchising. What are your hopes and aspirations when you get out of school: To get into something that will be long term or to get into half a dozen things that may or may not be successful? What are your hopes and aspirations, and where do you think we're going in the world? This is a huge question, I guess. But in terms of long-term security, something you can count on-I think you know what I mean.

Mr D'Angelo: It's sort of a philosophical debate about franchises. It's interesting. Going back to the comment that nothing is forever, if you're someone who saved a bit from your paycheque for years and you invest in this business and you open it up, and because of the scheme set up by your franchisor you are forced into bankruptcy and you do lose your savings, that's something that is forever, unfortunately. The business may not be forever, but going bankrupt, losing your life savings, losing your home and your RRSPs is something that I think does last forever.

As someone before you today in this committee, someone potentially interested in one day having perhaps a franchise, I think that what this committee has is an opportunity to really do something to help small businesses thrive in this province. It's something that we need to look at. I hope some of the amendments that I presented ideas for are presented and hopefully passed into the bill.

Mr Gill: Thank you, Mr D'Angelo, for being here. I have a couple of questions. Actually, this is our third full day of hearings, and to be honest, you are the first one who is not related in any which way to a franchisee or franchisor or somebody related to a law system or whatever. Just to let you know that you're the first one. Are you from Ottawa?

Mr D'Angelo: Yes.

Mr Gill: Are you related in any way to Brenda?

Mr D'Angelo: No.

Mr Gill: How did you hear that these hearings were being held?

Mr D'Angelo: I heard about these hearings as a business student. I'm interested in some of the things that go on in business law, and as someone who has worked for a franchise, I do know a franchise owner who indicated that there was a bill. I was referred, too, by your parliamentary channel that invited calls be made to the clerk of the committee, and the clerk did a lot in helping to get me here today and giving me the time to be here.

I find it interesting that you noted that I was the first person who wasn't related to a franchisor or a franchisee. That's sort of the position I took in coming here today, that is, what do I want to see as a person in the public for small business, because I know that small business plays a vital role in community building. That's what I'm interested in, building a strong community in the west end of Ottawa, where I'm from.

Mr Gill: When did you know that Bill 35 was not being discussed? On the table was Bill 33. Where did this Bill 35 come from?

Mr D'Angelo: The Legislative Assembly of Ontario Web page that you have lists the bills that are currently on your order paper and Bill 33 is on that. It's listed alphabetically, "Franchises: Bill 33." Right under it was another bill called Bill 35 that was also about franchises. I had the opportunity to read both bills and what I found was that Bill 35 provides a stronger enforcement, a better idea for a dispute resolution process than some of the things that were offered in Bill 33. Bill 35 is definitely a stronger bill, and I hope you look into Bill 35 as perhaps a source for some amendments to Bill 33.

Mr Gill: You have some good points. In your submission where it says what Bill 33 fails to do, in fact, if you really dig deep into it, Bill 33, in the detailed disclosure agreement and the right to associate, once the regulations are made, will address all those issues. The only thing it will not address is the gag orders, to eliminate that. That's the contract you sign when you settle something. I don't think we can ever eliminate that, if you agree to sign something. I don't think we'll be able to legislate that. Do you want to comment on that?

Mr D'Angelo: I think you can legislate against using the gag order against someone to keep them from informing another franchisee about the misdeeds. I personally think that it's unconscionable to force someone to sign a contract before giving them a business, to say, "If we put you in a situation where you have to lose your savings and your home, you don't have recourse to speak to other potential franchisees who may be considering investing," and perhaps giving more information of your personal experience than your franchisor allows you. I don't believe it's the role of the franchisor to tell the franchisee what they can say and do.


Mr Gill: These gag orders are not signed before getting into business; these are signed after dispute happens, after they get into some kind of settlement. I think you are incorrect in saying that these gag orders are imposed upon before signing a contract.

Mr Martin: Some are.

The Vice-Chair: We've had quite a bit of discussion on this. Mr D'Angelo, we really appreciate the time you've taken here in making your deposition and all the efforts you've put into your presentation.


The Vice-Chair: The next presenter is Mr Charles Gibson. Mr Gibson, I understand that you may be willing to give up five minutes of your time so that we may ask Mr Tremblay some questions.

Mr Charles Gibson: Yes. Perhaps we can just see how it goes with me, and if there are five minutes left, I'd certainly like to have Mr Tremblay have the occasion.

The Vice-Chair: That's okay with the committee, so you've got 20 minutes.

Mr Gibson: I'm Charles Gibson. I'm a lawyer. I represented Mr Tremblay in his matter to which he referred during his presentation. I think I'm going to change my presentation from my original thoughts. Sitting here listening to the committee, it seems to me that it dovetails very well with what I was going to present, but I think I'll change the fashion.

We were talking today about whether or not something is for life. We've heard whether or not when someone signs a franchise agreement it should be something which is a pension plan and provides them something for life. I think that most persons would agree that it should not be a pension plan. However, what it should be is a fair chance for the contracting parties to have a commercially reasonable business relationship.

I think it's important to note that in the traditional franchisee-franchisor relationship, there's a real imbalance of power. You have the little guy and the big guy. Traditionally in law that's treated by way of a fiduciary duty. I don't think that in these circumstances in a commercial contract you necessarily have to have the law impose a fiduciary duty, but to be able to ensure that during the life of the commercial contract, which is what it is, both parties have a chance, if they work hard and if the competition doesn't beat them, to have a successful business.

What happens traditionally, in my experience-and I've represented a lot more people than the Loeb people. I've represented dozens of franchisees. I've also-don't tell anyone-represented some franchisors. Traditionally, what happens is that during the course of the relationship things evolve. In every franchise agreement I've seen that's been signed in the last 10 years, as it evolves it gives a discretion to the franchisor. The franchisor then exercises that discretion, whether it be for lowering or increasing of fees, whether it be for costs. Most franchise agreements call for the franchisees to purchase exclusively from the franchisor. They have to purchase, they have to pay the fees, etc. When one has an unfettered discretion in a commercial context, where does that put the person against whom that discretion is being exercised?

I'll draw back. I obviously have some confidentiality provisions from the Loeb incident, as well as that they're my clients who signed the gag orders. This is not just limited to Loeb, because I've represented many franchise situations. Traditionally what happens is: "Well, we've gone for five years. We've paid for the renovations. Now we're starting to make some money. Now let's exercise the discretion, either to increase the fees or the costs, or let's get some new renovations. Let's have them invest more money." Instead of allowing the individual to have a period where they don't have a heavy debt load etc and they can earn some money, they exercise their discretion.

In Bill 33 there's section 3, which deals with the duty to deal fairly. In my review of this section, in conjunction with section 2, I must admit I came to a surprising conclusion. At least a tenable interpretation is that the fair dealing does not apply for contracts that existed prior to the introduction of this bill. I see at section 2, which deals with the application of the law, it states: "This act applies with respect to franchise agreements entered into on or after the coming into force of this section, with respect to" etc. I don't know if that is intentional, but in my opinion, if this franchise legislation is to have any validity, any power for those who are already in the franchisor-franchisee relationship-clearly section 3 says, "Every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement...." I respectfully suggest that should be changed to make it clear, so when you get lawyers like me reading it, it's clear that it does apply under those circumstances. That's as an aside. As a lawyer, I saw that and that flew to me.

But one must now look, in my opinion, at what happens during the commercial relationship when the discretion is being exercised. When it's being exercised, I respectfully submit to you that it should be done in a commercially reasonable fashion. I think that's the key. Nobody expects to invest money in a business and have a pension and have the government say: "OK, we're going to protect you. Nothing that happens is going to be your fault. You've got this free ride." However, when you have an imbalance of power I suggest that what has to happen is that there has to be something which keeps the more powerful party in line. This is a business. A good example is when you have a franchisor who has corporate stores and franchise stores. Traditionally, the franchisor is the wholesaler as well. So if they're the wholesaler and the retailer, they don't care where in the chain of sale the profit goes because it's going in the same pocket.

However, if you're a franchisor and you have franchisees, you have to look at whether or not that decision impacts on the front-line retail profitability. If all your decisions don't take that into account because two thirds of your stores are corporate stores, then what happens to the franchise stores? The franchise stores get squeezed. They make the money at the wholesale and they squeeze it at the retail.

If you have in Bill 33 a section which defines fair dealing-as it stands now the common law provides for fair dealing but it provides for unconscionable transactions. In other words, if it's an unconscionable transaction, then the fair dealing comes into play. However, unconscionable transactions for general purposes means fraud. It's very, very difficult to prove in a civil context. So if you have this fair dealing as it stands now in section 3, I respectfully submit that what you have is a toothless section. It does nothing more than what already exists.

Do we just want optics? Do we just want to look politically correct in putting this in there? I respectfully submit, no, we don't. I only ascribe the best intentions and I think it's important that the Legislature and the government not allow themselves to put into law something that basically does not change the problem for which the law is being enacted. It's got "fair" in there. Let's ensure that there's some fairness ensured by what's in there. If we don't, it'll look good in the name of the law but it will not have any practical effect.

I could go on and give what the proper definition of a commercially reasonable transaction is, but I don't think that's necessary here. You have your experts who can tell you that. But having that in the law, one might initially say: "That's going to cause a lot of litigation. There's Gibson the lawyer. He's going to make more money. That's great." But that's not really what it will do. It will make people have a sober second thought, the franchisor before they do something and the franchisee before they do something. It's ensconced in our law already. The Personal Property Security Act has it, and it's defined. There is a lot of jurisprudence about commercially reasonable transactions and what is and is not acceptable. I think if the law succeeds in doing one thing, then that's what it should do. I'm a litigator, so I only get involved when the problems happen, but in consequence I see what the problems are with disclosure, with right to associate, and with the duty to deal fairly. If this law were to succeed in doing one thing, it should be the fair dealing, because that permeates throughout, whether it's at the front end or the back end.


The right to disclosure helps those 1,000 people who go into a franchise every year, but it doesn't help the 40,000 who are there presently.

The right to associate: Mr Tremblay was speaking from experience when he said that if the right to associate is not backed up by a regulation which says the franchisor as well has to deal with the association when it's set up-I've dealt in situations where there is an association, but if the franchisor refuses to recognize it, what does it do? Again, a toothless section.

I'd just like to conclude by saying this is a law which is required. In 1997 I was in Queen's Park. I met with Mr Martin, I met with Mr Patten, I met with the then minister, Mr Tsubouchi, and we discussed these very things. It is now some two and a half years later and, to be very frank, it looks as if there has been some backing up in what is in the legislation. Your duty, as elected members, is to look at the best and most efficient way to ensure that all citizens are protected, franchisors and franchisees. Sometimes a franchise doesn't work; sometimes a franchise has to be terminated. Not everybody is a good businessman. It's impossible, in my opinion, for the Legislature to put in a set of criteria for rights.

If you do it on a "commercially reasonable" basis, then everybody has got to stop: "Is this reasonable? Am I putting the screws to this person, or am I being reasonable?" If they can't deal with a reasonable commercial transaction, then they shouldn't be in the business.

Thank you very much for listening to my remarks.

The Vice-Chair: Mr Martin, do you have a comment?

Mr Martin: I sure do.

Mr Gibson: Whoops.

Mr Martin: I can't not respond to your comment on, "Is anything forever?" We had a gentleman before us here today who was second-generation grocery. We had in the Loeb case in Sault Ste Marie two families-

Mr Gibson: I represented them.

Mr Martin: Yes, you did, and one of them left a store in Blind River to his son. His son lost the store, moved to Sault Ste Marie. He thought he would have a chance if he worked hard, if he was a good competitor, a good businessman-and he was all that. He was one of our best corporate citizens. Anybody you'll talk to in Sault Ste Marie today is very sad that he's gone, no longer there. He thought that if he did the right things, if he worked hard and all the rest of it, he was going to have a store that would take him into his twilight years and he would be able to pass it on maybe to another one of his family. Is there anything wrong with that?

Mr Gibson: No. And if there's a "commercially reasonable" provision defining fair dealing-I represented him, so I know what the situation is. If there had been fair dealing and a definition of fair dealing in the law at that point in time, it would have been a different story. And you know something? If there had been a definition of fair dealing in the law at that time, the problem wouldn't have arisen.

Mr Martin: Let me ask you another question, and I know you may have some problem answering because of the confidentiality agreement that you had a hand in, although I don't think you signed it; maybe you had to witness it or something.

Mr Gibson: No, but I have some-

Mr Martin: Yes, some other concerns. Anyway, and this isn't in the bill, the right of franchisees to be consulted on the sale of a system-the franchisee, from what I gather, puts in the money, and the franchisor has the power.

Mr Gibson: Well, that's a simplification, but yes.

Mr Martin: So the franchisor decides to sell the system, but he doesn't ask the franchisee. He doesn't share it with him or explain to him why he's doing this, how this is going to be in everybody's best interest. He just goes ahead and does it. The franchisee wakes up in the morning and it's no longer Loeb, it's Provigo. Is there something that we should be considering there?

There's another part of that, and maybe you can answer them both at the same time. You've looked at lots of contracts. How many sections deal with the rights and powers of franchisees, as opposed to dealing with the rights and powers of franchisors?

Mr Gibson: There are lots of rights given to the franchisor, but very few obligations. There are a lot of obligations given to the franchisee, but very few rights. I hate to come back to the same issue, but that can be dealt with in the terms of a reasonable commercial contract. If it's sold and they don't consult, and the new franchisor comes in and starts acting unreasonably, then he has breached the law. It's as simple as that.

The franchising system is too complicated to say we can break it down into nuts and bolts. You cannot. There is a myriad of different types of relationships. There is the mom-and-pop new Internet type of franchise which takes $20,000 to get in and they give you some tools and you try. Then there are the ones that are going to cost you hundreds of thousands of dollars: Canadian Tire, Tim Hortons, McDonald's etc.

To have one law that's going to give a specific set of rights for such a wide gambit of relationships, you're going to hurt by exclusion. You're going to miss things. You're going to have misapplied things. What might be applicable for the mom-and-pop might not be applicable for the McDonald's. But if you look at it and say, "It's got to be commercially reasonable"-it's the sober second thought, when someone is doing it, and they say: "A judge may or may not be looking at this some day. I have to see whether or not I think it would be acceptable."

Of course, a judge is a whole other set of problems, because franchisees don't normally individually have the means to hire a lawyer and have a big fight. I've heard talk about ADR. I didn't mention it but it could very well be a very important tool for the franchisor-franchisee dispute resolution system because it's very costly to hire lawyers, and it should be something which should be a last resort as opposed to something which is the only way.

The Vice-Chair: Mr Gilchrist and Mr O'Toole both have a comment.

Mr Gilchrist: A couple of brief things. I won't indulge in lawyer-bashing but, for the record, if you had gotten to the clause between 2 and 3, you would have seen that 2(2) says that section 3 and others "apply with respect to a franchise agreement entered into before the coming into force of this section, and with respect to a business operated under such agreement...."

The act does very explicitly say that that clause applies to every single existing franchise agreement that's already in force, so they will have protection from day one.

The other thing is, Canadian Tire has no franchise fee-I wanted that on the record-not hundreds of thousands, not one dollar. It never has.

I'd like to very quickly get your opinion in terms of whether the cases you've dealt with, by and large, would have been materially different if there had been full disclosure, and let me underline and re-underline the word "full." Things such as the complete price list of products-if it's a question of let's say a doughnut shop or a pizza franchise-so that you could go to your local wholesaler and compare the price you're being quoted from the franchisor with what would happen if you walked in off the street; if you knew up front all of the terms and conditions that would apply at renewal time; if every material fact-and I appreciate things can change in the course and you talked about areas where there is discretionary power, but even there-if it laid out in detail what those powers could mean, would it not obviate most of the problems that ever crop up in the term of a franchise agreement? Or might it even preclude a lot of people from getting into questionable franchises at the outset?


Mr Gibson: No, I don't think that it would. It would affect, I'm sure, a certain percentage of franchises at the front end if there was total disclosure. But I don't think, when you have normal franchisees-and again I use "normal," "regular"-being inundated with all kinds of information and they bring them to me and it's about-I'm trying to think of one that I haven't dealt with so I would know nothing about it. If it was about the growing of flowers in a nursery and they said, "These are the prices," and these people were not really experts in it and they were relying on this as being information which showed that it would be profitable and subsequent to that they found out that it wasn't, or, more likely, they found out that discretion was exercised, it won't do that much good to have learned at the outset that those were the material facts. I'd like to back up one more step and say I don't know how you could ever disclose all the material facts.

Mr Gilchrist: Let me again put on the table something Mr Konigsberg, a lawyer from Montreal, told us this morning. I thought it was a very wise comment that he offers to prospective franchisees who come into his office. He tells them he won't talk to them until they've either gone out and researched the marketplace or spoken to past franchisees. Why shouldn't the law society make that a requirement for every lawyer?

If you're going to be paid to counsel a prospective franchisee, at the outset, unless they are very savvy investors, why shouldn't your first words to them be: "Ignore everything the franchisor has told you in the sales pitch, everything, because if it isn't in this document, it doesn't matter. Do you understand me?" If they don't satisfy you at that point, are you really meeting their needs by allowing them to go further?

Mr Gibson: Am I a lawyer or a business adviser?

Mr Gilchrist: If they've come to you expecting, when they walk out of that office, to have the comfort level to sign the deal, if you in fact don't know anything about growing flowers-and nor do I-I would like to think that the first responsibility either one of us has would be to say: "I can't even come close to answering the issues when it comes to pricing. They've quoted you certain prospective profits. Here's what you must do to satisfy yourself, because there's nothing I can do in this office." I would suggest to you that if you don't make that very express statement explicitly clear to them, then they have not been well served in that one regard.

Mr Gibson: When someone comes into a lawyer's office with a bunch of contracts and says, "Review these contracts and tell me the legal effect of these contracts," if the lawyer does his job, he'll tell him the legal effects. You say to your client: "With respect to the business component, ensure that these numbers are right. Go see your accountant."

Mr Gilchrist: Whatever direction you point them in, but you would agree with me that they should be seeking other counsel on their business terms.

Mr Gibson: Certainly.

The Vice-Chair: Mr O'Toole, a quick comment.

Mr O'Toole: I think it was clarified that the prior provision you clarified at the beginning is important. You would know, if you've been practising in this area-and I'm not trying to contradict you-but Mr Tsubouchi tried, and there was a working group that has put together a consensus of views. This process has been going on basically since the Grange report. Where other governments have attempted to find the balance and have failed, clearly this attempt is to find the best first step, not to absolve us of making a world of perfection; that, it is not. Do you understand?

Mr Gibson: Oh, sure.

Mr O'Toole: It's certainly a warning to the industry, as Mr Gilchrist said, and the legal community as well, to recognize that. I wish to strengthen the language under "fair dealing" myself if there's something that has been defined in law. The first thing I asked was, "What does `fair dealing' mean to me?" Somebody said that the provision under the Personal Property Security Act would prevail. I am more comfortable with something that's defined; otherwise I'm going to have to pay another $1 million to find out what "fair dealing" means.

Mr Gibson: Didn't the Grange report give a definition at one point in time?

Mr O'Toole: Yes, that's what I'm referring to. It's back to the Grange report and it's one of the substantive recommendations in there. But I've used my time and I appreciated your input.

Mrs Boyer: I just want to assure you, Chuck, that with all these hearings we're going back with a lot of recommendations to look into and to give force to this bill.

Mr Gibson: When I stated it earlier, I said I don't ascribe any bad faith on anyone's part. You have a very difficult job to do and obviously you have many conflicting interest groups that make presentations to you. Obviously, many of them have good spokespersons and they're persuasive from all contexts.

Mr O'Toole: From all their lawyers.

Mr Gibson: That doesn't necessarily mean that lawyers are good spokespersons.

Mr O'Toole, with respect to your comments about it taking so long, I understand why it takes so long. As I said earlier, there is a myriad of relationships. You can't define the franchisor-franchisee relationship on a piece of paper. It's so wide and vast. That's why I get back to the simple. When I say to define, you're going back to the simple.

Mr O'Toole: You go back to established law.

Mr Gibson: Exactly. You go back to the simple and therefore you're not giving lawyers a pension plan by putting all these various things in there that they can attack. You go to one-and that's what judges do anyway. It doesn't matter what the law says, judges look at it and say: "Is this reasonable? Should this person have done this?" If not, they'll find a way to get around it.

The Vice-Chair: Did you really think you were going to get through this in 10 or 15 minutes?

Mr Gibson: It's like when a judge asks me, "How long are you going to be?" and I say, "Oh, half an hour." Yes, right, another two days.

The Vice-Chair: Thank you for your time.


The Vice-Chair: Our next speaker will be Mr Greenwood from Algonquin Travel.

Mr Ron Greenwood: Good afternoon, ladies and gentlemen. Thank you for providing me with an opportunity to address these hearings. My name is Ron Greenwood. I'm president of Algonquin Travel Corp. I'm a graduate of Ryerson Polytechnic Institute's chemical engineering program and Wilfrid Laurier's business and economics program.

In 1967, I joined Imperial Oil Ltd and worked on the Esso service station franchise program. In 1971, I purchased an E.K. Williams bookkeeping and accounting franchise as a franchisee. I successfully operated that franchise, becoming the largest franchisee out of more than 30 franchisees in Canada, and sold that business in 1978. In the same year I joined Algonquin Travel Corp, and today I'm responsible for all aspects of the efficient, profitable and successful operation of Algonquin and its related businesses.

During my tenure in the travel industry, I've been fortunate to hold numerous positions serving the travel industry and the franchise communities, including sitting on the provincial and national boards of the Association of Canadian Travel Agents. I co-chaired the Ontario travel industry self-management steering committee, which led to the formation of the Travel Industry Council of Ontario, or TICO, and was a member of the first TICO board. Most recently, for the past two years, I chaired the board of the Canadian Franchise Association and now remain on that board as past chair. Having shared that knowledge of me, I will proceed to share with you my views about the proposed legislation.

My presentation to you today is as president of Algonquin Travel Corp, an interested and concerned franchisor doing business in Ontario and that other regulated province, Alberta. As such, I trust that you'll find my input on the draft legislation relevant to the committee's consideration.

Algonquin Travel has about 80 franchised travel agency locations across Canada, of which about 50%, or 40, are located within the province of Ontario. With more than 30 years of franchising experience behind me, I am strongly in favour of the proposed legislation. For the past eight years, we've provided full disclosure to all of our prospective franchisees. It was the law in Alberta and, latterly, a requirement of membership in the Canadian Franchise Association. Our experience at Algonquin is that full disclosure provides the prospective franchisee with all of the information that is required to make an informed decision, including-very important-a list of all the franchisees; past litigation and franchisee terminations, if there are any; a detailed description in lay terms of the franchisee obligations and commitment to the franchise system; and the financial status of the franchisor.


Additionally, the proposed legislation proposes fair dealing and the right of all franchisees to associate and communicate with one another. To go beyond such disclosure at this time is unfounded and without justification. Alberta found that more rigorous legislation was unworkable and unjustified and was subsequently simplified to today's disclosure style of legislation, in form similar to that being proposed by the government of Ontario.

As a responsible franchisor, we absolutely need franchisees to be successful. We've had failures and the consequences have been very significant-almost bringing down my chain in the early days. Franchisees are both an asset and a liability. As an asset they commit their time, dedication, capital and enthusiasm to help build our system. On the liability side of the equation, we entered into significant contracts to support each franchisee. We have a very significant commitment to each of our franchisees, as follows.

We head-lease almost all of our premises. A failed franchisee is a significant liability. We've lost money on every failed franchisee, in most cases more than the business was ever worth in the first place.

We have a fiduciary obligation to our customers and our franchisees to guarantee, to the best of our ability, that each of the customers receives the quality and quantity of services contracted for. A failed franchisee is a significant liability costing us money that is usually not recoupable.

Most supplier contracts are in our name and suppliers demand payment if the franchisee cannot pay. Non-payment will result in a demeaned relationship with that supplier and degrading the entire Algonquin system.

Our franchise support centre has significant human and technical resources to meet the needs of operating franchisees to support the system.

Our bankers require a "soft" letter of comfort for all Canada Small Business Financing Act types of loans, stating that in the event of a failed franchise, all proceeds realized on the resale of the franchise will be first used to retire bank obligations before any funds are used to offset indebtedness to our company.

In summary, I reiterate that we need happy, successful, profitable franchisees. If we have unsuccessful franchisees, it's very expensive, cumbersome and time-consuming to get these people out of our system. The proposed legislation will help to create a fair, informed and balanced environment for both the franchisee and franchisor.

Legislation can never be a substitute for doing your homework before you make a decision to purchase a business. This legislation sets a solid foundation for any entrepreneur who is looking to make an educated decision about investing in a franchise. The government's draft legislation sets out fair and reasonable disclosure requirements. The legislation will have the greatest impact on new franchises being sold in Ontario, by requiring all franchisors from now on to provide the level of disclosure that the very best franchise systems already disclose. Disclosing all of the necessary information needed to make an informed decision before any agreements are signed, combined with a cooling-off period, will ensure that the franchisees are able to make sound business decisions in selecting a franchise system. I urge you to pass this long-overdue legislation.

Perhaps just a couple of comments because I haven't really heard very much from franchisors in these hearings, certainly not today.

Some of the examples of losses: My former partner and I feel that over the last 20 years we've lost about $2 million in failed franchisee-type operations. It's not insignificant for a small operation. To put that into perspective, my total gross revenue in my system today, not the sales of the system but the revenue coming into my company, is about $4 million a year. We actually budget right now more than $100,000 a year for failed franchisees; that's only one, maybe two, out of a system of 80-plus franchises.

I'll give you some examples and I'll be right upfront. Cadillac Fairview, Portage Place, Winnipeg, Manitoba: We lost $150,000 when Cadillac Fairview built kind of a Taj Mahal, a very deluxe operation akin to the Eaton Centre in Toronto, the Rideau Centre here in Ottawa. It didn't work very well. We were on the hook for a 10-year lease. The franchisee lasted a year and a half or so and ended up relocating outside of there, and we had to eat that lease because that place was not rentable. A deluxe facility.

I had another franchisee that was with me for 11 years, absolutely an impeccable franchisee. Something went wrong. Two years ago at Christmastime, he stopped paying some of his suppliers. I found out about it at the end of January, started taking action in February, and by the end of March he was into the system for almost $300,000. I ended up losing $75,000. Never could refranchise that facility; lost it all.

I had another franchisee, another one in Manitoba-I don't know; it must be the air out there-the fellow ran into some marital problems and drinking problems and they installed one-armed bandits. This fellow was in a cash-rich business, had been with me for seven or eight years, was a model franchisee during most of that period of time. He started taking the cash from this business and it just didn't make it to the till or the bank. He ended up going out of business, and we lost $65,000 and could not refranchise that facility. All the business had been driven away.

I guess the point here is that each franchisor has a significant investment in each one of the franchisees; it's not a case where the franchisee pays everything and the franchisor collects the money. That is absolutely not the case. In our own operation, we feel that we have invested at least 50% and perhaps 100% of the money that each of the franchisees has invested on a per-facility basis. We have a very significant investment in our operation and we need those franchisees to be successful.

I could go on. Over the course of 20 years, we have perhaps 25 or so failed franchises. We were at 100 at one time; we actually sold off some of ours to a competitor because they were too small, but maybe 25 failures out of 100 over the course of 20 years. Each one hurt a lot. I believe this legislation goes a long way to disclosing adequate information to all of the prospective franchisees, and I hope it will add a fair level of integrity to the franchise community here in the province of Ontario.

The Vice-Chair: Thank you, Mr Greenwood. The first questions are from the PC members. Mr Gill.

Mr Gill: Thank you, Mr Greenwood, for coming here. A couple of times it was mentioned today that nothing is forever. You did say that you have a disclosure agreement of some kind when you talk to your franchisees. In the new one that you supply these days, does it have any clause about this e-commerce coming in and the Web tickets and whatever else is going on in your industry?

Mr Greenwood: Actually, it doesn't, and that's a very good point. You try to have agreements that encompass everything; three years ago we really couldn't see much about e-commerce, and some of our agreements-the initial term is 10 years, renewable for another five and another five. We're right in the heart of e-commerce country, and before I came here today, the full three hours was spent on a new booking engine for our system. We couldn't have anticipated that three years ago. We have just rolled out state-of-the-art technology this year at a cost of about $2.5 million to our small system.

I can tell you, yes, I've got 20 or 25 franchisees that are very anxious about it. Maybe I have more that are anxious, but 20 or 25 that are reticent about committing to this new technology, so much so that they have kind of steered clear of it so far. It's just a scary environment.

Before we started rolling this out, we did a lot of homework. We were led by some very savvy people in the industry, and I think we've got a very cost-effective, state-of-the-art program that will take our franchisees into the new millennium. I'll tell you, they'll be head and shoulders ahead of 95% of the people in the industry. But still, I've got 25 guys who say, "Don't need it; don't want it; afraid of it," and my job is to convince them otherwise.

Mr Gill: Under your system, who holds the actual licence, the retail licence?

Mr Greenwood: The franchisee is licensed by the province of Ontario, and he also holds an IATA licence by the International Airline Transport Association to issue tickets.

We hold all of the leases. We hold all the technology contracts. In fact, to get the technology we were just talking about, I had to co-sign a blank guarantee with the leasing company such that if any of the franchisees failed, I had to pay. Similarly, our technology contract, which is about $7 million over a three-year term, I had to guarantee. It's one contract for the entire system.

Mr Gill: In your mind, from what you've just explained to me, you pretty well are already doing these things that are encompassed in Bill 33.

Mr Greenwood: Yes.

Mr Gill: The right to associate, the disclosure agreement-

Mr Greenwood: Yes.

Mr Gill: So you support that.

Mr Greenwood: Yes, I absolutely do. I think what a lot of people are missing here is that we're still in a commercial marketplace and if all prospective franchisees have access to or knowledge of your existing franchisees, it's incumbent upon those prospects to talk to the existing franchisees to find out what the relationship is, because no matter how thick that document is, whether it's one inch, five inches or whatever, you can't have everything in there and more knowledge is gleaned from talking to a handful of existing franchisees than we can ever put in our promotional literature.

Mr Martin: You talked about the experience of Alberta and how the legislation there to some degree didn't work, so they backed off. In the work that I had done to compare various jurisdictions and the legislation they have in place, under "fair dealings" and under "enforcement mechanisms" or bodies in Alberta, they committed in their bill that a self-governing body be appointed by the Lieutenant Governor in Council to promote fair dealing among franchisors and franchisees to cover both issues. To date, no such body has been appointed. Would that have anything to do with the fact that their legislation isn't working?

Mr Greenwood: No. In fact, fair dealing is quoted. If you have any potential litigation or a statement of claim, fair dealing is mentioned in every single one them, to the best of my knowledge. So "fair dealing" is an issue in Alberta and, to the best of my knowledge, it is expected to be abided by, although there is no definition of "fair dealing."

Mr Martin: I'm told that in Alberta the number of cases hitting the courts is still as high, if not higher, than it was back before the legislation was actually passed.

Mr Greenwood: I don't have any empirical data to that.

Mr Martin: OK. Just to make the point that so far that body in Alberta hasn't been appointed.

Mr Greenwood: Just in Alberta. Before this reduced legislation came into effect, we had to charge prospective franchisees about $10,000 more than we did in Ontario just to cover the costs. The costs in Alberta were prohibitive.

Mr Martin: You mentioned also in your deputation that you make available to prospective franchisees a fairly complete disclosure statement, including the name of former franchisees. Do you have former franchisees out there who have a confidentiality clause attached to any agreements you made with them?

Mr Greenwood: All of our franchise agreements, of course, have confidentiality clauses, but nothing that would restrict them to talk about business in general. They couldn't disclose trade secrets, the way we do business and that sort of thing, but general comments and questions about the franchise system are fair game.

Do you mean whether there was a settlement of some sort? Of course, if you had some sort of unique one-off type of thing and you made a settlement, both parties would sit down and negotiate that and you'd arrive at some sort of amicable conclusion and you'd sort it out.

Mr Martin: But that person would be out there, not able to speak to prospective franchisees about that particular circumstance or situation.

Mr Greenwood: Perhaps about the one isolated incident, but they could talk generally about the franchise system and their experience within that system, and they do.

Mr Martin: Does the name Ed Barge mean anything?

Mr Greenwood: Oh, it sure does. Yes.

Mr Martin: We had him before us on Monday. Thank you very much.

The Vice-Chair: Mr Greenwood, thank you very much for your time today. We appreciate that.

Ladies and gentlemen, that concludes the open session of the committee meetings here today and we'd ask if you'd leave the room. We're going into closed session for a few minutes.

The committee continued in closed session at 1605.