Archive for September, 2011

Franchises – Entitled to Disclosure?

Tuesday, September 27th, 2011

Ontario’s franchise legislation is known as the Arthur Wishart Act, 2000.  Among its various provisions is the requirement that franchisees are entitled to get disclosure of certain items such as financial statements or projections, copies of franchise documentation, etc.  This permits franchisees to get an idea of what they are truly getting into.  Or, alternatively, it gives them enough that they can take all of this documentation to their lawyer and their accountant who can then lead them through the mass of paper and explain it all to them.

But when are you entitled to get this disclosure?  The Act has a loophole and it has now become, I would argue, a rather large loophole thanks to a decision today by the Ontario Court of Appeal.  The loophole is found in subsection 5(7).  The requirement for disclosure does not apply if (a) the term of the franchise agreement is for one year or less AND (b) no franchise fee is charged.

In TA & K Enterprises, the plaintiff became a franchisee of Suncor Energy.  It signed a franchise agreement that was for only one year and did not have any franchise fee but, rather, required only payments of royalties.  The franchise agreement expired at the end of the one year and at the end of the year then Suncor would normally negotiate a new franchise agreement or, as happened in this case, Suncor wrote to the franchisee and said that the parties would continue their arrangement through a series of extensions of the franchise agreement on a “month to month” basis.  Thus, if they kept their relationship going for 100 years, it would technically be a one year agreement combined with 99 years worth of monthly extensions.

In the case, the franchisee had the franchise for one year and the agreement expired in accordance with its terms.  It was then extended on the same terms and conditions on a month to month basis for another 9 months.  Meanwhile, two months after the franchise agreement expired, Suncor wrote to the franchisee and gave notice that the monthly extensions would only continue for another 7 months and then the franchise arrangement would be terminated.  Prior to this, however, the franchisee sued and sought class action status on the basis that the agreement should be rescinded because there was no franchise disclosure given.  (Why would they do this?  Ultimately it would still terminate the relationship but then the franchisee would be able to get its franchise royalty payments back and well as other costs.  From the franchisee’s perspective, it would be “I worked hard and paid money to you in terms of royalties to build up your brand and you’ve now pulled the rug out from under me.  That’s fine, but it will now cost you in that you have to reimburse me for what I did for you.”)

Suncor brought a motion for summary judgment on the basis that the term was only for one year and that there were no franchise fees – only royalties.  Suncor won at the Superior Court and the franchisee appealed.  Mr. Justice Goudge in today’s decision on behalf of the Court of Appeal also agreed with Suncor’s position holding that the fact that the franchise agreement was subsequently extended did not mean that this was not a one year agreement and also that royalties are not franchise fees.

Is the decision wrongly decided?  Not at all.  Based on the facts of this case, if I had been the judge I would have come to the same conclusion.  But what it does, though, is recognize a flaw in the legislation, I would suggest.  As Justice Goudge recognized, a primary concern of the exception was that if someone set up a Pizza Pizza franchise booth at The Ex for a few weeks each Summer, it wouldn’t be fair to require Pizza Pizza to prepare a ton of disclosure documents for a relatively short franchise arrangement.  Similarly, it is a little difficult for the franchisee in this case to complain that it did not get the disclosure since it continued on as a franchisee for more than one year and it appears that the main purpose for complaint was the fact that Suncor decided to terminate the arrangement (in other words, it was trying to use the Act to help it get out of what turned out to be a bad deal it had made).

The problem, though, is the recognition that many businesses fail within their first year.  Suppose that I wanted to set up a submarine sandwich franchise through Mr. Wraps Sub Shops.  I enter into the arrangements but I don’t get full or proper disclosure.  I carry on for, say, 9 months and then come to the realization that I have lost a ton of money.  I then find out after my business has failed that, in fact, the franchise never had a hope of succeeding and that I was basically suckered out of my money by the franchisor.  Am I protected by the Act?  Nope.  Not if it was only a one year term on the franchise agreement.  And what franchisor in the future is going to want to put franchise agreements for more than one year?  Probably not many now.  To this, however, we add the fact that the key money maker for franchisors has been the collection of franchise fees.  How do they now get around that?  They just up the amount of the royalties payable or front-end load a higher royalty that is subsequently reduced over time.

Many small business opportunities come through franchising arrangements.  What today’s decision means for you is that you are going to have to either seek a franchise arrangement that exceeds one year or else you are going to have to insist on obtaining full and complete disclosure of the type required under the Act.  Otherwise, the protections afforded under the Act are likely to not be available to you.  Does that mean that you are s.o.l.?  Not necessarily, but without the helpful provisions under the Act, it makes your situation a little harder to handle and makes any litigation a little tougher (but not impossibly so) to win.

Something to think about.

CALC

If the Collection Agency is Calling

Friday, September 23rd, 2011

One of the ways that I can tell how good or bad the economy is going is based on the frequency that I get inquiries from clients about collection agencies – either because they want to use a collection agency or because they are getting called by collection agencies.  Not too surprisingly, I am seeing more matters lately between my clients and collection agencies. 

Now, I have to say up front that I have mixed feelings about collection agencies – just like I have mixed feelings about many other trades: lawyers, dentists, doctors, police officers, real estate agents, etc.  Many are very good and professional in their dealings but there are more than a few “bad apples”.  I average about two or three instances per year where I am required to send a letter to a collection agency to have them tone down or reel in one of their agents.  And I also appreciate that sometimes you have to break a few eggs to make an omelette, but when I have to send the letters that is because things have gone too far and the collection agent has become too aggressive.

In Ontario there is a Collection Agencies Act and, more importantly, there is a regulation under that Act which sets out what collection agents can and cannot do.  That regulation can be found here and, most importantly, you want to look at Sections 20 to 25 which set out the rules more fully.  By summary, though, here are some of the key rules that collection agents should be following (and that if you are the one hiring the agency, you will want them to follow and, if you are getting the calls from the agent, you will want them to follow as well):

1. The collection agency cannot simply call the debtor out of the blue.  A written notice must be sent first and then the collection agency has to wait six days before they can start calling.  That said, if you are the debtor, check your mail because if the letter comes and you decide not to open it, that’s not going to be sufficient – all they have to do is send the notice.

2. If you are the debtor and you dispute that you owe the money AND you suggest that the matter be dealt with in the Courts AND IF you send a letter to this effect by registered mail THEN the collection agency should stop trying to contact you.  Of course, though, this will then mean that the lawsuit is on and you will have to deal with the issue in the Court.  That said, if a collection agency is involved, then chances are likely that you are dealing with a matter under $25,000 so the claim will go to Small Claims Court and you do not have to have a lawyer representing you.

3. With various exceptions, the collection agency should not be speaking with your relatives or employer about your debt and trying to get them to assist in the payment of the debt in some way (either through payments on your behalf or simply to have you contact them - ie. applying pressure on you through your relations and boss).

4. There are certain times when the collection agency is not allowed to call (for example, after 9:00 p.m.) as well as certain days (such as holidays) and any communications should not be threatening or have improper (ie. profane) language used.  In this regard, I’ll take a moment to mention my favourite story regarding an abusive collection agent.  This guy was really bad and I had to send his bosses a very strongly worded cease and desist letter.  The response I got from him was a voice-mail telling me to “F” myself this way and that way but that he wouldn’t be calling my client anymore.  However, after threatening to report me to the Law Society (a threat that either he never fulfilled or, if he did, the Law Society just ignored it and never bothered telling me it was ever made because it would have been a b.s. complaint), he said that he would also be calling “Mr. Gowling” to report about my behaviour.  At the time, I was working at Gowling Lafleur Henderson.  Not only was I not worried about any such complaint to Mr. Gowling because I knew that I had done absolutely nothing wrong, but more importantly, I had to laugh because Gordon Gowling had died many years before that time.  I figured that if the abusive collection agent was truly able to speak with Mr. Gowling about my conduct, I would have bigger problems to deal with than the collection agent and would have to call Ghostbusters!

5. Collection agencies are not allowed to threaten that if the debtor does not pay then there will be a lawsuit unless there will actually be such a lawsuit – in other words, no veiled threats.

6. The collection agency isn’t allowed to mislead the debtor in order to get the debtor to pay.  So, for example, there is a two year limitation period for most lawsuits in Ontario.  It is not uncommon for creditors to wait for most of the two years and then turn the matter over to collections just before it’s too late.  Suppose this happens and the collection agency says that if the debtor doesn’t pay that he/she/it will be sued.  And suppose further that the limitation period has now expired.  And, to round things out, suppose that the collection agent does actually know that the lawsuit would be brought (even though it would die due to the limitation period having expired).  In that instance, the collection agent has mislead the debtor because the lawsuit could not be brought and be valid.

Those are the main points to consider if you are dealing with a collection agent.  For a more fulsome list of the rules, go to the regulation and see for yourself.  And hopefully you will never have to make reference to these rules but if you have to do so, at least you now know that they are there.

Something to think about.

CALC

Interview Has Been Printed

Thursday, September 22nd, 2011

It’s been pretty crazy for me in court and otherwise the last few weeks.  However, I have just learned that my interview on the Court of Appeal’s decision in Tucows.com has been published in the September 16 issue of The Lawyers Weekly.  You can see the article here.  For other comments on the case, you can also see my August 8 post.

CALC