Sterns’ warning: Don’t do a half-assed job on disclosure reviews

April 9, 2010

Ontario’s 35,000 lawyers should consider themselves warned.This is not just outstanding peer-to-peer legal advice (which it is: both carrot and stick) but it’s also crucial information for all current Canadian franchise investors.

The benefit of collective franchisee action has never been more justified.

David Sterns of Toronto’s Sotos LLP writes in March’s Canadian Lawyer magazine an article called: Advising the purchaser of a franchise business.

Sterns’ bottom-line advice to lawyers? (especially general attorneys):

The harsh reality is that some franchises have a failure rate as high as or even higher than non-franchised businesses. When the franchised business fails, the results are often catastrophic for the franchisee. The legal advice provided by the reviewing lawyer will come under close scrutiny, particularly if the franchisee misses the rescission window because it was unaware of its rights…

Lawyers should allocate sufficient time and charge a sufficient fee to permit a proper document review and reporting to the client. Otherwise, they should decline the retainer.

Lots of implications for the general and franchise Ontario bar.

But, hey, huge importance for the 40,000 ON investors in a current franchise relationships who are organized. Disclosure requirements are not just for the entering but whenever a material change happens to the relationship (ie. during, at renewal: any time a material or “significant” franchisor decision is made).

Did you get proper disclosure documents the last time your franchisor decided to change the rules in the middle of the game?

These are the business risks I assigned and that appear in the WikiFranchise.org entry:

  1. Arthur Wishart Act (Franchise Disclosure), 2000, Canada,
  2. Buying an existing outlet even riskier than from scratch,
  3. Courts extremely picky about shoddy disclosure practices,
  4. Disclosure documents are deficient,
  5. Disclosure document: one, bound and delivered at the same time,
  6. Disclosure document certificate,
  7. Disclosure document must disclose all material facts,
  8. Disclosure document must include third party contracts (suppliers),
  9. Disclosure documents never given,
  10. Disclosure documents not given within proper timeframe,
  11. Duty of care,
  12. Franchise law being ignored,
  13. Independent businesses survive longer than franchised ones,
  14. Independent businesses much higher profit than franchised ones,
  15. Lawyer alert: advise only prospects with adequate legal due diligence budgets or risk being sued,
  16. Lawyers being threatened with lawsuits for speaking out,
  17. Material facts were not disclosed,
  18. Outstanding advice,
  19. Professional negligence,
  20. Refuses to take client,
  21. Rescission,
  22. Sue the lawyer,
  23. Unintentional or hidden franchises

This is an important article that I will visit again.


Ontario franchise law is +90% irrelevant

October 22, 2009

OntarioExisting laws are a result of a competition.

A competition of interests, normally between opposing groups.

Any statute exists because:

  1. some interest(s) wanted them,
  2. that group had the clout to push the political system to put it into place while
  3. defeating opposing views.

Franchisees face the combined strength of what I have defined as Big Franchising. The pathetic state of Canadian franchise law is the predictable result. Ontario, PEI, Alberta and (sort of) New Brunswick have specific franchise laws.

In Ontario, the relevant law is the Arthur Wishart Act (Franchise Disclosure), 2000.

I helped push for the first Ontario, starting in 1998. I was even an expert witness at the public hearings. The Wishart Act was sold to me as a “compromise” or as a “first step”. Those were lies and I believed them: then.

The Ontario government has refused to listen to repeated calls for improving the laws, from franchisees.

Privately, many MPPs know the score but Big Franchising blocks for their friends to the Premier.

The industry had a problem in the lat 90s: they couldn’t sell as many outlets because of very high profile nightmare cases such as Pizza Pizza or 3 for 1 Pizza and Wings.  They needed a fake law (McLaw: make-believe fairness) and they got it. The Ministry of Consumer’s reaction to  Country Style’s alleged dirty CCAA and the Grand & Toy mass terminations confirmed that.

99% of all abuse is never seen by Ontario judge (let alone a jury of citizens)

The high cost of litigation and the franchise bar’s “filtering process” sees to that.

The law needs to change to become relevant or be abolished.

Now.


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