Solicitor-client relationship: When does it start?

December 23, 2008

looselips1Congratulations.

You’re just finished your initial meeting with a franchise lawyer. You chose the baddest ass, most franchisee-friendly sob you could find. He was “kind” enough to give you 30 minutes of his time and you told him your whole story. The great man asked a few questions (actually a fair number about your net worth) but alas…unless you can rally another 9 other losers: Too bad, so sad; you’re shit out of luck.

Great bed side manner…regret to inform how weak the law is…best to put this all behind you (my most favouritest thought-terminating cliche).

You’ve just shot your mouth off to an industry insider that may very well use that information against your best interests. What?

I’ll explain with a real-life example.

1. Seven distributors walk into the most “pre-eminent” CDN franchisee lawyer’s office and tell him their story. His response: No case here go bankrupt. No if ands or buts: Do not pass Go…

2. The Group of Seven wants a second opinion. They call to me, I meet the group at their home and talk to a then-independent 2nd lawyer (just new into franchisiing but quite keen). We conclude: Excellent case. U.S. franchisor was too lazy to give disclosure documents after the Arthur Wishart Act (Franchise Disclosure) was passed in 2000. These are franchisees not distributors and therefore they can rescind their contract, dissolve their relationship and get their money back. Easy peasy.

  1. One set of case facts PLUS
  2. one Ontario law EQUALS
  3. 2 irreconcilably, diametrically opposed legal opinions?

How is this possible? Simple it has to do with duty and the timing of when a solicitor/client relationship is formed.

Fiduciary Duty: I am not a lawyer and the Upper Canada Law Society website wasn’t much help so here is a definition from the Canadian Encyclopedia.

The legal system recognizes a multitude of special relationships in which one party is required to look after the best interests of the other in an exemplary manner. These relationships, which include solicitor/client, physician/patient, priest/parishioner, parent/child, partner/partner, director/corporation and principle/agent, are called fiduciary relationships.

Fiduciary relationships entail trust and confidence and require that fiduciaries act honestly, in good faith, and strictly in the best interests of the beneficiaries of such relationships.

Solicitor/client Relationship: This relationship ONLY starts when you formally enter into a contract for legal services. The signs are when you cut the cheque for a retainer, sign an agreement, etc.

Anything that you say to a lawyer before you are his client (when you or the relationship is consummated) does not have this legal protection (ie. the information you provide can, and in franchising is, be used against your interests).

This is how an internationally known franchise lawyer can give you knowingly false advice at the first meeting:

There is no legal duty for him to do so because the solicitor/client relationship has NOT been created yet (before contract for legal services started).

But why turn away work? The franchisees were steered away from defending themselves because there were (and still are) literally hundreds of franchise systems in Ontario that are ignoring the Wishart Act. These are called accidental or unintentional franchises (true franchisors who don’t want to bother with some stupid provincial law) .

The first lawyer knew that by exposing the Group of Seven’s franchisor  in public (ie. in Superior Court) he would be very unpopular at the next franchisor-only national trade association golf tournament. (Please don’t tell anyone but this is why this organization [ie.] has an Ombudsman program [ie.]: To have you come in and be convinced you have no case. Skim off the biggest floaters. That’s why the banks are the biggest sponsors based on the theory that they have the most damaging facts to conceal, like, Predatory franchise lending.)

  • It would be bad form for the franchise law expert to showing the other 32,000 Ontario lawyers (the unwashed masses: 99.9% of the province’s lawyers who are not in the cabal) where the juicy billable hours are.
  • Let alone the risk of dozens of copy cat lawsuits against franchisors, banks, sales agents, lawyers, etc.
  • And the inconvenient lawsuit against the franchisor’s lawyer for contempt of a provincial law that he is, as an Officer of the Cour, duty-bound to respect (should have dropped his masquerading client if they refused to self-identify accurately).
  • This would not do when the franchise bar pays so lucratively when run as a credence good monopoly (see Winand Emons, Credence Goods: The Monopoly Case).

hermanngoeringWhen you hear these words together: You should use an expert franchise lawyer

…you should “reach for your gun

(Hermann Goering’s advice when you hear the word culture).

Yes you should trust your lawyer. But you should qualify him or her first. Trust but verify is a very good idea.

Since being a lawyer means having to survive in business to practice another day, you should determine where the vast bulk of his future earnings are coming from (franchisee, franchisor or non-franchised commercial law).

  • Based strictly on economics (95% of legal services paid for by franchisors and friends and credence good cheaters who are run as a monopoly), a franchise expert lawyer should be the last person a franchisee talks to.

I always say talk to a 60-year old regional commercial lawyer with his name on the building. Anyone else is more than likely to torpedo your perfectly watertight case.

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Credence Goods attract Experts who Cheat

August 27, 2008

If I had to choose the second concept that was critical to know in the study of franchising, it would be This one.

Lionel Hutz

HINT: If they’re talking about protecting franchisees and not talking about credence goods, they’re all hat and no cattle [all show and no go].

Some goods and services, by their very nature, come with much higher risks than others. These risks can be compounded and therefore astronomically high if:

  • there are few experts to choose from in a market,
  • the costs of switching experts is very high,
  • this is the first time you have contracted for these expert services, and
  • the experts organize themselves to protect one another.

As we shall see, franchising has compounded, interdependent and very aggressive expert stakeholders [see Big Franchising: franchisors, franchise bar, lenders, sales agents, consultants, politicians, media, etc].

  • As a franchise investor, you are at a severe disadvantage because of credence good service providers.

A Credence good is a good or services with the following 3 characteristics:

  1. the value is difficult or impossible for the buyer to determine accurately before they buy it,
  2. the buyer can’t know if it was useful [even after they did buy it] and
  3. also, the seller does know the value of #1 and #2 [could therefore exploit this ignorance for their own self-interest: information asymmetry leads to opportunism risk]. Wikipedia

Uwe Dulleck and Rudolf Kerschbamer:

Consumers’ concerns about being defrauded seem not to be unfounded: Emons (1997) cites a Swiss study reporting that the average person’s probability of receiving one of seven major surgical interventions is one third that of a physician or a member of a physician’s family. Wolinsky (1993, 1995) refers to a survey conducted by the Department of Transportation estimating that more than half of auto repairs are unnecessary…These examples reveal that infomational asymmetry matters. Free download: On Doctors, Mechanics and Computer Specialists – The Economics of Credence Goods

Gillian K. Hadfield, University of Southern California:

Economists refer to a good as a credence good if it is provided by an expert who also determines the buyer’s needs. Buyers of credence goods are unable to assess how much of the good or service they in fact need; nor can they assess whether or not the service was performed or how well. This puts buyers at risk of opportunistic behavior on the part of sellers: they may be sold too much of a service or billed for services not performed or performed poorly. Theoretical work on markets for credence goods predicts that markets for credence goods may be characterized by fraud (billing for unnecessary services or services not performed) and a price mark-up over cost…Legal services are credence goods… Free download: The Price of Law: How the Market for Lawyers Distorts the Justice System

Winand Emons, University of Bern:

With a credence good, consumers are never sure about the extent of the good that they actually need. Experts such as doctors and lawyers, as well as auto mechanics and appliance service-persons (the sellers) not only provide the services, but also act as the expert in determining the customer’s requirements. This information asymmetry between buyers and the seller creates strong incentives for the seller to cheat. Free dowload: Credence Good Monopolists

We will come back to credence goods and how these types of services really help value being stripped from investors with deceit [opportunism].


Who does Franchise law serve?

June 7, 2008

Laws should be like clothes. They should be made to fit the people they serve.

Clarence Seward Darrow (1857 – 1938).

I believe Darrow is correct: Existing franchise laws do protect who they are meant to protect. But it is not who most investors think it is.

If not Me, Who then?

  1. Many franchise investors think the laws are there to serve them.
  2. Franchisors (product and business format), franchisor associations, the franchise bar, bankers, sales agents, and bankers believe the laws are there to serve them.

Who do you think is likely to be more accurate?

Considerations:

  1. Laws are a result of a competition between brokered interests within a democratic political arena. Those without a voice, have no influence.
  2. The law can be used to present an illusion of safe (or safer) investing when, in fact, the opposite might be true.
  3. The business of providing legal services can further distort any attempts of remedy through the law.
  4. Any franchisee legal “win” lasts as long as it takes to sell the legal “software patch” by the franchise bar to their customers (franchisors).
  5. Franchise attorneys act as litigation gatekeepers. Perfectly valid claims are routinely sabotaged because the lawyers depend so much on profile and referrals from their national association.
  6. Legal services are a credence good AND an effective monopoly (once you choose one lawyer). The risk of experiencing a legal expert who cheats is quite high.

Credence Good Monopolists

With a credence good, consumers are never sure about the extent of the good that they actually need. Experts such as doctors and lawyers, as well as auto mechanics and appliance service-persons (the sellers) not only provide the services, but also act as the expert in determining the customer’s requirements. This information asymmetry between buyers and the seller creates strong incentives for the seller to cheat… Credence Goods Monopolists, Winand Emons, 1997


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