~CHAPTER 4: ENTREPRENEURS~
Link to Article:
http://www.thestar.com/business/small_business/people/2013/01/04/what_franchise_owners_need_to_know_rights_and_the_wishart_act.html What Franchise owners Need to Know: Rights and the Wishart Act
Franchisees can rest a little easier after a recent ruling by the Ontario Supreme Court. It ensures franchisees – individuals who own a franchise business, such as a McDonalds – can pursue legal claims against franchisors – parent corporations, such as McDonalds Canada – regardless of the state of their business. Published on Fri Jan 04 2013
By: Kaleigh Rogers Special to The Star Franchisees can rest a little easier after a recent ruling by the Ontario Supreme Court. It ensures franchisees – individuals who own a franchise business, such as a McDonalds – can pursue legal claims against franchisors – parent corporations, such as McDonalds Canada – regardless of the state of their business. In the case, the franchisee is pursuing claims for $1.1 million against his franchisor, Bagel World, for not providing complete information about the business. These types of claims are made under the Arthur Wishart Act — a provincial statute that protects franchise business owners. The Wishart Act came into effect in 2001 and in part requires parent companies to provide a disclosure document that contains accurate, clear and concise information — including financial statements and the proposed franchise agreement — prior to signing any contracts. In this case, the parent company attempted to avoid the claims by buying the franchisee’s bank debt. It’s a process similar to a mortgage: if a homeowner goes bankrupt, the bank that lent them cash can seize their property. Similarly, if a franchise owner goes bankrupt, the bank that gave them a loan can seize the franchise, along with any pending lawsuits the business is currently pursuing. In this case, Bagel World bought the franchise back from the bank, and the lawsuit came with it. “The franchisor was trying to be clever,” Steven Goldman, a Toronto franchise lawyer whose firm is representing the franchisee, explains. But the justice ruled the franchise owner cannot waive or release his rights under the Wishart Act, regardless of the fact the franchisor now had ownership of the lawsuit. The claims against Bagel World are still pending, Goldman says, but will likely settle rather than go to trial. “Basically, it’s another example of how franchisee-friendly the Arthur Wishart Act can be,” Goldman said. Since it came on the scene, the Wishart Act has been the basis for multiple claims like this against franchisors who often fail to meet its standards by providing clear and complete information. Often, Goldman says, it’s a case of the parent company not understanding the requirements of the act. They either don’t provide all the necessary information — often leaving projected earnings or financial statements that indicate how much the franchisee will need to invest— or they don’t provide a disclosure document all. “To do a disclosure properly, you’re looking at $20,000 to $50,000 on legal and accounting fees,” he explains, due to the fact that the requirements of the Act are so broad, it requires the services of an experienced, and expensive, expert to cover all the bases. “Unsophisticated franchisors just don’t spend the money.” But Goldman notes that even large, sophisticated companies sometimes fail to meet the requirements because they don’t bother to take the time and money to do it properly. If the business fails, it leaves any corporation open to lawsuits. Both franchisees and franchisors have also used the Act to support claims against legal counsel who they feel did not properly explain the company’s obligations. While it can be difficult to parse, Goldman explains the Act is in place to protect franchisees and recommends speaking to a lawyer prior to investing in a franchise in order to fully grasp the Act’s requirements. “Most of it is about disclosure, so it doesn’t protect against stupidity,” says Ned Levitt, a Toronto-based franchise lawyer who helped bring the Wishart Act into effect. If a corporation meets all the disclosure requirements and a franchise still fails, the parent company can’t blamed, he says. Still, Levitt says, until the Act came into effect, it was far too easy for larger corporations to take advantage of franchise owners, who are often entrepreneurs with their life savings invested in a business. If things start to fail, Levitt adds, the Wishart Act can ensure the franchisee wasn’t cheated from the start by not having the chance to make a fully-informed decision. “It’s really helped to level the playing field on pre-sale disclosure and I think that’s a really good thing,” Levitt says, adding that rulings like the Bagel World case are setting a precedent for how the Act will be used in the future. “It sets up a warning to franchisors, who will then modify their behaviour accordingly,” he said. Doug Fisher is the president of FHG International Inc., a Toronto franchise consulting agency. He said the ruling is good news for franchisees. “For the franchisee, it’s a matter of their life savings. For the franchisor, that’s not so much the case, and we need to protect the smaller guy.” |
This article relates in a few ways with the key terms in "Chapter 4: Entrepreneurs." The owner of the franchise is an entrepreneur because they started their own business. After being in the Ontario Supreme Court, the franchisees can rest a bit better. This is because they can go after the legal claims of the franchiser, even if their condition of the business is not running that smooth. Furthermore, for a franchisee, they really only care about their life savings.
|