Published as a link in the online Canadian Franchise Association updated, January 15, 2021
What’s in a name: Ombudsperson, Ombudsman, and Ombuds?
The name “ombudsman” (om budz man) comes from Swedish and literally means “representative.” At the most fundamental level, an ombudsman is one who assists individuals and groups in the resolution of conflicts or concerns. Ombudsmen work in all types of organizations … . The primary duties of an organizational ombudsman are (1) to work with individuals and groups in an organization to explore and assist them in determining options to help resolve conflicts, problematic issues or concerns, and (2) to bring systemic concerns to the attention of the organization.”
[Source: International Ombudsman Association].
For many years leading franchisors in the United States have established successful independent franchise system ombudsman programs to resolve potential concerns or disputes with their franchisees, and the concept is now being followed by franchisors in Canada. How do these programs work, why are they attracting attention and what are the benefits for both franchisors and franchisees?
Commensurate with the growth of franchising in the Canadian economy, franchise legislation now exists in six provinces and there is an increasing number of disputes between franchisors and their franchisees. Franchisors have an incentive to resolve these disputes at an early stage and before they become lawsuits because of the impact of disputes on franchise disclosure documents.
Franchise disclosure documents must contain a statement and details of: (i) any pending or actual deceptive business practices or violation of a law that regulates franchises or businesses by the franchisor, the franchisor’s associate or a director, general partner or officer of the franchisor; (ii) a statement and details whether any such person has been subject to a pending or actual administrative order or penalty under any law regulating franchises or businesses; and, (iii) a statement and details whether any such person has been found liable in a civil action of misrepresentation, unfair or deceptive business practices or violation of a law that regulates franchises or businesses, including a failure to provide proper disclosure to a franchisee or whether a civil action involving such allegations is pending.
Franchisors do not want to have descriptions of any of these matters included in their franchise disclosure documents because of the negative effect on prospective franchisees and such actions may disentitle the franchisor from an exemption to disclose financial statements. If a franchise dispute is resolved without litigation, the dispute will be confidential and private and will likely not be required to be included in a franchise disclosure document.
In an effort to resolve disputes at an early stage and to minimize the negative effects of litigation on the parties and franchising in general, the Canadian Franchise Association has established an ombudsman program for franchisors and franchisees to use at no charge. However, despite the benefits of this program, it has limitations on time and resources.
An ombudsman is a neutral, independent person who provides informal, confidential assistance to help with the resolution of concerns and complaints. An ombudsman program provides the services of a confidential and neutral third-party ombudsman to help resolve problems as early as possible in an amicable and expeditious fashion. The ombudsman helps facilitate a resolution by discussing the issues and possible solutions. If a solution is not reached, where possible the ombudsman may suggest and refer unresolved complaints and problems to alternative methods of dispute resolution, such as mediation.
In franchise systems that have established their own independent ombudsman programs, franchisees do not pay for the use of the program. The ombudsman is typically under contract as an independent contractor (and not an employee) and his or her services are paid for by the franchisor. The ombudsman must be impartial and neutral, and not take sides. There are no formal investigations, no binding decisions and no repercussions to franchisees. From the franchisor’s perspective, an ombudsman program can act as an early warning system of systemic franchisee concerns.
The ombudsman, as a designated neutral third party, must maintain privacy and strict confidentiality concerning matters under consideration. Usually the only exception is in the discretion of the ombudsman when there appears to be a threat of serious harm. The ombudsman must take all reasonable steps to protect any records and files pertaining to confidential discussions from inspection by other persons. The ombudsman should not testify in any formal judicial or administrative hearing about matters brought to his or her attention. When making recommendations, the ombudsman is responsible for suggesting actions or policies that will be equitable to all parties.
An independent franchise system ombudsman should have broad franchise industry experience, be trained in conflict resolution and must become familiar with the system involved. The person must not have any conflict of interest and must be respected by both sides. In effect, the ombudsman operates as an intermediary, meeting with each side independently in order to understand the facts, consider the problem, discuss options and attempt to facilitate an effective solution. The ombudsman cannot provide legal advice, make management decisions or advocate for anyone in a dispute. For the program to be successful senior management of the franchisor must commit to it and the franchisees must accept it. Endorsement of the program by a franchisee advisory council is highly recommended, if a council exists. The ombudsman must have ready access to a dedicated senior member of the franchisor’s management team who has authority to make decisions or to obtain instructions quickly and effectively.
There are a few important steps that must be taken to design a successful ombudsman process. After the requirements for the program have been determined, the key stakeholders must be committed to the program and funding must be undertaken by the franchisor. The terms of reference for the process and procedure must be documented in writing and included in the franchise agreement, the operations manual, an ancillary document or a policy adopted by the franchisor. Provincial franchise legislation requires that the program be described in the franchisor’s disclosure document.
Before the program gets underway, the parties should determine how to assess the metrics that will apply to determine the success of the program. There should be some periodic and confidential generic reporting to the stakeholders on the utilization of the program and at least annually on the success of the program based on the metrics adopted by the parties. The parties may also decide to give the program a stated term with a determination at the end of the term whether the program will continue and whether modifications will be made.
Clear benefits of an independent franchise system ombudsman program are the increased integrity it brings to the franchise system, the proven success factor and the extremely minor cost when compared with the direct and indirect costs and risks of litigation that might have been avoided. Franchise litigation can be very uncertain, costly and disruptive for both parties. Results may take months in the case of interim orders or years in the case of trials. Costs can easily run into hundreds of thousands of dollars. Disputes involving current franchisees can and most often will have a negative effect on the ongoing franchise relationship and, if publicized, can diminish new franchisee prospects, consumer loyalty and franchise system revenues. The downtime involved for franchise executives can be staggering. The resolution of a dispute at a very early stage through an independent franchise system ombudsman program will allow the parties to focus on their ongoing business needs rather than disputes.
In light of all of these factors, and with the continuing interest of print and social media in reporting on franchise disputes, particularly those involving well-known systems, more franchise systems should consider introducing an independent franchise system ombudsman program. Such a program clearly falls into the category of best practices in franchising today.
©Frank Zaid 2021
During his 40 year career as a lawyer before retirement at the end of 2012, Frank’s business law practice was concentrated in franchise law and he was involved with over 400 franchise systems. He has been an investor in both franchisor and franchisee operations and has served on the boards of directors of a number of well known franchisors. Frank was consistently ranked as the most frequently recommended franchise lawyer in Canada and among the most highly regarded international franchise lawyers. He served as General Counsel of the Canadian Franchise Association, Chair of the Supplier Forum of the International Franchise Association, and the first Chair of the Franchise Law Section of the Ontario Bar Association. He was the initial recipient of the CFA’s prestigious Lifetime Achievement Award. He was a founder and the Managing Editor of the leading franchise business and legal loose leaf service, The Canadian Franchise Guide.
Since retirement he has transformed his unique business and legal experience in franchising into several support service functions through his company, Frank Zaid FRANlegal Support Services (www.frankzaid.com): franchise dispute mediator and arbitrator with ADR Chambers in Toronto (www.adrchambers.com); member of the boards of directors or advisory boards of franchisors; independent franchise system ombudsman; expert witness in franchise litigation matters; non-legal advisor/consultant on high-level strategic domestic and international franchise business matters; and, profile speaker at franchise conferences or conventions.
Frank Zaid, Principal
Frank Zaid FRANlegal Support Services
(c) 416 837-5973