Vijay Kawatra Public Hearing Testimony

…you likely may have noticed - I don't know if there has been any study done on the franchisees' profile - many of them are immigrants, like myself. They are not aware and not strong enough to exercise their legal rights. Some franchisors have actually gained, if you like, quasi-judiciary positions vis-à-vis their franchisees and they've terrorized them.

LegislativeAssemblyofOntarioCostofArms.jpg

Legislative Assembly of Ontario
March 8, 2000

Public Hearing Testimony
Ottawa, Ontario, Canada
Mr. Vijay Kawatra, franchisee

Standing Committee on Regulations and Private Bills
1st session, 37th Parliament

FRANCHISE DISCLOSURE ACT, 1999
Consideration of Bill 33, An Act to require fair dealing between parties to franchise agreements, to ensure that franchisees have the right to associate and to impose disclosure obligations on franchisors

VIJAY KAWATRA

The Vice-Chair: Mr Kawatra is the next person in our presentations here. Mr Kawatra, you have a 20-minute time allocation, and I'm going to tell you at five minutes if you want us to ask you some questions.

Mr Vijay Kawatra: First of all, I would like to inform you that the notice I was given was really not ample for me to a prepare lengthy commentary like the person who just left has made, although I tend to concur with many of the observations the previous speaker has made.

Let me first inform you that I am honoured to be present here to talk to you today. I would like to thank you for inviting me and giving me this opportunity. My special thanks go to Claudette Boyer for making it possible for me to come and express to you my concerns.

It's an important subject and I have a lot to say on it. Given the time, however, I would like to present only a summary of some of my thoughts now and leave more comprehensive discussions for later, if you so desire.

May I point out that although I am speaking as a former franchisee of a system, my thoughts are based on much wider knowledge and observations than just my personal experiences with one system. I have held discussions with other franchisees from other systems and other regions. Also, I have read the contemporary literature on the subject. I operated a franchise myself for about seven years.

To summarize some of my principal thoughts, I've just jotted down some ideas. They are not really all that I would like to talk about, but just to express to you some of the things that I have on my mind.

First of all, the proposed legislation is a very good start and is urgently needed to help Ontario's franchising industry grow in an orderly fashion. I would like to take the opportunity to commend you for the initiative you have taken, but my feeling is that the proposed legislation in its present form will do little to protect current or future franchisees who are the main victims of the industry. For example, the legislation is not directed to post-sale agreement activities, the area where 90% of the damage is done and where the main victim is the franchisee and not the franchisor. The proposed legislation intends to deal with pre-sale disclosures. It is important, but it will fall very much short of addressing the issues at hand in any significant way.

Also, it does not consider some very crucial areas of concern in the field of fairness, transparency and justice. The industry is riddled with myths like "90% success rate" and "recession-proof business opportunities." However, no conclusive data or empirical evidence is available to support these kinds of promotional and seductive claims. Often US industrial observations are circulated to attract franchisees in Ontario without Canadian references, and you probably know that the often-quoted US data has not been confirmed yet.

It might come as a surprise to you that a whole lot of abuse is taking place in some segments of the Ontario franchise industry. I think something must be done to address it, because the situation, to my knowledge, is very serious and it affects a large number of people. It's having an impact not only on their financial well-being but also the families are affected because of the financial difficulties that these franchising businesses are bringing about to those families.

I don't have the details in writing. They are of course in my mind, and I have several examples I could cite if need be. I would be prepared to talk to people in confidence if they want to discuss specific examples where I know, from my personal experience and the experiences of other people in Ontario, that they have not been dealt with fairly, and it is mostly the franchisor that derives the benefits of the transaction, not only at the time of consummating the sale but even throughout the entire life of the franchising agreement. There are many, many shortcomings in the present system, and I'm kind of surprised that we have taken so long to actually initiate the legislation to govern a segment which I believe is very important to Ontario.

A whole lot of information is required before we make any sensible remarks, and I think it's been stated in your own proposed legislation that there is a lot of research required to be done. I'm not sure how much work has been done yet. But to cap my information to you, I would say that it is a good start. It's urgently needed. It does very little in its present form, and even in the case of pre-sale disclosures I can think of some points that can enhance its application and utility. However, it does not really address more than 10% of the problems associated with the franchising industry, because I would say 90% of the industrial problems actually take place in the post-sale area rather than the pre-sale area.

Those are all my observations at this point in time, and I'll be very happy to discuss it with you should you like to do that.

The Vice-Chair: OK, thank you very much, Mr Kawatra. The questioning this time starts with the PC, then Liberal and NDP.

Questions

Mr O'Toole: Thank you very much, Mr Kawatra. I have just a couple of questions. I guess you had short notice, but if you have written comments you can still submit them to the committee. That would be accepted.

What franchise did you operate and for how long? Seven years, you said?

Mr Kawatra: I operated a franchise in the fast-food business, and I'm not sure if I would like to disclose the name at this point in time.

Mr O'Toole: OK, that's fine. You said it's a good start. I'm just wondering, do you believe that the disclosure portion, which is perhaps the strongest portion of it, as we have not got a template for what that disclosure would require, could deal with some of the escalating pass-through clauses or with respect to provisions to address additional costs or royalties? You're talking about a post-sale agreement. I'd love to have one. In fact, I won't have one until the year 2003, the next time I get to review my franchise for my riding. Nothing's for sure, you know. I was going to say, life is full of—

The Vice-Chair: You call it a franchise, do you?

Mr O'Toole: Well, I'm trying to make it into one.

In a more serious tone though, what I mean is nothing is forever, not even life, unfortunately. The thing is, if I knew I was going to make on a certain stock I'd retire now and just get it all. It's interesting. I really don't understand how that could ever be defended. Do you understand? This is what exists and then I suspect if there's some association that says, "This association will review all cost increases through royalties, whatever," that would be a way to, as a collective, address it. Do you understand what I'm saying?

Mr Kawatra: Sort of.

Mr O'Toole: If we attempt in this legislation to make sure that people live happily ever after, sort of like Goldilocks, that ain't happening.

Mr Kawatra: No.

Mr O'Toole: It wouldn't matter. We heard one person here today read off a litany of prescribed rights that people would have, while we just move to a two-box contract. Do you understand? So I suspect that's what I'm saying. We should be realistic here in disclosure, and if you have something to add to that from real-life experience that would address in some cases after-sale, pass-through costs, I'd be happy to make sure that it's fair in the ultimate intent of the legislation here.

Mr Kawatra: I may have some points, actually, on pre-sale disclosure that, to me, would help. It's not going to answer everything you want to answer; however, I think I could come up with some specific issues that you would like to consider as part of the pre-sale thing. That's what I can say at this point in time.

Mr Patten: Welcome. I have two questions you might want to respond to that relate somewhat to the gentleman who spoke before you, who is living under a gag order, he tells us. But if I recall the situation in those circumstances - and you may have a comment -some of the franchisees were in competition with franchises that were owned centrally by the company, and they'd have a sale and put the squeeze on and the others weren't a part of this particular promotion, for example, or they'd add other franchises nearby that would eat into your marketplace without any particular agreement around what your market really is. Do you have any comments on both those things?

Mr Kawatra: From what I remember, I think they are both plausible and I have seen that happen. There are other issues you might like to consider in the same bag, where you find that some of the advantages which rightfully should go to the franchisee as part of the system are actually siphoned out to the franchisor; for example, in relocation. It's not unusual. I've seen many franchisees relocated over a period of time, between five to 10 years. That opens up a whole lot of opportunities for franchisors to actually carve out the profitable area in terms of location and place or re-place the existing franchisee in a location which is not preferred.

On an associated topic, if I may, I would like to point out that the issue of transparency that I mentioned earlier could be associated here, and that is when the landlord requests a relocation. Some landlords are not too bad, in the sense that they consider the hardship it will cause to the franchisee and the potential sales changes that might result from it, and within limits they offer some compensation, monetary and otherwise, and I have seen franchisors reap those benefits directed to them and not pass them on to the franchisee. Those are some issues that you might like to consider. Others are associated with the suppliers, how often they change suppliers. One other thing - I don't know if it has been brought to your attention - is repossession of the store. The same store is repossessed by the franchisor. Time and again they kick the franchisees out and they sell the same store a few times.

Mrs Boyer: Thank you, Vijay, for your presentation. I know it was short notice, but at least you got a sense of being heard.

From the very beginning you said that Bill 33 was a very good start, that it was a bill that was urgently needed. But then I heard you saying: "Are we really ready for it? Is it strong enough? Is it ready to go?" Why would you say that? Do you find that in this form right now the bill is not ready to be voted on? That's exactly why we are having these hearings, so that we can take up the recommendations that different presenters have given us. We hope you will be able to give us the recommendations you've talked about. You've talked about transparency and you've also talked about fairness. In this present form, do you think it's ready to go on as a bill?

Mr Kawatra: I would like to see a few additions to that. One is some kind of organization of structure or infrastructure. It might be the Canadian Franchise Association or some body that is an independent body of the franchisors and franchisees that has at least an observation role if not a judicial or mediation role. I have seen statistics on how many cases go to the courts from among the industry and franchisors. To my knowledge there are several that don't go to court, and they are settled not to their mutual advantage but usually to the unilateral advantage of the franchisor. There is no recourse available to franchisees for many reasons.

One, you likely may have noticed - I don't know if there has been any study done on the franchisees' profile - many of them are immigrants, like myself. They are not aware and not strong enough to exercise their legal rights. Some franchisors have actually gained, if you like, quasi-judiciary positions vis-à-vis their franchisees and they've terrorized them. I'm sorry to say that. I'm not exaggerating. I've seen situations where that continues to go on, and the franchisees, because they have invested their life savings, even though they're incurring losses and borrowing and begging money from other people just to hope that at some time they will recover, many times they don't. They keep the business going simply because of the fear of the franchisor and the fear of losing everything they ever owned.

What I am trying to tell you is that there is a definite need for another party to be present, at least. I'm not saying that we want to move from free market conditions into some highly regulated industry, though many industries in Canada are regulated and this is not. To me, it's a big surprise.

However, for the bill to go ahead to my liking, I would like to see some kind of body that has an independent point of view of reporting to whomever it wants to, and observes and takes confidential information and treats that so and is available for consultation. If you can incorporate something like that, that will go a long way, in my judgment.

Mrs Boyer: Thank you.

Mr Martin: I certainly hear loud and clear what you're saying, that we need something after the contract is signed, by way of dispute resolution mechanism that we can go to, that's third-party, that won't cost an arm and a leg for lawyers' fees and all that kind of thing, that will resolve a whole lot of the issues that come up on a regular basis.

But that's not what I want to ask you about. I want to go back to some comments by my colleague Mr O'Toole on this issue of nothing lasts forever. We have a fundamental philosophic difference of opinion here. I believe there are some things, if we do them right and we're careful and we're respectful of each other, that could last forever - like my marriage; that's a contract that I signed. I hope he's not saying that won't last forever.

Mr Kawatra: I'm really glad to know that.

Mr Patten: Don't go there.

Mr Martin: I would think that when we make business relationships, investments, we think they will last forever; that when I build a home, it'll be there for me and I'll be able to pass it along to my children or sell it and have a retirement, that when I go into business and make an investment in a community, all things being equal, if conditions are relatively normal, it'll be a business that I will be able to work at and make a living at and perhaps pass on to my children. But what we're finding more and more in Ontario—I was brought into this in my own community by about three families I knew personally who lost all that. They had worked very hard over a long period of time to build up their skill and their understanding and knowledge, they made the investment, they were working hard and overnight the company that owned them changed and the sand shifted.

What I've heard you and so many others say over the last two or three days is, "Put something in place that at least gives us a fighting chance, that keeps going what we've put our time and energy into so that we get something out of it," so that it isn't always the big guy walking away with the bone.

Somebody mentioned the other day that it was a dog-eat-dog world out there. But in this instance, where franchising is concerned, it's more like a dog-eat-goldfish reality, and that's what I'm beginning to hear and see, so I'll be supporting very much your call for a dispute resolution mechanism.

Perhaps you want to talk a little bit about this philosophic "nothing lasts forever" comment.

Mr Kawatra: First of all, I am delighted to hear what you just said: one, the perceived intention of something lasting. I think philosophically we should not enter into everything in our lives just from the hope that it's going to last only today, because that tells a lot about us as a society and the value system we place in our transactions.

Having said that, if you ask the franchisee as a party to this negotiation, to my knowledge, they always come forward with this intention and hope. Believe me, most of them have put every penny they've earned over the last 30 years into this thing, so they're not going to accept anything short of having this last for another 30 years, if not more. So your point is well taken and I encourage that.

In business, of course, the risks are there in the globalization of markets, and now centralization and standardization, and many other things are acting upon us, which keeps us at the edge. They want new technology, new skill sets and so on, and many of the people in the franchisee group, unfortunately, are not necessarily on the technology edge. The pressure may be—it's not coming out as clearly but I think that's happening underneath, the standardization. In other words, the franchisor would like to have control over the supply system; they would like to have control over advertising; they would like to have control over every segment of the thing. The franchisee doesn't have any control at all.

From many of these points of view, I think to some extent we should try to encourage some kind of legislative or institutional framework whereby the length of the transaction can last longer than just two or three years, certainly five to 10 years, which is the minimum for most franchisees to recover the return on their investment to compensate for all the money and the sweat equity they have put in place. That's one thing.

The other thing, if you want, I can discuss with you at some point in time. Suffice it to say that I'm really glad you're here and you're listening to people like myself. I hope, before you actually announce the legislation, that you give serious thought to some of the things you have heard here today and in other proceedings on the topic.

The Vice-Chair: Thank you very much, Mr Kawatra. We're over time now. I had another questioner written down here but I'll get him later. We appreciate your time.

This document is a verbatim copy of this witness’ oral testimony. To review the original transcript: http://www.ontla.on.ca/web/committee-proceedings/committee_transcripts_details.do?locale=en&Date=2000-03-08&ParlCommID=1&BillID=&Business=Bill+33%2C+Franchise+Disclosure+Act%2C+1999&DocumentID=19724#P491_179970

Copyright (c) 2000
Office of the Legislative Assembly of Ontario
Toronto, Ontario, Canada


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Risks: Fear, Ontario Public Hearings, Canada, 2000, Necessary illusions, Gag orders (confidentiality agreement), Churning (serial reselling), Affordable, early and non-legal dispute resolution mechanism, Tony Martin, Fear of poverty, Disclosure laws: 10 per cent solution, Success rate, 95 per cent, Broken relationships, ruined lives and alienated children, Bad faith and unfair dealings, Corporate stores competing with franchisees, Corporate stores get better deal than franchisees, Termination of franchisee, mass, Can't afford to fight, Dispute resolution means franchisee goes broke, Sunk costs, Life savings gone, Terrorizing franchisees, 2 per cent of valid claims make it to Trial, Immigrants as prey, Canada, 20000308 Vijay Kawatra

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