Bob Krupp Public Hearing Testimony

In my days, the franchise was not that restrictive. But they're tightening the screws, and you're going to hear more stories about it. They are really tightening down. To buy all your product all the time from one supplier is not commercially reasonable in a lot of instances, because they're not that good at what they say they do.

LegislativeAssemblyofOntarioCostofArms.jpg

Legislative Assembly of Ontario
March 9, 2000

Public Hearing Testimony
London, Ontario, Canada
Mr. Bob Krupp, Franchise Sector Working Team

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

FRANCHISE SECTOR WORKING TEAM

The Vice-Chair (Mr Garfield Dunlop): Our next presenter is Mr Bob Krupp of Krupp's Food Market. Welcome. We are on a 20-minute schedule, so please free to start right now.

Mr Bob Krupp: Thank you and good morning. First, my apologies. I have "Madam Chair" on this. Is the Chair still ill?

I'm just going to read from this, but I would like to make one comment on the heels of John's comments with regard to the bill that was put forward. We were all part of that on the Franchise Sector Working Team. However, the basics of fair dealing are still at issue as far as I'm concerned, in that, yes, fair dealing is mentioned but it's not defined. You will see that that runs through here and may sound like a conflict between John and me. I think the fact that fair dealing is there is important. But having said that, I believe there is more to be done.

My name is Bob Krupp. I am from Kincardine, Ontario. I am addressing you today from my perspective as a past franchisee and with very limited experience as a franchisor. I am also currently an acting member of the Franchise Sector Working Team.

During my working career I have experienced some of the strengths and weaknesses of the franchise sector from both perspectives. From 1968 to 1979 I was employed by an independent grocery wholesaler, Knechtel Wholesale Grocers, from Kitchener. During my tenure with Knechtel, after three years in the wholesale division, I managed and supervised corporate supermarkets in the Kitchener area for Knechtel.

Subsequently I purchased a small grocery store business in Kincardine, Ontario, from Knechtel Wholesale and operated it as a Knechtel associate store, a franchisee, until 1995.

Although there was no upfront franchise fee associated with this purchase, it was mutually agreed that Knechtel would be the primary supplier of goods and that the associate store would comply with certain standards of customer service, advertising and operations. It was more or less a buying agreement.

The implied and practised objective was for Knechtel to assist the franchisee to achieve operational success and profitability, thereby increasing revenues and profitability for the distributor-franchisor.

During the 1979-95 time frame, with the assistance of the franchisor, my company assembled appropriate property and developed, constructed and operated a larger, full-service supermarket in Kincardine.

Concurrently, my company redeveloped the former grocery store location into a mini-mall in order to offset obligations of the lease that had several years remaining. One of these retail outlets was a convenience store, which I developed in a similar fashion to a franchise.

Ultimately, because my focus was on the supermarket, I adjusted the business format of the convenience store to that of a partnership, with the ultimate objective of selling the business outright to the franchisee. I felt that unless my company was prepared to contribute continuing expertise and assistance to the franchisee, the drivers would not be substantial enough to promote a high level of commitment by the franchisee.

I would like to state up front that I believe franchising to be an excellent vehicle for supplying high-quality goods and services to consumers in an efficient manner. If the goals and objectives of both the franchisor and the franchisee are met, the chances of success are very high.

Often an individual has many qualifications required to achieve success in retailing; however, they sometimes perhaps lack the capital resources or a commercially viable business idea. With the assistance of a franchisor having developed a successful business format, the franchisee, through sweat equity, may be able to secure financial stability as well as build equity in the franchise business.

There are several examples of very successful franchise systems that have provided financial success for many individuals. However, given the large number of failures in this growing sector, I think it is fair to say that there are good franchise opportunities as well as those which have been developed simply to attract the hard-earned after-tax dollars of unsuspecting individuals.

In a perfect world, the need for legislation would not be an issue. Experience demonstrates that it is because of the self-serving franchise systems that inequities exist, and therefore some mechanism must be sought to level the playing field to ensure fair dealing.

I will attempt to be brief in my comments because the committee has previously had the benefit of several expert witnesses regarding the goals and objectives of the Franchise Sector Working Team.

The Franchise Sector Working Team, as you are aware, consists of representatives from the Canadian Franchise Association, franchisees from a variety of Ontario franchise operations and Ministry of Consumer and Commercial Relations staff. Additionally, experts representing the views of franchisors and franchisees are present to provide professional perspectives on franchising.

The Franchise Sector Working Team was formed in late 1994 to work together in order to establish a framework by which the franchise sector could address mutual interests as well as to determine the need for legislation. From the outset, it was evident that franchisor representatives wished to have less regulation and disclosure, while franchisee representatives preferred more disclosure together with a method for dispute resolution. Several important areas of concern were discussed at length, at times generating heated dialogue as to what should be included in legislation and regulation. Some pertinent issues discussed were: self-regulation; good-faith standards, or fair dealing; power imbalance; alternate dispute resolution; code of ethics or conduct; disclosure and misrepresentation; territory or market exclusivity; and arbitrary termination of the franchise.

Prior to speaking to specific issues of concern, I would like to state for the record that I am in agreement with several minor amendments being advanced to the committee by MCCR staff, which are: to permit electronic disclosure; to expand the right of action to agents or brokers; that upon granting an additional franchise to an existing franchisee, disclosure would be required only if there had been a material change; that franchisees pre-existing before legislation would be subject to a disclosure document upon renewal or immediately in the case of a material change, as suggested above; and within the definition of "payment" include the terms "direct" or "indirect" payment. That alludes to what John was saying with regard to franchise fees that are built into the operational and purchasing of goods and products.

In the interests of brevity, I will confine the remainder of my comments to two specific areas of the proposed legislation put forward by the ministry that fall short of my expectations.

Fair dealing: Although the fundamentals of the proposed legislation were reached by consensus, the "fair dealing" clause, as proposed, will not achieve the result sought by franchisee representatives. Franchisee representatives proposed that a code of ethics or conduct be developed to define the terms under which a franchise would operate. However, agreement could not be reached with regard to enforceability. It was agreed that a "fair dealing" clause would be necessary to ensure that the imbalance of power inevitably present in this business format was addressed with regard to dispute resolution. In the absence of a mechanism for statutory remedy, a code of ethics or good faith standard is virtually meaningless.

Alternate dispute resolution: Again, in the absence of a suitable dispute resolution mechanism, fair dealing must have a definition and state the remedy available to the franchisee. Stating the terms of fair dealing, if in fact franchisors intend to participate in an active, expanding market in the long term, would not disadvantage any legitimate franchisor. Considerable discussion ensued with regard to the appointment of an ombudsman to assess the validity of a dispute between a franchisee and a franchisor. It was felt that a third party review by someone familiar with franchise sector issues could resolve disputes, avoiding costly litigation. The imbalance of power between franchisees and franchisors renders litigation irrelevant due to cost.

In conclusion, there are, of course, many additional areas of concern that in my view should be strengthened in the proposed legislation. As an example, the issue of balance of power with regard to additional franchisees in a particular market is not addressed. However, I feel it is important to move forward with at least a basic framework that provides some elements of fairness. I believe that if fair dealing and commercial reasonableness were defined, with substantial consequences in the case of a breach, this legislation would be a good first step. However, if this is not addressed as a minimum, in my opinion the Franchise Sector Working Team has achieved very little.

Thank you for your time and attention. If you have any questions, I'm here.

The Vice-Chair: Thank you, Mr Krupp. I'd like to start out with the Liberal caucus.

Mrs Claudette Boyer (Ottawa-Vanier): Thank you for your presentation. It was quite useful; good comments, good recommendations. Along the way, you said you were in agreement with several minor amendments that were advanced. I would like you to elaborate on where you say "within the definition of payment, include the terms 'direct' or 'indirect' payment."

Mr Krupp: I think where the ministry is coming from on that one is that with my franchise, as an example, there was no fee per se. The fee was involved in the purchase of goods, in advertising and other charges that were attributed to the franchisee but not called a franchise fee per se. Lots of franchise fees today, certainly in fast food and others, have a fee that you pay up front and then maybe an ongoing one year after year. I think the ministry felt that if it was missed, then that would be construed to mean that if you didn't pay an upfront fee, there was in fact no franchise fee. So "indirect" would, I think, clarify that there are franchise fees included in the cost of goods or other charges.

Mr Tony Martin: I want to thank you for coming forward and sharing with us your thoughts, and I also want to thank you for your honest assessment of the bill as it now exists. We're trying really hard here to get a handle on the truth in this issue and at times it's difficult because there are competing interests in this, as you know. You expressed and shared with us very clearly your experience of the working team, where there were lots of areas of discussion and disagreement.

You list in your presentation the points that were discussed. There are about eight, and there were actually only two out of that eight that you really got to in the bill. One was the good faith standards and fair dealing and the other was the disclosure and misrepresentation. You then go on in your presentation to actually say that even those really don't work.

Well, the disclosure will work for new people coming in, but for those already in, there's nothing in there for them. And the stories we've heard over the last three days were primarily about them, some very well-meaning and hard-working individuals, entrepreneurs and small businesses, in my own community and across the province, who are under duress at the moment because there is no place they can go. In fact, the amendments that have been proposed by the working team don't deal with this either. They're technical in nature and they capture the dealers and the brokers, but they don't deal with this.

I guess my question for you is this. You're saying in your conclusion that in fact the team has really achieved very little. I'm not going to put words in your mouth, but I would go a little further to suggest that if we move forward with Bill 33 and do nothing to it, we are giving out a false sense of security to an industrial sector that may think: "I'm protected. There's legislation, there's regulation." And some of those people who are anxious to get into the business, who do the due diligence now and bring in lawyers and accountants to check it out, may be lulled into a sense of not having to worry about that so much any more if we adopt Bill 33.

You've suggested a further defining of "fair dealing" and I agree with you there. What in your view would be some of the specifics of that that we could do? I guess two questions: One, do you agree with me that that's a possibility, that we could lull people into a false sense of security?

Mr Krupp: Yes, I'd be glad to elaborate on that.

What has happened in our discussions-and the reason I didn't want to bring up all these issues that we've talked about is that they were discussed ad nauseam and in a lot of cases just couldn't go any further-it would seem that the bill needed to get a start. We needed to start somewhere. There are too many dichotomies of interest. In the efforts of getting something put forward, we've agreed to disagree on some of these issues, so the bill went forward.

What concerns me is exactly what you said, that it looks like there's something, but "fair dealing" being stated in a clause just as two words without definition and without clarity on what it is and what it means, I can't take that anywhere. If I'm treated unfairly, in my view, unless there's some description of what that means, it's pretty hard to take that to litigation or even to a third party mediator if it's not defined. It's in the eye of the beholder. So I think there needs to be some description around that term if there's going to be commercial reasonableness practised in a franchise situation.

With regard to disclosure, I didn't address that issue, because I thought that we came a long way with disclosure. There are several areas now that will be required. I think Mr O'Toole made a good point though, that disclosure without somebody having advice is a little bit redundant because, again, as John said, the heart rather than the head sometimes makes these decisions.

I wish my cousin had had more disclosure at his disposal. When I was advising him not to go into the franchise he went into-of course, he'd already decided he was going to go in-when I asked him what I thought were important questions that he should know with regard to pro forma, where the numbers came from and how they were going to back that up, if at all, he said, "Oh, well, he said it would be this and it would be that." I'd ask him another question and he said, "Oh, he said…," and then tomorrow, "What does he say?" It wasn't documented, so it wasn't something I could use as ammunition.

I think disclosure is one piece of it. Then that allows a person to go for financial and/or legal advice. The difficulty with that is that the individual who wants to get into business is usually already hooked, already sold on the notion, so it's probably way more important that there is some way to make sure that there's fairness throughout the contract. Not after the signing; the signing is one thing. You can ask all the questions you want and you can get all the disclosure. But once you're in business, it's: "How are you going to react? How is the franchise going to do?" And there are lots of really good ones out there, so I don't mean to beat up the system.

The Vice-Chair: Mr O'Toole has a question.

Mr O'Toole: I appreciate your input this morning. Just a couple of things we may want to get to: You mentioned in a subtle way that you had a brother or a relation who didn't take your advice and went with their heart instead of their mind. Do you think-very briefly, because I have a couple of real questions-that that is substantively the way a lot of the decisions are made by new franchisees?

Mr Krupp: Yes.

Mr O'Toole: I think it is important to really rigidly require certain due diligence provisions-do you know what I mean?-a cooling-off period, whatever. Otherwise, they're just going to say, "Where's the store, where's the key?" I sense it because of some personal experience as well.

I want to respond to a couple of things. You were in the grocery business. We heard repeatedly that the supply issue was a substantive problem in the grocery business, in the disclosure saying, "Thou shalt buy ‘everything' from me." It becomes a really serious problem even if it's in disclosure.

Mr Krupp: That's right.

Mr O'Toole: I'm not sure if you have any suggestions there, but it does come back to fair dealing as well. I'm kind of rolling all of this in. It's our understanding that the fair dealing provision is being referenced to the Alberta model, which really hasn't played itself out in the courts just yet. I think there's some sympathy with the "commercial reasonableness" definition, in my mind anyway. I can't speak on anything more, after listening for a number of days.

You've got the fair dealing and the commercial reasonableness, you've got disclosure and association. Now when you look at where you were-and no perfect world-do you think we've moved tremendously forward from the dilemma we found ourselves in the early 1990s, when the then government had the ability to make decisions and found a way of avoiding it by finding some kind of working group to deal with the Loeb situation in Ottawa, which is the same business, and did nothing? Do you understand what I'm saying?

Mr Krupp: Yes.

Mr O'Toole: It's difficult to find that balance and move forward. Really, the question is, do you feel there's enough strength, with a few minor amendments, to really make this a win-win for both sectors?

Mr Krupp: If "fair dealing" and "commercial reasonableness" are defined and there are significant consequences if they're found to contravene those rules, then it gives an opportunity, once you're in the deal-with respect to disclosure again, that's fine, and I counselled this fellow quite strongly. I'm pretty aware of business, and I gave him as good a shot as I could. I've taken my spouse often to a lawyer because I'm doing a business deal, and she gets outside advice. He tells her not to sign it, and then of course we sign it. That can sometimes be a false sense of assistance too.

With regard to the grocery industry, the compression is a problem. In my days, the franchise was not that restrictive. But they're tightening the screws, and you're going to hear more stories about it. They are really tightening down. To buy all your product all the time from one supplier is not commercially reasonable in a lot of instances, because they're not that good at what they say they do. Having said that, there are other people with real examples of that.

The Vice-Chair: Thank you so much for your time, Mr Krupp. It has been a pleasure.

Mr Tony Martin: On a point of order, Chair: There is some material you might have some interest in reading that talks a bit about this business of what agreements say and what they don't say and what in fact they really mean. The article I'm referring to is called Avoiding the Traps: Boilerplate That Fights the Ten Most Dangerous Contract Terms. I'll give you a copy of the summary our researcher has done so that you can take a look at it and in further discussions you have with the working team perhaps you can bring it up.

Mr Krupp: The notion is to use that as a guideline for improving?

Mr Tony Martin: Yes.

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=2000-03-09&ParlCommID=1&BillID=&Business=Bill+33%2C+Franchise+Disclosure+Act%2C+1999&DocumentID=19723#P84_23847

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


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