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New legislative changes for franchisors doing business in Canada: the PEI Act and the other recent changes to the Ontario and Alberta Regulations provide good reasons to review their Canadian disclose documents to ensure compliance not only with the act, but with all laws governing franchises in Canada.

Things are heating up in the north this summer as Canadian provincial legislators have turned their attention to franchising. Prince Edward Island recently passed a franchise disclosure law for the first time, Ontario amended its regulations governing franchises to alter the requirements regarding financial statements, Alberta extended its franchise regulations to be effective into 2015, and the Uniform Law Conference of Canada is about to present proposed regulations to uniform franchise legislation. Franchise systems that are currently franchising in Canada or are considering franchising in Canada, should pay careful attention to these recent legislative developments.

Prince Edward Island Enacts Franchise Law

On June 7, 2005, the Prince Edward Island Legislative Assembly passed a Franchises Act, becoming the third Canadian province, following in the footsteps of Alberta and Ontario, to enact substantive legislation expressly governing franchising, and specifically requiring the pre-sale disclosure of material information to prospective franchisees.

What does the act require?

Once effective, PEI's Act and corresponding regulations will impose specific pre-sale disclosure requirements, in addition to providing a statutory duty of good faith and fair dealing, and right of franchisee association. The act also authorizes a private right of action for damages and/or rescission, depending on the type of violation at issue.

You should pay particular attention to the statutory duty of good faith and fair dealing. Generally, the duty requires a franchisor to act in a commercially reasonable manner, and may influence a court's interpretation of franchise agreement provisions, exposing the agreement (and particularly areas of franchisor discretion within the agreement) to increased scrutiny. You may want to consider ways to contractually address the duty. For example, by including a contractual standard of review and limiting your use of terms such as discretion, you may be able to better predict a court's interpretation of your franchise agreement. Where the terms of a franchise agreement are clear as to the parties' duties, courts will generally be less likely to substitute its judgment and impose a heightened standard of performance.

You should also understand what it means to be an "associate," a concept similar to an "affiliate" under U.S. law, if you intend to conduct franchise activities in Canada. Under the Act, a franchisor associate is a person who controls or is controlled by a franchisor, and who is "directly involved in the grant of the franchise" or who "exercises significant operational control over the franchisee and to whom the franchisee has a continuing financial obligation." A franchisor associate may be liable to a franchisee under certain conditions. As Canadian "associate" provisions (which appear in all three provincial franchise laws) and U.S. "affiliate" provisions do vary somewhat, you should be aware of the distinctions. Understanding the concept of an "associate" is integral in providing full disclosure and limiting other-entity exposure.

For instance, if you are operating in the United States and Canada, and have created a separate Canadian entity to run the franchise operations in Canada, you will want to avoid having your U.S. company labeled as an "associate" and therefore face liability for the activities of the Canadian entity. You should therefore attempt to structure the companies' responsibilities so that the Canadian entity independently establishes all procedures and makes all decisions with respect to the review and authorization of any grant of franchise rights. Communications with prospective franchisees should always be on the Canadian entity's letterhead and salespeople should not be selling franchises for both entities.

How do you comply with the Act?

Franchisors already complying with Ontario or Alberta franchise disclosure laws will need to make very few changes to their disclosure documents and sales practices in order to comply with the act. In fact, PEI's regulations appear to provide that a franchisor in compliance with the laws of another Canadian jurisdiction may also be in compliance with PEI's new act. If you currently do not sell franchises in Ontario or Alberta, but intend to franchise (or continue franchising) in PEI, you will need to create a disclosure document in compliance with PEI's Act and subsequent regulations.

Importantly, however, unlike many U.S. state franchise laws, none of the Canadian provincial franchise laws currently require the pre-sale registration of franchise offerings. Therefore, once the disclosure document is complete or revised, you may immediately begin using it. This will come as particularly good news to emerging franchisors already overwhelmed by the lengthy application and approval process in many U.S. jurisdictions.

How will the act affect existing franchisees in PEI?

If you already have franchisees operating in PEI, the act will not currently affect your disclosure obligations as to these franchisees. Rather, the act regulates the pre-sale disclosures given to a franchisee by a franchisor. Therefore, you will not have to prepare disclosure documents until such a time when a current franchisee wants to renew its franchise agreement (assuming there are material changes) or when you want to sell a new franchise. Of course, in preparing a disclosure document, you should also consider whether any exemptions apply to the arrangement at hand.

Although the act will not affect your disclosure obligations to existing franchisees, it will affect your relationship with them. As discussed above, the act will impose a duty on both parties to deal in good faith. In addition, franchisors cannot prohibit franchisees from associating with each other or forming a franchisee organization.

When will you have to comply with the Act?

According to the Consumer, Corporate and Insurance Division of the PEI Attorney General's Office--the division charged with implementation of the act--it is anticipated the act will be officially proclaimed, and therefore take effect, within the next few months. Before implementation, the Division must (as was the case in Alberta and Ontario) enact regulations to the act, outlining specific disclosure and exemption rules. These final regulations will likely track, in a more abbreviated form, the regulations to the Wishart Act.

A copy of the new act may be obtained at the following Web address: www.assembly.pe.ca.

Amendments to Ontario's Franchise Disclosure Law May Reduce Burden on Franchisors

Effective July 1, 2005, Ontario's regulations were amended to provide that the financial statements included within disclosure documents be prepared in compliance with auditing standards that are "at least equivalent to those sent out in the Canadian Institute of Chartered Accountants Handbook." While previously the financial statements needed to be compliant with Canadian standards, now you will be able to include financial statements that are prepared in accordance with generally accepted accounting principles that are at least equivalent to Canadian standards. This revision lessens the burden, especially for U.S. franchisors, who presumably are now able to use the same financial statements already included in their U.S. disclosure documents. Of course, a franchisor should consult with its accounting firm to ensure its financial statements satisfy Canadian standards.

The newly-amended Ontario regulations also ease the process for claiming an exemption from including financial statements within a disclosure document. While previously the regulations mandated that a franchisor apply for this exemption, now a franchisor who meets the qualifications for the exemption need not apply in order to claim it. This change tracks Alberta's approach.

Alberta Extends Franchise Regulations

Not to be left out of all the action, Alberta just extended the expiration date on its regulations to the Alberta Franchises Act. Prior to this action, Alberta's financial statements exemption regulation was set to expire at the end of November, 2005, and its general franchises regulation was set to expire at the end of January, 2006. As a consequence of these regulatory extensions, both regulations will now remain in force through November, 2015. Although Alberta's legislature could take action to modify, repeal or expand the Franchises Act and/or regulations prior to that time, at least in the near future, such action appears very unlikely.

Proposed Regulations to the ULCC Uniform Franchise Act Due in August

In August, 2004, the Uniform Law Conference of Canada presented a uniform franchise act that was largely based upon the Arthur Wishart Act in Ontario. The purpose of the ULCC was to formulate a franchise act for use in the provinces and territories in Canada to encourage uniformity in regulating franchises. The regulations to the uniform franchise act are due out in August. If the uniform act and the regulations are approved by the ULCC, it will be presented to the provinces and territories for adoption.

In addition, it is interesting to note that a bill was recently introduced in the New Brunswick legislature that mirrors the ULCC uniform franchise act. Although it appears as of the date of the writing the bill will not pass, it is an indication of the increased attention to franchising in Canada and the likelihood that the ULCC's recommendations will be considered throughout the country.

Looking Forward

Whether you have yet to establish your first unit in Canada, or already have several hundred franchises on the ground, the introduction of the PEI Act and the other recent changes to the Ontario and Alberta Regulations provide both franchisors and franchise attorneys with a good opportunity to review their Canadian disclose documents to ensure compliance not only with the PEI Act, but with all laws governing franchises in Canada.

WHAT THE MEDIA IS SAYING

Virginian-Pilot (Norfolk, Va.)

Discipline. Maturity. Structure. Franchising

The International Franchise Association offers extra incentives for ex-military personnel looking to be the boss through the Veterans Transition Franchise Initiative, known as VetFran. The program offers honorably discharged veterans assistance with the process of buying a franchise, and a price discount at participating franchises that's better than the company's "best deal."

About 150 companies are part of the program, including Hampton Roads-headquartered franchises such as Liberty Tax Service in Virginia Beach and Geeks on Call in Norfolk. Nearly 300 franchises have been sold to veterans across the nation since VetFran was resurrected in 2002, and another 130 sales are pending, said Terry Hill, IFA vice president of communications.

Hill said veterans are a natural fit for franchising.

"They're very mission focused, and they're used to dealing with a chain of command, which is how a franchise operates," said Hill, who also serves as the staff liaison for the VetFran program. "There's a big demand among franchisors for people who already feel a comfort level with that kind of structure."

Jonathan Toronto is a principal in the franchise and product distribution practice group at the Minneapolis law firm of Gray Plant Mooty. He can be reached at 612-632-3362 or jonathan.toronto@gpmlaw.com.

Elizabeth Street is an associate in the franchise and product distribution practice group at the Minneapolis law firm of Gray Plant Mooty. She can be reached at 612-632-3284 or elizabeth.street@gpmlaw.com.
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Title Annotation:FW FOCUS: INTERNATIONAL LAW
Author:Toronto, Jonathan; Street, Elizabeth
Publication:Franchising World
Geographic Code:1CANA
Date:Aug 1, 2005
Words:1782
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