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The Regulation of Franchising in PEI -- Franchise Lawyer Canada

Written by: Peter Macrae Dillon

Article Overview: This article examines the regulation of franchising in Prince Edward Island, Canada, pursuant to the Franchises Act of PEI. peter macrae dillon franchise franchisor lawyer attorney Toronto Ontario Canada www.franchiselaw.ca

The Regulation of Franchising in PEI -- Franchise Lawyer Canada

PEI REGULATES FRANCHISES

PEI gave Royal Assent to its Franchises Act on June 7, 2005. It will not come into force until Regulations under the Act are brought into force. The Ministry responsible for the Regulations expects this to happen early in 2006.

For members of the CFA, the existence of provincial legislation does not change much: all members are required by virtue of their membership to comply with the CFA's mandatory disclosure policy, and provide their disclosure document to all prospects, regardless of whether the jurisdiction has a franchise disclosure law. Don't forget to include the CFA Code of Ethics in your disclosure document, and modify your Certificate of Disclosure.

The good news about PEI is that its Act and draft Regulation (available online at www.assembly.pe.ca/bills and http://www.gov.pe.ca/photos/original/oag_franchiseac.pdf respectively) is a significant improvement over the vague and overly-burdensome Ontario law. Examples of improvements in the PEI Act include the following:

• a "bona fide wholesale purchase" exemption, that clearly exempts a wide range of distributorships (similar to Alberta, and also present in the draft NB law);

• a "substantial compliance" provision, similar to Alberta's, that alleviates Ontario's harsh requirement for strict technical compliance;

• flexibility as to the means of delivery of the disclosure document. If the parties agree, the document may be delivered by email, CD, courier, or dogsled;

• use of a disclosure document prepared in accordance with the laws of another jurisdiction, and modified to contain information relevant to PEI. This would allow for use of an Ontario document, or a UFOC, with a PEI rider;

• the requirement that certain information be grouped together in the disclosure document is eliminated; and

• a much improved (if still flawed) provision relating to the use of financial projections.

PEI also maintains certain other "positives" from the Ontario Act, such as:

• the exemption from disclosure of financial statements for qualifying systems (same criteria as Ontario);

• use of review engagement financial statements; and

• acceptance of financial statements prepared in accordance with the audit or review standards that are at least equivalent to Canadian standards.

Unfortunately, some of the shortcomings of the Ontario law were carried over into PEI, including:

• the nefarious requirement to disclose "all material facts", which makes Canadian legislation perhaps the most onerous on the globe;

• personal liability for the individuals signing the document for misrepresentations or errors in the document, which again sets Canadian laws far apart from other jurisdictions and creates enormous risk for individuals who participate in franchising through limited liability corporations;

• lack of a clear right to utilize the financial statements of a parent corporation, consolidated with the subsidiary franchisor

• a requirement to disclose a breach of any law that "regulates business", which arguably includes any and every law;

• disclosure of all officers and directors of the franchisor, regardless of whether they have management responsibilities relating to the franchise; and

• lack of any time limit limiting the period for disclosure of past administrative and civil findings of liability.

Most importantly, while the many improvements in PEI are welcome, franchisors must be aware that the Act and Regulation contain some differences that should be addressed in their disclosure document. These include:

• Risk Warnings peculiar to PEI;

• disclosure of the franchisor's associates who will engage in business with the franchisee;

• any Statement of Material Change must be accompanied by a Certificate of the franchisor in the prescribed form;

• the exemption from disclosure of financial statements is not automatic: franchisors must make application to the Minister (as Ontario formerly required); and

• the Certificate of Disclosure is more comprehensive than the one required by Ontario.

As the checkerboard of Canadian franchise legislation fills up, it is imperative that franchisors pay close attention to ongoing compliance. The risks of non-compliance, which may include unlimited joint and several personal liability, require that you allocate adequate time and resources to this aspect of your business.

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