Franchisors looking to enter New Zealand will find a sophisticated market with a wealth of potential. Here are the rules and laws to be aware of before heading to the Land of the Long White Cloud
New Zealand is an exciting and fast-developing market in relation to franchising. Considering that the population of New Zealand is about 4.6 million and there are over 630 systems, there is one system for every 7,400 people, which is very high in my opinion.
Why? The answer is because New Zealanders love brands and businesses which succeed and franchising offers people a chance to leave the security of employment and purchase a franchised business which should succeed provided the system is followed.
There are no franchising specific laws in New Zealand. However, there are existing laws which protect franchisees. The three main laws are the Fair Trading Act 1986, the Commerce Act 1986 and the Contract and Commercial Law Act 2017. Those acts focus in particular on misrepresentations and restrictive trade practices which include anti-competitive behavior.
The Commerce (Cartels and Other Matters) Amendment Act 2017 became law in New Zealand in August 2017. This new act amended the Commerce Act 1986 and key changes include the following:
1. Cartel conduct prohibitions
Broadly speaking, there are three new “cartel conduct” prohibitions that are unlawful unless an exemption applies:
• A prohibition on competitors fixing prices
• A prohibition on competitors jointly restricting output
• A prohibition on competitors colluding to allocate markets
These new prohibitions clarified the law in New Zealand and will have a far-reaching impact on business. However, some types of anti-competitive arrangements are exempt from the cartel prohibitions.
2. Collaborative activity exemptions
This exemption applies to cartel conduct by competitors in a “collaborative activity” where the cartel provision is reasonably necessary for the purpose of the collaborative activity. The collaborative activity exemption may also apply to a restraint of trade provision post-termination of a franchise agreement in certain circumstances.
Competitors can seek clearance for proposed collaborative activities that contain a cartel provision giving certainty that the proposed activities will not breach the Commerce Act.
The collaborative activities exemption is an important exemption for those involved in franchising in New Zealand. Some provisions of franchise agreements may be regarded as cartel provisions (such as territory allocation and restraint of trade) and so any franchisor entering New Zealand will want to obtain legal advice that this exemption applies to any cartel provisions in the proposed franchising activities.
3. Vertical supply contract exemption
This exemption recognizes that there may be circumstances where a supplier and a customer may be in competition with each other and as a result provisions in their supply agreement risk being cartel provisions. This exemption allows cartel provisions that are included in vertical supply contracts where certain requirements are met.
4. Joint buying and promotion agreements exemption
This exemption may apply when competing buyers arrange to purchase goods or services together on terms that individually the competitors could not negotiate on their own. This exemption applies only to price-fixing and not the other forms of cartel conduct.
The amendments to the Commerce Act affect New Zealand businesses including:
• Many suppliers and resellers – for example, distribution agreements with territorial allocation clauses
• Most franchisors and franchisees since most franchise agreements contain territorial allocation clauses and restraints of trade
Because the cartel’s legislation impacts key areas contained in franchise agreements, in my opinion, it is very important to explain the basis of a number of clauses which are commonly inserted in franchise agreements. Such clauses include approved products, approved services, restraint area, restraint period and location of a franchised operation.
The definition of franchising
The definition of “franchise” as contained in the rules of the FANZ (Franchise Association of New Zealand) is as follows:
• “Franchise” means the method of conducting business under which the right to engage in the offering, selling or distributing of goods or services within New Zealand includes or is subject to at least the following features:
• The grant by a franchisor to a franchisee of the right to the use of a mark, in such a manner that the business carried on by the franchisee is or is capable of being identified by the public as being substantially associated with a mark identifying, commonly connected with or controlled by the franchisor
• The requirement that the franchisee conducts the business or that part of the business subject to the franchise agreement, in accordance with the marketing, business or technical plan or system specified by the franchisor
• The provision by the franchisor of ongoing marketing, business or technical assistance during the term of the franchise agreement.
Consideration should also be given to the definition of a franchise agreement which “means a contract, agreement or arrangement, whether express or implied, whether written or oral, between two or more persons by which one party to the agreement (“the franchisor”) grants, authorizes or permits the other party to the agreement (“the franchisee”) the right to operate a franchise. Any contract, agreement or arrangement which purports to be a franchise agreement shall be deemed to be a franchise agreement for the purpose of this definition, notwithstanding that it may lack any or all of the requirements or attributes referred to in the definition of “franchise”.
Code of Practice and Code of Ethics
There is no mandatory disclosure régime in New Zealand but there is the FANZ, which was formed in 1996. The FANZ publishes the Code of Practice and the Code of Ethics and all members of it must comply with both codes. The Code of Practice has four main aims which are as follows:
• To encourage best practice throughout franchising
• To provide reassurance to those entering franchising that any member displaying the logo of the FANZ is serious and has undertaken to practise in a fair and reasonable manner
• To provide the basis of self- regulation for franchising
• To demonstrate to everyone the positive will within franchising to regulate itself
All members must subscribe to the Code of Ethics which sets out the spirit in which the Code of Practice will be interpreted. All franchisor members of the FANZ must have a franchise agreement which contains a dispute resolution clause and a cooling-off provision. In order to resolve disputes, mediation is the favored method and it has a high success rate in relation to franchising disputes. However, if mediation does not work then litigation would be the next step.
New Zealand encourages and welcomes franchise systems from overseas and in all cases master franchise agreements and unit franchise agreements will need changing for New Zealand conditions.
In particular, some clauses which will require attention are restraint of trade, dispute resolution, franchise payments where non-resident withholding tax must be deducted, governing law, and personal property securities aspects.
Taxation is payable on all income earned in New Zealand. The current rate for companies is 28 per cent. The goods and services (GST) tax rate is 15 per cent and it is added on to all goods and services with no exceptions. Although there are no restrictions on the transfer and remittance of currency from New Zealand to an overseas jurisdiction, the tax laws must be complied with.
In relation to the payment of royalties, dividends or interest, non- resident withholding tax (NRWT) must be deducted by the payee before funds are remitted to the overseas entity. The tax deduction must be paid by the payer to the New Zealand Inland Revenue Department (IRD) but a tax credit would be available to the overseas company.
The rate of tax varies on the country involved, and New Zealand has double taxation treaties with a large number of countries. For example, for Australia, Japan, Singapore and the United States, the rate of NRWT is five per cent in relation to royalties, and for Canada, China, Taiwan and the U.K., the rate is 10 per cent. In relation to Fiji, Indonesia, Malaysia and the Philippines, the rate is 15 per cent.
Royalties mean “payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematographic films, films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. The term ‘royalties’ also includes income or gain from alienation of any property or rights described in this paragraph to the extent that such income or gains are contingent on productivity, use or disposition of such property or rights.”
The clause essentially means that the overseas franchisor would receive royalty payments net of any overseas taxes.
NEW ZEALAND: FRANCHISE STATS
• In 2017 there were 631 business format franchise systems, compared with 446 in 2012
• It’s estimated that franchised businesses contribute around $27.6bn to the economy
• There are estimated 37,000 franchised units compared with 23,600 in 2012
• There are an estimated 124,200 employees of New Zealand franchised systems, up from 80,400 in 2012
• The median total start-up cost for a franchise was $308,500 for retail and $87,550 for non-retail
• The median initial franchise fee was $35,000
• 50 percent of franchise systems have been operating since before 2000 NEW ZEALAND: FRANCHISE STATS
* Information taken from a 2017 survey conducted by Massey University (Auckland) and Griffith University (Queensland, Australia)
Stewart Germann is a franchising lawyer based in Auckland, New Zealand.