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Saturday 26th November, 2022

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New Zealand law: what international franchisors need to know

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New Zealand law: what international franchisors need to know

New Zealand is renowned globally for its ease of doing business, lack of red tape and sensible regulatory environment, but there are still a few legalities you need to be aware of, says Katrina Hammon

While often considered to be similar to Australia, or even confused with its larger neighbor on occasion, there are in fact important differences in the regulatory environment and laws in New Zealand that impact on recruitment of franchisees, entry into franchise agreements and enforcement of key provisions.

Given the smaller market size in NZ, it is common for global franchisors to either direct franchise or grant master franchise rights to the entire market. Regional or area development agreements are less common in the New Zealand market than elsewhere.

Existing laws and self-regulation

In New Zealand, there is no franchise-specific law or mandatory disclosure regime. There is, however, the option to join an industry association – the Franchise Association of New Zealand (FANZ). FANZ members are required to adhere to FANZ’s code of practice and code of ethics (codes). These reflect best practice in franchising and incorporate matters that you would expect to see in markets with franchise-specific laws, including a short form disclosure document and a requirement that the franchise agreement contains clauses for a cooling-off period, mediation and alternative dispute resolution, and compliance with employment and labor laws.

The Fair Trading Act 1986, the Commerce Act 1986, and the Contract and Commercial Law Act 2017 are the key pieces of legislation that deal with restrictive trade practices, anti-competitive behavior, and misrepresentations. In 2017, the Commerce Act 1986 was amended to deal with cartel conduct prohibitions and exceptions for collaborative activity, vertical supply, joint buying, and promotion agreements.

New laws and upcoming changes

On 16 August 2022, amendments to the Fair Trading Act 1986 come into force, extending the existing unfair contracts regime (which currently only applies to standard form consumer contracts) to also apply to standard form business-to-business contracts with an annual value of less than $250,000 (including GST).

Whether a contract is the standard form or not depends on (among other things) relative bargaining power, who the contract was drafted by, whether the contract was offered on a take-it-or-leave-it basis, and whether there was an opportunity to negotiate the terms. In most cases, it’s likely a franchise agreement will fall within this definition.

According to the amendment, an unfair contract term is one that:

  • Would cause a significant imbalance in the parties’ rights and obligations arising under the contract
  • Is not reasonably necessary in order to protect the legitimate interests of the party that would be advantaged by the term
  • Would cause detriment (whether financial or otherwise) to a party if it were applied, enforced, or relied on.

There are a number of concepts and clauses in franchise documents that may be at risk of being considered unfair. Often, these are the very clauses that a franchisor would expect to rely on when enforcing or terminating a franchise agreement. The key lies in striking a balance between protecting the franchisor’s brand and reputation, and not being so onerous as to be deemed unfair.

In addition, the amendments will also introduce a new law against unconscionable conduct that aligns with Australian laws. Unconscionable conduct is not specifically defined as it intends to capture a broad range of activity. There is a non-exhaustive list of factors for a court to consider in determining whether conduct is conscionable, such as relative bargaining power, good faith, unfair pressure and adequate disclosure. The test is highly contextual with a particular focus on the operational relationship between the parties.

The new unfair contracts and unconscionable conduct laws will apply to all actions of a franchisor, not just the terms of a franchise agreement. For example, it will affect the way franchisors approach breach notices, terminations, and decisions on whether or not to renew a franchise agreement.

Modern slavery regulation is also on the horizon. Since April 2022, the New Zealand government has been consulting on proposals regarding business obligations toward modern slavery (submissions closed on 7 June 2022). This may see New Zealand adopt some of the strictest laws in the world regarding an entity’s obligation to report on and prevent modern slavery along the supply chain. The proposed law is expected to apply to all New Zealand entities, as well as overseas holding companies and companies that exercise considerable contractual control over any New Zealand entity. Unfortunately, this proposed law does not align with the Australian regime, which would have been beneficial to AUNZ and global businesses.

Market entry, scaling and brand protection

Market entry and protection of valuable brand and reputation is relatively straightforward. From registration of trademarks and domain names, to incorporating a local limited liability company and understanding local taxation requirements, launching and doing business in New Zealand should be easier than in most markets.

Trademark applications should ideally be filed prior to the recruitment of local franchisees. However, there’s no requirement to have marks registered in order to collect royalties and other payments from franchisees.

Income tax is payable on income earned in New Zealand with the current company rate at 28 per cent. The New Zealand goods and services tax (GST) is payable at the rate of 15 per cent. GST is added to all goods and services and there are no class-based exceptions.

Unlike other markets, there are no restrictions on the repatriation of funds, transfers and remittance of currency from New Zealand.

Non-resident withholding tax must be deducted on payments of royalties, dividends or interest before remittance to an overseas entity. The tax deduction must be paid to the New Zealand inland revenue department, but a tax credit would be available to the overseas recipient, with the amount of such credit depending on the relevant double taxation treaty (if any) between New Zealand and the country in which the recipient is based.

Only in very limited circumstances will overseas investment restrictions apply to a franchise system. It’s more likely where bricks-and-mortar property is being acquired, or a franchisor is operating corporate-owned franchise operations in New Zealand.

Franchisee recruitment and adapting contracts

Franchise agreements and related documents such as application forms, confidentiality agreements, deeds of restraint, deeds of guarantee, lease clauses and franchisee recruitment material must be adapted for New Zealand laws. Important provisions such as restraints, non-compete, dispute resolution, payments/tax, and security for payment require a nuanced approach, but can easily be adapted to ensure compliance and ease of enforcement, the point being that global templates will need to be updated for use in the New Zealand market but will not need to be rewritten or significantly amended.

‘New Zealand-izing’ a franchisor’s existing suite of templates is generally the most cost and time-effective approach to adapting legal and recruitment documents for the New Zealand market. Where a franchisor already operates in a similar market, such as Australia, Canada, or the United Kingdom, it is often efficient to start with the templates used in those markets.

Snapshot of New Zealand laws:

  • There are important differences between New Zealand laws and laws in other markets such as Australia, the U.S.A. and Canada
  • No franchise-specific laws or mandatory disclosure regime
  • Franchise agreements governed by general commercial and contract laws with cartel prohibitions and limited exceptions
  • Unfair contract terms regime will apply to B2B from August 2022 – will capture most franchise agreements
  • Industry association membership with the Franchise Association of New Zealand is voluntary and requires members to adhere to codes to drive best practice
  • Modern slavery law now on the horizon – will not align with Australian and global regimes
  • Privacy and data protection laws – do not align with GDPR or comparable Australian laws
  • Overseas investment laws apply in limited circumstances.

The author

Katrina Hammon is a partner and consumer markets team leader at Wynn Williams, New Zealand

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