The legal logistics of franchising in New Zealand | Global Franchise
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Wednesday 10th August, 2022

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The legal logistics of franchising in New Zealand

Insight

The legal logistics of franchising in New Zealand

Auckland lawyer Stewart Germann provides a snapshot of franchising in unregulated New Zealand, including vital information about franchise agreements

New Zealand is one of the most deregulated countries in the world when it comes to small to medium-sized businesses. There’s no specific legislation controlling the operation of franchising in New Zealand like there is in just about every other country in the world, excluding Singapore and the U.K.

However, although there are no specific franchising laws in New Zealand, there are existing laws to protect franchisees, including the Fair Trading Act 1986, the Commerce Act 1986 and the Contract and Commercial Law Act 2017. These focus in particular on misrepresentations and restrictive trade practices, including anticompetitive behavior.

Once a franchisee has chosen a particular brand and franchise system and wishes to progress further with enquiries, the first question they need to ask is whether the franchisor belongs to the Franchise Association of New Zealand (FANZ). Many franchisors belong to the FANZ and its Code of Practice has four main aims, as follows:

  • To encourage best practices throughout franchising
  • To provide reassurance to those entering franchising that any member displaying the logo of the FANZ is serious and has undertaken to practice 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.

The code applies to all members, including franchisors, franchisees and affiliates such as accountants, lawyers and consultants. All prospective new members of the FANZ must agree to be bound by the code before they can be considered for membership.

What does the code cover?

  • Compliance – all members must certify that they’ll comply with the code and members must renew their certificate of compliance on an annual basis
  • Disclosure – a disclosure document must be provided to all prospective franchisees at least 14 days prior to signing a franchise agreement. This must be updated at least annually and it must provide certain information, including a company profile; details of the officers of the company; an outline of the franchise; full disclosure of any payment or commission made by a franchisor to any adviser or consultant in connection with a sale; a listing of all components making up the franchise purchase; references, and projections of turnover and possible profitability of the business
  • Certification – the code requires franchisors to provide franchisees with a copy of the code and the franchisee must then certify that he or she has sought legal advice before signing the franchise agreement
  • Cooling-off period – all franchise agreements must contain a minimum seven-day period from the date of the agreement, during which franchisees may change their mind and terminate the purchase. This is very important. However, the cooling-off period doesn’t apply to renewals of terms, or re-sales by franchisees
  • Dispute resolution – the code sets out a dispute resolution procedure that can be used by both franchisor and franchisee to seek a more amicable and costeffective solution. It requires all members to try to settle disputes by mutual negotiation in the first instance. However, this process does not affect the legal rights of both parties to resort to litigation if needed
  • Advisers – all advisers must provide clients with written details of their relevant qualifications and experience, and they must respect the confidentiality of all information received
  • Code of Ethics – all members must subscribe to the Code of Ethics, which sets out the spirit in which the code of practice will be interpreted.

Competition law

The Commerce (Cartels and Other Matters) Amendment Act 2017 regulates cartels which will have an impact on franchise networks. There won’t be a cartel arrangement in place where parties are not in competition with each other.

In most franchise systems the franchisor will not be in competition with its own franchisees, but that’s always the case. For example, a franchisor that owns its own outlet might be found to be in competition with its franchisees. Similarly, a franchisor that sells online direct to the end consumer, yet at the same time has franchisees who also sell to those consumers, may be considered to be in competition with its franchisees.

Where a franchisor is in competition with a franchisee, or franchisees are found to be in competition with each other, the franchisor needs to be cognizant that there may be provisions in its franchise agreements that amount to cartel provisions.

The Commerce Act 1986 provides a number of statutory exceptions that would not constitute a cartel arrangement and may be procompetitive. These exceptions relate to collaborative activities (for example, joint ventures or franchise arrangements), joint buying, vertical supply contracts and specified liner shipping arrangements.

There are no legal defenses for mistakes of fact relating to the elements of joint buying and promotion and vertical supply contracts. Therefore, it would be possible in the future for a director of a franchisor company to be criminally liable under the Act for a cartel offense. For an individual who commits an offense, the penalty on conviction could be imprisonment for a term not exceeding seven years or a fine not exceeding $500,000, or both. For a company that commits an offense, the penalty could be up to $10m, so great care must be taken.

COVID-19 and force majeure

Whether the outbreak of COVID-19 constitutes a force majeure event will depend on the wording of the force majeure clause. In the absence of any reference to a disease or pandemic in the clause, general terms such as “act of God” or “government restrictions” may apply.

Determining whether the pandemic crisis has “prevented, hindered, or delayed performance” of the contract will also depend on the specific facts and terms of that contract. Often force majeure clauses will require that those performances are rendered legally or physically impossible.

Franchise agreements

All franchise agreements in New Zealand should contain a robust force majeure clause. The type of force majeure clause that I use in franchise agreements states:

“Neither party shall be liable to the other and neither party shall be deemed to be in default for any failure or delay to observe or perform any of the terms and conditions applicable to the party under this Agreement (other than the payment of money) caused or arising out of any act beyond the control of that party including (but not limited to) fire, flood, lightning, storm and tempest, earthquake, strikes, lockouts or other industrial disputes, acts of war, acts of terrorism, riots, civil commotion, explosion, malicious damage, government restriction, unavailability of equipment or product, disease and/or virus of epidemic or pandemic proportions or other causes whether the kind enumerated above or otherwise which are beyond the control of that party and where such failure or delay is caused by one of the events above then all times provided for in this Agreement shall be extended for a period commensurate with the period of the delay.”

The purpose of the above clause is to ensure that neither party will be liable to the other for any events outside their control. Common events are listed in the clause like fire, flood, lightning, storm and tempest and, of particular relevance to current events, the phrase “disease and/or virus of epidemic or pandemic proportions.”

While the effects of a global pandemic do not specifically feature in previous case law, it may still be possible to draw inferences from the existing body of cases about how the doctrine of frustration may apply to the effects of COVID-19.

Franchise 2021 survey

The Franchising New Zealand 2021 Survey results released in December 2021 showed that the turnover of the franchise sector in New Zealand exceeds $36bn per year. This figure does not include the revenue generated through franchised hotels, petrol stations or car dealerships. There are 590 franchise systems in New Zealand and over 30,000 individually-owned franchised businesses.

The survey also confirmed that 70 per cent of franchise brands originated in New Zealand, more than 20 per cent of franchisors have entered international markets, 90 per cent of franchise brands return profits back into the community, and almost two-thirds of franchisors identified environmental sustainability and ethical supply chain examples.

Unfair contract terms

The Fair Trading Amendment Act 2021 was passed to extend the existing prohibition on Unfair Contract Terms (UCT) to standard form small trade contracts worth under $250,000 and introduced a new statutory prohibition on unconscionable conduct which will apply from 16 August, 2022. If a standard form small trade contract was signed prior to this date, the UCT regime will not apply unless that contract was amended or varied after 16 August, 2022. A standard form contract is a small trade contract if:

  • Each party is engaged in trade
  • It’s not a consumer contract
  • It doesn’t comprise of a trading relationship that exceeds the annual value threshold of $250,000 per annum for goods, services or an interest in land when the relationship first arises.

The unconscionable conduct in trade provisions is much broader, as it applies to all conduct, not just contractual terms. The term unconscionable conduct is not defined, but the Act provides elements for the court to consider below:

  • The relative bargaining power of the parties
  • The extent to which the parties acted in good faith
  • Whether the affected person was reasonably able to protect their interests
  • Whether unfair pressure or tactics were used.

Penalties for both types of conduct include that the Commerce Commission can apply to a court for a declaration that a term in a contract is unfair. If it’s found to be unfair then that business must not include a term (or is amended with the court’s approval), or attempt to enforce or rely on the term. A business may also face fines not exceeding $200,000 in the case of an individual, and a fine not exceeding $600,000 in the case of a company.

Furthermore, a business may be injuncted from applying or enforcing that term and or orders directing a refund or payment of damages. The Commerce Commission could also bring civil proceedings – for example, seeking a declaration in relation to unfair contract terms. The remedies include damages, injunctions, and other orders.

These provisions will bring New Zealand more into line with similar provisions in Australia.

Attractive market

New Zealand is very attractive for franchising and many overseas systems have entered the market, including from Australia, U.S.A., Canada, and the United Kingdom. International franchising is still thriving worldwide despite the global pandemic, as it’s such an excellent way to expand a brand and system. The FANZ has been very successful in promoting self-regulation and high standards in franchising, and its Code of Practice is widely understood and accepted by many franchisors in New Zealand.

The author

Stewart Germann is a franchising lawyer at Aukland, New Zealand. Email stewart@germann.co.nz or go to germann.co.nz

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