Aspects of Franchising in Relation to New Zealand

New Zealand is an exciting and fast developing market in relation to franchising.  Considering that the population of New Zealand is about 5.12 million and there are over 590 systems, there is one system for every 8,690 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.

Legal Position

There are no franchising specific laws in New Zealand.  However, there are existing laws which protect franchisees and probably 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 behaviour.

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
2. Collaborative Activity Exemptions
3. Vertical Supply Contract Exemption
4. Joint Buying and Promotion Agreements Exemption

Because the cartels legislation impacts upon 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.

FANZ – Code of Practice and Code of Ethics

There is no mandatory disclosure régime in New Zealand but there is the Franchise Association of New Zealand (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:

1. To encourage best practice throughout franchising.
2. 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.
3. To provide the basis of self-regulation for franchising.
4. To demonstrate to everyone the positive will within franchising to regulate itself.

The Code applies to all members including franchisors, franchisees or affiliates such as accountants, lawyers and consultants and 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?

1. Compliance - all members must certify that they will comply with the Code and members must renew their certificate of compliance on an annual basis.
2. Disclosure - a disclosure document must be provided to all prospective franchisees at least 14 days prior to signing a franchise agreement.  This disclosure document must be updated at least annually and it must provide 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, listing of all components making up the franchise purchase, references and projections of turnover and possible profitability of the business.
3. Certification - the Code requires franchisors to give franchisees a copy of the Code and the franchisee must then certify that he or she has had legal advice before signing the franchise agreement.
4. Cooling Off Period - all franchise agreements must contain a minimum 7 day period from the date of the agreement during which a franchisee may change its mind and terminate the purchase.  This is very important and the cooling off period does not apply to renewals of term or resales by franchisees.
5. Dispute Resolution - the Code sets out a dispute resolution procedure which can be used by both franchisor and franchisee to seek a more amicable and cost-effective solution.  The Code requires all members to try to settle disputes by mutual negotiation in the first instance and this process does not affect the legal rights of both parties to resort to litigation.
6. Advisers - all advisers must provide clients with written details of their relevant qualifications and experience and they must respect 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.

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 favoured 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.

Recent Changes

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 (including GST) and introduced a new statutory prohibition on unconscionable conduct applicable from 16 August 2022.

The unconscionable conduct in trade provisions are 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; and
• Whether unfair pressure or tactics were used.

International Aspects

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.

Latest Survey

In 2021 a survey of franchising in New Zealand was conducted by Massey University (Auckland) and Griffith University (Queensland, Australia) and some highlights from that survey are as follows:

• There are 590 business format franchisors in New Zealand
• There is an estimated total of 32,300 units operating in business format franchises
• More than 156,820 are employed directly in business format franchises
• Sales turnover for business format franchises was estimated at $36.8 billion
• Sales turnover for the entire franchising sector was estimated at $58.5 billion
• 70% of franchise brands originated in New Zealand
• Online sales grew tremendously with now almost 80% of brands engaging in online sales
• More than 20% of franchisors have entered international markets
• 90% of franchise brands return profits back into the community
• Almost two-thirds of franchisors identified environmental sustainability and ethical supply chain examples, with the principal examples being enforced recycling of materials, waste minimisation programmes and hybrid car use
• Only 18.5% of franchisors were involved in a substantial dispute (with one or more franchisees) in the past 12 months
• COVID-19 brought considerable disruptions to trading, greater stress and mental health considerations, adjusted hours of operation, supply chain interruptions, significant sales reductions and many other issues

New Zealand is a sophisticated market and fairly deregulated in relation to business.  The FANZ has been very successful by promoting self-regulation and high standards in franchising, and its Code of Practice is widely understood and accepted by franchisors in New Zealand.  Overseas franchisors who wish to enter into New Zealand should find it relatively easy, but in all cases expert commercial and franchising law advice should be obtained.