Franchising in New Zealand - Legalwise Seminars

Stewart Germann, Partner at Stewart Germann Law Office provides a guide to franchising in New Zealand, following fast-paced developments in recent years. He explores FANZ’s Code of Practice and Code of Ethics, the cartels legislation, new business protocols and international aspects. 

Franchising is developing in New Zealand at a very fast rate. The last survey of franchising in 2017 listed highlights as follows:

• 631 business format franchisors in New Zealand in 2017, compared with 446 in 2012.
• It is estimated that franchised businesses contribute around $27.6 billion to the New Zealand economy.
• 24,200 people employed in New Zealand franchises.
• 72 per cent of franchises are NZ-founded.
• Median initial franchise fee $35,000 for retail and $28,750 for non-retail.
• Total start-up cost (median) is $308,500 for retail and $87,550 for non-retail.
• 50% franchising since before 2000.
• Median time before franchising is 4.5 years. 36% are franchised within first year.
• Most business format franchisors operate in retail trade, followed closely by service industries.

No Franchise Legislation

There is no franchise-specific legislation in New Zealand. The industry is self-regulating but a number of statutes like the Commerce Act 1986, Fair Trading Act 1986 and the Contract and Commercial Law Act 2017 are relevant in franchising.

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. Many franchisors and service providers belong to the FANZ. The Code of Practice prescribes a mandatory 7 day cooling off period and a dispute resolution procedure whereby mediation is very popular and successful.

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.

Cartels Legislation

The Commerce (Cartels and Other Matters) Amendment Act 2017 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:
   1. a prohibition on competitors fixing prices;
   2. a prohibition on competitors jointly restricting output; and
   3. 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 and are summarised below.

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 posttermination 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 recognises 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:

1. Many suppliers and resellers – for example distribution agreements with territorial allocation clauses; and
2. Most franchisors and franchisees since most franchise agreements contain territorial allocation clauses and restraints of trade.

The Commerce (Criminalisation of Cartels) Amendment Act 2019 which will come into force in April 2021 introduces new sections in relation to the criminalisation of cartels including offence relating to cartel prohibition, defence relating to exceptions to cartel prohibition, disclosure by defendant in cartel prosecution, and consequences of failure to disclose under section 82D (disclosure by defendant in cartel prosecution). These new provisions will have an impact on franchising where franchisors fail to adhere to them. In particular, new section 82B which introduces the concept of criminal offence in relation to cartels contains penalties whereby an individual who commits an offence could be liable on conviction to imprisonment for a term not exceeding 7 years or a fine not exceeding $500,000, or both; and a company which commits an offence could be liable on conviction to a fine up to $10 million or more according to the formula specified in section 82B(3). This criminalisation aspect follows Australia and the USA and it is both powerful and frightening, in my opinion.

Because the cartels legislation impacts upon key areas contained in franchise agreements 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.

New Business Protections

The Government has announced proposed changes to the Fair Trading Act 1986 which, if enacted, will bring New Zealand more into line with similar provisions in Australia.

The main changes to the Fair Trading Act include the following:

1. The introduction of a new prohibition against unconscionable conduct in connection with the supply of goods and services and
2. The extension of current protections against unfair contract terms in standard form consumer contracts to apply to standard form business contracts with a value below $250,000.

The prohibition against unconscionable conduct will seek to address the most serious types of commercial misconduct.

International Aspects

New Zealand encourages and welcomes franchise systems from overseas. Master franchise agreements and unit franchise agreements will need changing for New Zealand conditions. In particular, the clauses which usually 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.

Stewart Germann is a Barrister and Solicitor of the High Court of New Zealand and he attended the University of Auckland. He has the qualifications of B.Com, LLB, FCIS, CFInstD and Notary Public and he specialises in franchising, licensing, sale and purchase of businesses and commercial law. Stewart has over 35 years’ experience in franchising law and has acted for many franchisors in New Zealand and overseas. He also acts for franchisees advising them about a particular franchise and commenting on the form of franchise documents. From 1997 to 1999 Stewart was the Chairman of the Franchise Association of New Zealand. He has spoken at franchising conferences in New Zealand, Australia and USA and is very interested in international franchising. He has also written numerous articles on franchising for New Zealand and international publications. Stewart is a member of the International Franchise Association (IFA) based at Washington DC and of the International Bar Association (IBA). Stewart is a qualified mediator and is a member of AMINZ. He is also on the Panel of Mediators of the Franchise Association of New Zealand. Connect with Stewart via email: stewart@germann.co.nz or via LinkedIn