Executive Summary
"Franchising" can be viewed as a form of licensing distribution arrangement, but the term is often used loosely to refer to one or more types of these arrangements. Unless otherwise specified, this discussion document relates to business format franchising. Business format franchising is a mode of doing business based on a long-term contract. The relationship between a franchisor and franchisee in this situation is collaborative and interdependent, but it is also unequal. Because a franchisor has its name and reputation at stake, it is often able to exert considerable control over the operations of a franchisee's business.
In New Zealand, there is no specific law governing franchising. Franchise agreements are subject to a range of generic laws such as contract law, intellectual property law, consumer law and competition law. There is also self-regulation of business format franchising. This is done through the Franchise Association of New Zealand Inc, a non-profit body which requires its members to follow a Code of Practice and a Code of Ethics.
Earlier this year, reports surfaced of alleged scams involving franchises. Although these appear to be cases of fraud, which is already suitably dealt with by current laws, it has raised the question of whether the legal framework around franchising needs to be changed to provide more protection to franchisees.
Several aspects of the franchising relationship have been raised to make a case for franchise-specific law. It is important that potential franchisees do their due diligence (thoroughly investigate and evaluate the contract) before entering into a franchise arrangement however, some prospective franchisees may not know what information to ask for. Also, once an agreement has been entered into, if any disputes arise, the adversarial nature, cost and formality of court proceedings may be a barrier to some franchisees from seeking a resolution to these disputes.
It has also been suggested that in some cases the imbalance in contractual power between the franchisor and the franchisee may expose the franchisee to unreasonable commercial risks. This is particularly the case if the franchise agreement confers unilateral rights on the franchisor to amend or terminate the agreement and this right is able to be exercised without due cause. However officials do not have enough evidence to determine the existence or extent of this problem. We are interested in whether this concern is widespread, if it is limited to a particular type of franchising arrangement or industry practice and/or whether it is best addressed by facilitating due diligence and better ways of resolving disputes.
The following options are considered in this discussion document:
- maintaining the status quo
- education initiatives targeted towards both franchisees and franchisors
- introducing franchise-specific legislation, which could include:
- mandatory information disclosure;
- a requirement for a potential franchisee to seek professional advice, or for a franchisor to recommend that a potential franchisee seeks professional advice;
- a cooling off period;
- enhanced dispute resolution, such as a mandatory mediation process;
- rules for franchise contracts; and/or
- an obligation of good faith.
- for each of the franchise-specific legislation options, possible institutional arrangements could include:
- a co-regulatory regime; and
- a public enforcement regime.
Finally, interested parties are asked to submit views outlining the direct and indirect costs of possible intervention options and how to address transitional issues.
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