Status Quo
Current Regulatory Arrangements
16 In New Zealand, a franchise is treated as a commercial contract to be negotiated between parties. There is no specific law relating to franchising, but franchise agreements are subject to a wide range of generic laws including contract law, consumer law, intellectual property law, and competition law.
Contract Law
17 Franchise agreements are governed by the general law of contract. This allows contracting parties to arrange their affairs as they choose. Contract law does not inquire as to fairness or equality of the mutual obligations of the parties as it is assumed that they are capable of and will, act to protect their own interests. However, remedies are available for instances of undue influence and misrepresentation.
18 The contract between a franchisor and franchisee will usually regulate matters such as the duration, right of renewal and termination of a franchise agreement, but these matters will be governed by common law if the contract does not specifically address them. This imposes limitations on the ability of the franchisor to control the conduct of the franchisee after the termination of a franchise agreement (i.e. it cannot unreasonably restrain a franchisee from competing against a franchise system after the agreement has been terminated). The common law relating to agency and third party liability can also be relevant, particularly in tiered franchise agreements. Laws of equity may also apply in specific circumstances.
19 The Contractual Remedies Act 1979 allows damages to be obtained if a party entered into a contract as a result of a misrepresentation. It also includes termination rights in certain circumstances for a breach of contract or misrepresentation.
20 Contract law does not take into account the inequality of bargaining positions of the parties, compel a franchisor to renew a franchise agreement, or prevent it from terminating a contract pursuant to the agreement.
Consumer Law
21 Some parts of consumer law also apply to franchising agreements. In particular, the Fair Trading Act 1986 prohibits misleading and deceptive conduct and these provisions may be referred to if a franchisee has entered into a franchise agreement under such circumstances. The Fair Trading Act also has several other prohibitions relating to conduct in trade, including offences in the area of advertising misrepresentations.
Intellectual Property Law
22 Statutory and non-statutory IP rights protect against the misuse of IP. The Trade Marks Act 2002 provides the most important franchise-related statutory property rights. Also, the Copyright Act 1994 protects copyright and section 230 of the Crimes Act 1961 criminalises taking or copying trade secrets. There are common law protections for other non-statutory IP rights as well.
Competition Law
23 In competition terms, a franchise agreement is a form of exclusive dealing arrangement. Most franchising disputes do not raise competition concerns. The franchisor generally has incentives to maximise market share across its franchisees and so will be seeking contractual terms that promote its brand and benefit consumers. The general Commerce Act prohibition on the misuse of a substantial degree of market power can deal with the unusual situation where there might be anticompetitive conduct in the context of franchising. The Act also prohibits other anti-competitive conduct including price maintenance schemes which are relevant in a franchising context.
Self-Regulation
24 As well as these laws, there is also voluntary self-regulation of business format franchising in New Zealand. This is done through the Franchise Association of New Zealand Inc (FANZ), an organisation formed in 1996 which is open to membership by franchisors, franchisees, and professional advisors with an interest in franchising. It is a not-for-profit association and does not receive ongoing government funding.
25 FANZ has over 220 members, covering between 40-50% of active franchise systems in New Zealand. Membership includes large and small franchises, ranging from the franchise divisions of large companies, to the New Zealand operations of international franchises, to independent companies and many smaller companies and other individual entities which are growing through franchising. FANZ also has a number of professional advisor members, including banks, law firms, patent attorney firms, accounting firms, business consulting firms and specialist franchise consulting firms.
26 Members pay a fee to join FANZ and in return, among other benefits, they are able to use FANZ's logo as a sign of credibility. Potential franchisees then know that a franchisor and the franchising agreement comply with certain standards and practices.
27 FANZ has established a framework to promote the growth and development of franchising in New Zealand. This framework involves a Code of Practice, a Code of Ethics and a scrutineering process. The main emphasis of the Code of Practice is on the supply of information to prospective franchisees but it also imposes obligations on franchisors and gives rights to franchisees. The Code requires franchisors to provide franchisees with much of the financial and non-financial information they need to make informed decisions about whether to enter into or renew a franchise agreement. It also provides for a cooling off period, specifies standards of conduct and establishes a mediation process.
28 The scrutineering process allows FANZ to assess and review its members' documents (franchise agreements and disclosure documents) on an ongoing basis. An independent scrutineer assesses these documents against the Code of Practice and the Code of Ethics before a franchisor is accepted as a member. They are also assessed on a regular basis to ensure these documents remain compliant.
29 FANZ operates a complaints committee to investigate possible non-compliance with the Codes. Under the Rules of FANZ, the Board has the power to deregister any member for non-compliance with the Code of Ethics or Code of Practice.
30 FANZ is affiliated with international franchise associations, being a member of the Asia Pacific Franchise Confederation and the World Franchise Council. This allows FANZ to access the latest information on franchising and to receive information on trends that may be important to New Zealand. These links are also intended to assist New Zealand systems enter foreign markets.
Overseas jurisdictions
31 There is no common approach to the regulation of franchising overseas. Some countries, such as Australia, the USA, Canada, Malaysia, South America, China, Vietnam and several countries in Europe have adopted franchise-specific laws. Other countries, such as the UK, Singapore and Hong Kong have not, and like New Zealand, rely on a combination of generic legislation and self-regulation of the sector. The decision whether to introduce franchise laws in each case has depended on evidence of widespread problems within the sector, the availability of other legislative remedies and cultural factors, such as the general view of the public towards regulation.
32 In those jurisdictions where franchise legislation exists, the focus has tended to be on upfront disclosure of certain information to address the information imbalance between franchisors and franchisees. In Australia for example, the Franchising Code of Practice contains the following elements:
- an obligation to prepare a disclosure document which must be provided to a prospective franchisee at least 14 days prior to signing a franchise agreement;
- a seven-day cooling off period;
- a process to strongly encourage a franchisee to obtain professional advice, supplemented by a certification process that obliges a franchisor to ensure the prospective franchisee is aware that advice should be sought;
- a continuous disclosure obligation in relation to material changes such as sale, legal action and insolvency;
- a mediation based dispute resolution process; and
- the rules relating to the termination and transfer of a franchise.
In most countries that have adopted franchise legislation, there is no document vetting or registration of franchisors.
33 On the other hand, some countries have decided against regulating the franchising industry. The topic has been debated several times in the UK, with successive governments concluding that there is not enough evidence to suggest that franchises are more risky than other forms of business to warrant special controls around them. Self regulation through the British Franchise Association is still considered to be the most effective way of regulating franchising.
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