Does New Zealand need franchise-specific legislation?

Following a series of alleged franchising scams earlier this year, the government is seeking feedback on whether there is a sufficient level of concern in the market to warrant introducing franchise-specific legislation.

On 15 August, the Minister of Commerce Lianne Dalziel released a discussion document Review of Franchising Regulation in New Zealand inviting interested parties to comment on whether franchisees are sufficiently protected by current laws and structures, or whether there is something more that the government should be doing in the form of education initiatives or through the introduction of a franchise regulatory framework.

Types of franchising arrangements under review

Franchising is essentially a way of doing business. It has no fixed legal meaning, but the term is often used loosely to refer to a form of licensing distribution arrangement. The discussion document is primarily focused on business format franchising, which is based on a long term contract and licence where the franchisor grants a franchisee the right to operate a copy of its business system for a specified period.

Typically under this arrangement, the franchisees are the owners of their own business but will obtain the right to use the intellectual property, the business system and the know-how of the franchisor. Franchisees may also benefit from national advertising campaigns and established support systems. The franchisors usually gain their income from initial and on-going fees paid by the franchisees, or through supply and distribution agreements.

This arrangement can also be multi-tiered whereby a franchisor grants a master franchisee the right to grant sub-franchises.

In most, if not all cases, this type of arrangement will be subject to a written franchise agreement accompanied by an operations manual, and usually allows the franchisor to retain a high degree of control over the franchisee.

Status quo

In New Zealand there is no specific law relating to franchising, but franchise agreements are subject to a range of generic laws, including contract law, consumer law, intellectual property law and competition law. There is also voluntary self-regulation of business format franchising through the Franchise Association of New Zealand Inc (FANZ).

The discussion paper notes that, with a few exceptions, the status quo appears to be working well and that there is no evidence of widespread problems with the current framework.

Problem areas

Areas which have been identified as potential problems which need to be addressed include:

• the lack of relevant information available to franchisees to enable them to make informed decisions on whether to enter into the franchise arrangement;

• unsuitable options for resolving disputes;

• contractual power imbalance, particularly in relation to the ability of a franchisor to cancel a contract without just cause, or unreasonably prevent the transfer of an agreement; and

• in the absence of franchise specific legislation, the potential for adverse public perception of the franchising sector to inhibit the growth of the sector.

The discussion document, however, states that this consultation is not to be used for responses to the recent reports of scams in the franchising sector, which the government believes is sufficiently addressed by current laws dealing with fraud. Similarly the government does not want to receive comments on unconscionability (an issue often raised in franchising arrangements) since this is currently being reviewed in a wider context by the Ministry of Consumer Affairs as part of its review of the Fair Trading Act.

Future regulation

The discussion paper offers a number of options which could be pursued if it was considered necessary to introduce franchise specific legislation. This includes requirements for:

• mandatory information disclosure by franchisors to enable franchisees to do their due diligence;

• mandatory professional advice for the franchisee before entering into a franchise agreement;

• a cooling off period to allow a franchisee to withdraw from a contract if they decided the arrangement was not suitable for them;

• an alternative dispute resolution process;

• rules for franchising contracts to limit contractual power imbalance;

• an obligation of good faith on franchisors in relation to their post-contractual conduct; and

• institutional oversight.

Submissions

To access a copy of the discussion paper visit the Ministry of Economic Development's website at www.med.govt.nz. Submissions close on 21 November 2008.

Enquiries and information

For more information on any of the cases, articles and features in Commercial Quarterly, please email Diane Graham or call her on 64 9 916 8849.