All questions

Franchise law

i Legislation

As stated earlier, there is no franchise-specific legislation in New Zealand. There are a number of statutes and laws that affect franchising, including (but not limited to) the Building Act 2004, Commerce Act 1986, Companies Act 1993, Contract and Commercial Law Act 2017, Copyright Act 1994, Fair Trading Act 1986, Financial Reporting Act 2013, Health and Safety at Work Act 2015, Income Tax Act 2007, Overseas Investment Amendment Act 2018, Privacy Act 1993, Resource Management Act 1991 and the Trade Mark Act 2002. Any franchise or master franchise agreement is a contract and there are robust legal principles affecting the law of contract and its enforceability. Also, a recent amendment to the Commerce Act 1986, under Part 2: Restrictive Trade Practices (known as the cartel provisions), should be considered carefully in relation to franchise agreements (see Section VI.v).

ii Pre-contractual disclosure

There are no mandatory pre-contractual disclosure requirements in New Zealand. However, if a franchisor or a master franchisee is a member of the FANZ, a disclosure document that complies with the FANZ Code of Practice must be given to any prospective franchisee at least 14 days before the franchise agreement, or master franchise agreement as the case may be, is executed. If a disclosure document contains misrepresentations, the franchisor or master franchisee will most likely be liable to action under the Fair Trading Act 1986. The key elements to prove a claim of misrepresentation include that the facts are false or misleading, the potential franchisee relied upon those facts and the potential franchisee has suffered a loss.

Being an English common law country, the law of torts, including equitable estoppel, is applicable in addition to promissory estoppel and unconscionability. However, while every case will be dealt with on its own facts, the Court of Appeal has commented that it would be unreasonable for a party to claim misrepresentation on pre-contractual disclosure where they were independently advised and that independent advice ought to have explained the meaning of the contract (David v. TFAC Limited; see also PAE (New Zealand) Limited v. Brosnahan & Ors). Remedies may include damages for loss and general damages, and cancellation of the agreement; it is thus imperative that franchise agreements are properly drafted to mitigate any losses against the success of any misrepresentation claims.

iii Registration

There are no registration requirements for franchises. All franchise systems must comply with New Zealand laws, so if a particular franchise is in a special industry such as the medical industry, for example, or uses controlled products such as drugs, those franchises would need to comply with the relevant statutes and regulations. Great care should be taken rather than assuming that there are no restrictions in New Zealand.

iv Mandatory clauses

If a franchisor belongs to the FANZ mandatory clauses include: a seven-day cooling-off period whereby a prospective franchisee can 'cool off' or change its mind after signing the franchise agreement; a clause saying that the FANZ Rules, the Franchising Code of Practice and Code of Ethics must be adhered to and followed by both franchisor and franchisee; and that the franchise agreement must contain a dispute resolution clause with the recommended mode of resolving a dispute being mediation or arbitration. If a franchisor does not belong to the FANZ, no mandatory clauses apply.

v Guarantees and protection

The law of contract governs guarantees and it includes both statute and case law. It is common for a franchisor to require personal guarantees of all shareholders and directors of the franchisee company. Guarantees executed by individuals and companies are enforceable by the franchisor. Where there is more than one guarantor, liability should be joint and several in all cases. It is prudent for franchisors to require that all personal guarantors obtain independent legal advice evidenced by a solicitor's certificate to mitigate against possible future claims that the guarantors misunderstood the effect of the guarantee that they executed or that they suffered any duress.