Consider New Zealand Your Next Franchise Development Stop
September 2007 Franchising World
With a robust and fair legal system with no franchising legislation, New Zealand is attractive and high standards are being maintained by the Franchise Association of New Zealand through its membership having to comply with the Code of Practice.
By Stewart Germann
Franchising in New Zealand is a maturing way of doing business with annual growth between 15 percent and 20 percent. There are about 350 systems and with a population of about 4.2 million people which represents one system for every 12,000 people. That’s very high on a worldwide basis. There are some mature franchise systems which are now going offshore and there are always overseas systems wanting to enter New Zealand.
New Zealand is highly deregulated as far as small-to-medium business is concerned. There is no franchise-specific legislation and no mandatory disclosure regime. There are existing laws which protect franchisees and those main laws are contained in the Fair Trading Act 1986, the Commerce Act 1986 and the Contractual Remedies Act 1989. Those acts focus in particular on misrepresentations and restrictive trade practices.
The Franchise Association of New Zealand was formed in 1996 with New Zealand previously being part of the Australian Association. The FANZ publishes the Code of Practice and the Code of Ethics and all members of it must comply with both codes.
Code of Practice
The Code of Practice has four main aims which are as follows:
• Encourage best practice throughout franchising.
• Provide reassurance to those entering franchising that any member displaying the logo of the Franchise Association of New Zealand is serious and has undertaken to practice in a fair and reasonable manner.
• Provide the basis of self-regulation for franchising.
• Demonstrate to everyone the positive will within franchising to regulate itself.
The code applies to all members including franchise systems, franchisees and 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?
Compliance. All members must certify that they will comply with the code and members must renew their certificate of compliance on an annual basis.
• 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.
• Certification. The code requires franchise systems 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.
• Cooling Off Period. All franchise agreements must contain a minimum seven-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.
• Dispute Resolution. The code sets out a dispute-resolution procedure which can be used by both the franchise system 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.
• Advisors. All advisors 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. Mediation is the favored method of dispute resolution and it is working very well in New Zealand with a high-success rate.
There are three types of franchise systems in New Zealand:
• Franchise systems that belong to the FANZ and agree to adhere to its Code of Practice and Code of Ethics;
• Franchise companies that are ethical, but who elect not to belong to the FANZ; and
• Franchise organization that are not ethical and who do not belong to the FANZ.
The numbers making up this last category of franchise companies are diminishing and they need to be stopped. It is fair to say that the public has become far better educated in relation to the purchase of franchises and many potential purchasers are put off if a franchisor does not belong to the FANZ.
There are many types of franchise systems in New Zealand and many fall into the categories of food and beverage; business and commercial; home services; and retail. Over the past 10 years there has been dramatic growth in the home services area as people are working harder and longer and they value their leisure time. Whether it is mowing the lawns, cleaning the house, washing the car, washing the dog or cleaning the swimming pool, people are turning more and more to using franchise systems such as Green Acres, Crewcut, At Your Request, James’ Home Services, PoolWerx, Meticulous Home Services and VIP. Another area of rapid growth is the leisure and education sector and there is still huge potential for leisure and fitness franchises. In the children’s area, the country has the following franchise companies, including Jumping Beans, Jumping J-Jay’s, Kea Kids Club and Lollipop’s Playland. Some American systems such as Curves, Slim and Tone, My Gym and Stretch-n-Grow are already operating in New Zealand and should do well as New Zealanders like keeping fit and looking good.
About 75 percent of the franchise systems are home grown, but the overseas brands, such as McDonald’s, KFC and Burger King, are well known and supported. Because of its deregulated market, New Zealand is very easy to enter and there are double taxation treaties with a number of countries including the United States, the United Kingdom and Australia. Those agreements generally limit the taxing rights of each country (depending on the type of income derived), as well as helping to reduce double taxation. Most agreements limit the foreign countries’ tax on royalty payments to 10 percent.
The Bevinco system of Canada entered New Zealand by way of master franchise about six years ago and it is involved in providing consultants specializing in liquor assessments to maximize client profitability by use of a specialist software program. That system was novel in New Zealand and is proving to be very successful. Action Coach is also well known and business coaching has taken off with a number of competitors offering similar and different services. In relation to market development, competition is both necessary and healthy and where there is no direct competition franchise organizations can become complacent and loathe to update their system.
One method which can achieve rapid franchising expansion is to purchase and rebrand an existing system. Conversion franchising is becoming more popular, but it must be implemented for the right reason. In the United States, this method is often used for increasing the number of hairdressing salons when a franchised brand comes along and purchases independent hairdressing businesses. Within the last two years, Paper Plus which is a stationery and bookshop franchise and a well-known New Zealand brand, purchased Books and More and it is converting each Books and More store into Paper Plus stores.
Contract law governs the legal relationship between the parties to a franchise agreement. The courts in New Zealand may be willing to imply a duty of good faith into franchise agreements which stems from an overseas trend to imply such a duty because of the special relationship between the parties. Since the Dymocks case in the High Court and the subsequent appeal cases to the Court of Appeal and the Privy Council in 2004, a number of legal writers have argued whether the contractual relationship between the franchise company and the franchisee is of such a special nature that a duty of good faith and fair dealing can be implied. Justice Hammond, a High Court Judge, put this view forward in the High Court, but it was firmly rejected by the New Zealand Court of Appeal. It was discussed briefly by the Privy Council on final appeal, but the judgment of their Lordships did not require them to make any final decision in respect of that issue. However, Lord Browne-Wilkinson, a member of the Judicial Committee of the Privy Council based in London, when commenting on the Court of Appeal suggestion that “there is no room for superimposing a general duty of good faith, that to do so conflicts with requirements of certainty in commercial contracts” stated:
"These comments suggest that, in their view, the development of the law so as to make an obligation of good faith implicit in the relationship between franchisor and franchisee (as in the case of partnerships and other joint venture agreements) is not desirable. Their Lordships proposed to express no concluded view on these comments and wish to reserve their opinion on the suggestion that the implication of an obligation of good faith and the relationship between franchisor and franchisee would be an undesirable development.”
In Australia there was a recent Court of Appeal decision, Esso Australia Resources Pty Limited v. Southern Pacific Petroleum NL, which stated that no general duty of good faith arises in commercial contracts and such a duty would only arise where it is necessary to protect a vulnerable party from exploitative conduct. However, the franchising relationship is different and, like New Zealand, the Australian Courts are ready to imply a duty of good faith and fair dealing.
New Zealand has a very close relationship with Australia. Many Australian franchise systems have come into New Zealand and New Zealand franchise systems are going to Australia. Unlike New Zealand, Australia has a mandatory disclosure regime. Currently, a foreign franchise company is allowed to appoint one master for the whole of Australia without having to publish a disclosure document and comply with the Australian Code of Conduct. However, the government will remove the current exemption later this year when the code is amended.
New Zealand Development
There is no present move by the New Zealand government to introduce franchising legislation so that makes New Zealand an attractive market for international franchisors. New Zealand encourages the entry of overseas systems whose master-franchise agreements or unit-franchise agreements will only require minor amendments. For example, the restraint of trade clause, legislation and the governing law clauses are typical examples of where changes will have to be made.
New Zealand will continue to be a robust and exciting market for franchising. Home services will keep expanding together with leisure franchises, especially those involving fitness. Food systems are always welcome together with anything different and New Zealanders love brands. With a robust and fair legal system with no franchising legislation, New Zealand is attractive and high standards are being maintained by the FANZ through its membership having to comply with the Code of Practice.
Stewart Germann is a partner of the Stewart Germann Law Office. He can be reached at firstname.lastname@example.org.