Obligations for a franchisor
- Marketing obligations (minimum or periodic requirements)
- Assistance (in setting up, staff training, promotions,etc)
- Referral of client enquiries received from within the area)
- No competition provision
- Obligation to act in good faith in franchise agreement
- Right to inspect books, etc
Obligations for a franchisee
- make royalty payments to franchisor, including any specified levy for marketing
- other contributions
- minimum performance or standards
- non-competition
- secrecy provisions
Legislative framework
No specific legislative franchising regime in NZ. Still formative. No specific law could apply except for contract law
Contract law and franchises
Contract law is generally governed by general law of contract.
- Consequently, no enquiry into the fairness or equality of mutual obligations.
- No recognition of the inequality of bargaining positions (market power is everything).
- Agreement is everything (either party can terminate if there has been a breach or repudiation of agreement provided that it is an essential term)
- remedies usually specified in contract (mediation)
- obligations on departing franchisee (confidentiality)
Fair Trading Act 1986 and Franchises
Issue of misrepresentation such as what is ‘in trade’
Franchises and competition law
- competition law - it does not apply so neatly as franchisor is bigger and controls more resources
- franchisors impose all sorts of potentially anti-competitive requirements on franchises
- they are central to franchises as they promote quality control and uniformity
- they are not exempt from Commerce Act 1986 (s27 - likely to have effect of lessening competition in market) so some boundaries
Franchises and employment law
Franchise agreement is not an employment agreement (there is a difference)
Franchises and agency law
No, most franchise agreements state that the franchisee is not an agent
Partnership law
No, they are two separate businesses
Sale of Franchise Business Agreements
Agreements for sale of a franchise and a business sold as franchise are normal business contracts.
Usually, process is
- pre-contractual negotiations
- conditional agreement drawn up
- sale price agreed upon and duration period
- conditional clauses
Conditional clauses
- subject to general due diligence clause (to an extent)
- subject to finance to complete purchase franchise (franchisor can lend money to the franchisee to purchase business - slightly weird)
- subject to sale of some specific asset by purchaser
- subject to warranties as to turnover
- subject to purchaser’s accountant verifying and approving business FS (they have to sign confidential clause before access)
- subject to consent and agreement by landlord to assign lease
- subject to checking out current resource consents, local authority approvals, etc
- subject to approval by purchaser’s solicitor as to the term and conditions of current lease, including determination of rights of assignment or sub-assignment, renewal (what conditions)
ONCE CONDITIONS MET, NOT PART OF CONTRACT. they are indicated as complete by writing
Subject to restraint of trade
not a conditional clause. It is considered an express clause as it always runs with the contract.
onerous terms
a term where the cost to fulfil the term is higher than the financial and economic benefit that is received. Example is provisions limiting liability for damages (cause a significant imbalance in the other party’s rights). Included by those where there is a lot of liability (potential), past experience has shown there is a likelihood of large damages. Builders.
Valda Video Ltd & Others v United Video Franchising Ltd 2001
Facts: Argued they were induced to buy a new United Video franchise by incorrect representations about turnover and profitability. $10 000 but actually 4000-5000
Judgement: Entitled to expect that the representation given was fact. Claimed under Contractual Remedies Act. Awarded for trading losses, time spent operating the business and lost profits. Can’t get loss of capital value of business (Herbison v Papakura Video). Reduced level of recoverable profits by 20% (risk of franchised business to be subjected).
Additional issues
Rules based or principles based regulation.
Should there be specific franchise legislation?
Issues
- Disclosure documents and other preliminary materials often have a sales and promotion pitch to them, detailing success of system, the high demand for products and services and often optimistic project figures with no info about less rosy topics
- THERE MAY BE NO REMEDY - unless shown there is a representation by silence or misleading and deceptive conduct flowing from a failure to disclose full picture
Dymocks Franchise System Pty Ltd v Todd (2002)
Facts: Protracted and bitter dispute between Australian Dymocks and Todds who operated NZ outlets. Around lack of support (alleged or not). Todds wrote to Dymocks saying they wouldn’t pay the franchise fees nor participate in group buying activities until certain changes were agreed. Response was termination of agreement.
Judgement: Acceptable for Dymocks to terminate agreement as Todds had repudiated their agreement by expressing an unambiguous intention not to perform key aspects of it. Privy Council said that franchise agreements were not ordinary commercial contracts but give rise to LT mutual obligations and that there is an implied term of good faith. Not given legislative or judicial authority in FA
TFAC Limited and Anor v David and Anor (2008)
Facts: D was director of company. His company got a franchise to a home cleaning service. . They were able to sell regional master franchises. They sold to TFAC Ltd. TFAC cancelled contract. Apparently, misleading and deceptive conduct in breach of FTA and claimed damages for misrepresentation underContractual Remedies Act due to info out of date, expertise was misrepresented, number of sales was misrepresented, existing and terminating franchisees was misrepresented.
Judgement:
FTA appeal - no excuse for conduct that is misleading or deceptive.
Anor was supported as saying that the franchisor’s opinion was merely an expression of opinion. They should rely on independent advice with experience in franchising. SC dismissed appeal. In addition, David was using information provided to him. SUPPORT FRANCHISORS if honest and upfront.
Effect of relationship between a franchisor and franchisee
Consenting adults. TFAC decision shows Court respect sanctity of contract entered into by consenting adults. If full disclosure and independent advice, relationship is commercial.
i.e Scott Barrie v Nature Discoveries Ltd - info in franchise disclosure document constituted a misrepresentation and whether the franchisee relied on it.
Review of franchising regulation
There was a paper released on 11 June 2009. Still no laws. There is Franchise Association of NZ. Regulatory options
- facilitating due diligence
- mandatory professional advice
- addressing contractual power imbalance
