New Zealand is one of the most deregulated countries in the world to conduct small to medium-sized business. There is no specific legislation controlling the operation of franchising in New Zealand and other countries like New Zealand include Singapore and the United Kingdom.
Prospective franchisees who are looking at buying into a franchise must tread carefully and do their homework. New Zealand is an exciting and fast developing market which contains at least 590 franchise systems. The Franchising New Zealand 2021 Survey results showed that the sales turnover for business format franchises was estimated at $36.8 billion, and the sales turnover for the entire franchising sector was estimated at $58.5 billion.
- There is an estimated total of 32,300 units operating in business format franchises
- More than 156,820 are employed directly in business format franchises
- 70% of franchise brands originated in New Zealand
- Online sales grew tremendously with now almost 80% of brands engaging in online sales
- More than 20% of franchisors have entered international markets
- 90% of franchise brands return profits back into the community
- Almost two-thirds of franchisors identified environmental sustainability and ethical supply chain examples, with the principal examples being enforced recycling of materials, waste minimisation programmes and hybrid car use
- Only 18.5% of franchisors were involved in a substantial dispute (with one or more franchisees) in the past 12 months
- COVID-19 brought considerable disruptions to trading, greater stress and mental health considerations, adjusted hours of operation, supply chain interruptions, significant sales reductions and many other issues
There will be a new survey undertaken by the Franchise Association of New Zealand in 2024.
The New Zealand market is buoyant at present with a number of new franchisors coming on the scene and also a lot of activity with people buying franchises. However, both parties must be aware of the Unfair Contracts Terms legislation commonly referred to as UCT.
Unfair Contract Terms
In relation to distribution, franchising and agency matters in New Zealand, please note that the Fair Trading Amendment Act 2021 (“Amendment Act”) extends the existing prohibition on unfair contract terms in consumer contracts to standard form small trade contracts worth under $250,000 (including GST). The Amendment Act also introduced a new prohibition on unconscionable conduct.
The changes came into force on 16 August 2022 and affect standard form small trade contracts. A contract is a standard form small trade contract if it falls within the following definition:
- Each party is engaged in trade (i.e. two businesses);
- It is not a contract between a business and a consumer; and
- The relationship between the two parties in trade in relation to the goods, services or interest in land provided does not exceed the annual value threshold of $250,000 (including GST) per annum for goods, services or an interest in land when the relationship first arises (i.e. when you first sign the contract).
Any contract signed prior to 16 August 2022 will not be subject to the new amendments. However, if the contract is varied, amended or renewed and it falls within the definition of a standard form small trade contract above then the new regime applies to the varied, amended or renewed contract.
The unfair contract terms previously only applied to contracts between a consumer and a business, for instance gym membership agreement. The new amendments will ensure that small businesses also receive protection against any unfair contract terms.
The following is taken into consideration when assessing whether a term is unfair:
- Whether the term would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
- Whether the term is reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
- Whether the term would cause detriment (whether financial or otherwise) to a party if it were applied, enforced or relied on.
The new amendments will not apply to the following contractual terms:
- Definition of the main subject matter of the contract.
- Setting the upfront price payable under the contract, so long as the price term is clear and unambiguous.
- Any terms that are required or expressly permitted by any legislation.
The extent to which the term is clear and the context of the contract as a whole will also be taken into account. However, the new amendments will not disadvantage a business that has a legitimate business interest and the term is necessary to protect that interest. At this stage the Commerce Commission has not updated its guidance regarding unfair contract terms but we assume this will be issued soon to assist businesses.
Unconscionable Conduct
The unconscionable conduct in trade provisions are much broader as it applies to all conduct not just contractual terms. The term unconscionable conduct is not defined but the Amendment Act states that a Court can take the following into consideration:
- The relative bargaining power of the parties;
- The extent to which the parties acted in good faith;
- Whether the affected person was reasonably able to protect their interests; and
- Whether unfair pressure or tactics were used.
It may be that New Zealand will take guidance from Australian cases but at this stage no guidance or comment has been provided by the Commerce Commission.
The Commerce Commission can seek penalties and fines as above. The Commerce Commission could also could bring civil proceedings; for example seeking a declaration from the Court in relation to unfair contract terms. The remedies include damages, injunctions and other Court orders.
Data Protection and Data Privacy
It is very important for franchise parties to prevent data privacy violations. Both Franchisors and Franchisees will collect information pertaining to their employees, customers and suppliers. Franchisees must evaluate the information and how to protect it and they should conduct data mapping which is an internal audit process which allows the franchisee to determine what types of personal data it is receiving, where it is being stored, why it is being collected, and how long the franchisee intends on keeping the data. All of these processes must be set out in a privacy policy issued to customers and employees. The modern threat to this is the increased collection and use of personal information which is essential to the operation of all Government and other agencies. Furthermore, with the advent of AI processing tools such as Chat GPT, franchisees must be very careful of personal information being disseminated without that person’s consent.
In New Zealand the right to privacy is a fundamental human right and is governed by the Privacy Act 2020. The Act endeavours to control by statute the four ethical issues involved, being privacy, accuracy, property and accessibility. The essence of the Privacy Act is the identification of 13 information privacy principles which were established by the Organisation for Economic Cooperation and Development in Paris.
Franchisors must take an active role in the protection of stored data and compliance with regulations. In the unfortunate event of a data breach or public violation of data privacy regulations, there will be a direct harm to the brand regardless of who is responsible for the violation. Accordingly, franchisors must remain cautious of potentially non-compliant activities by franchisees. They must ensure that all franchisees conduct their businesses to high standards to ensure compliance with the laws. Franchisors can require written confirmation from franchisees that they have complied with any changes to data collection and data privacy laws and require that any changes will replace a current data protection plan.
Stewart Germann founded Stewart Germann Law Office (SGL) in 1993 as a boutique law firm at Auckland, New Zealand, specialising in franchising, licensing and business law. Stewart has over 40 years’ experience in franchising law and acts for franchisors in New Zealand, Australia, USA and the UK. SGL also act for franchisees and provides legal advice. Stewart has spoken at franchising conferences in New Zealand, Australia, Italy, South Korea and USA and he was on the Board of the Supplier Forum of the International Franchise Association (“IFA”) for 6 years until March 2007. Email: stewart@germann.co.nz | Web: www.germann.co.nz