last updated 27/09/2019

Franchise agreements could be affected by new business protections – lawyers

last updated 27/09/2019

26 September 2019 – Andrew Skinner and Khushbu Sundarji of Stewart Germann Law Office discuss the potential impact on franchising of proposed changes to the Fair Trading Act

Late last year the Ministry of Business, Innovation and Employment released a discussion document on proposals for protecting businesses from unfair commercial practices. A number of submissions were made on the proposals, including one from the Franchise Association of New Zealand.

After considering the submissions made on the proposals, earlier this week Hon Stuart Nash (Minister for Small Business) and Hon Kris Faafoi (Minister of Commerce and Consumer Affairs) announced significant proposed changes to the Fair Trading Act 1986 (FTA), which if enacted will bring New Zealand more into line with similar provisions in Australia.

The main proposed changes to the FTA are to:

a)  introduce a new prohibition against unconscionable conduct in connection with the supply of goods and services; and

b)  extend the current protections against unfair contract terms in standard form consumer contracts to apply to standard form business contracts with a value below $250,000.00.

The prohibition against unconscionable conduct will seek to address the most serious types of commercial misconduct. A list of factors will be included in the proposed changes for a Court to consider in determining whether conduct is unconscionable (such as whether the conduct was necessary to protect a legitimate business interest) similar to the guidance in the Australian Consumer Law.

Under the current unfair contract terms regime for standard form consumer contracts, the types of clauses that may be regarded as unfair often relate to terms that unilaterally allow a business to make changes to the contract or what they are supplying. Examples include a right to vary the terms of the contract, penalise a party for breaching the contract or vary the characteristics of the goods or services to be supplied.

Read more about the proposed changes

The proposed changes may have far-reaching consequences on how businesses operate and behave with each other. Due to the nature of franchising, franchise agreements often contain strong protections for a franchisor for legitimate business reasons to maintain the brand and standards of the franchise system. It is also common for franchisors to require a franchisee to update or make changes based on the latest improvements to the franchise system. It will therefore be important to understand the exact scope of the proposed FTA changes and the definition of what is a standard form business contract. If a franchise agreement is covered by the new regime and the value of the contract is below the threshold, then a careful review of the franchise agreement will be required.

The government is proposing to introduce amending legislation for the FTA in respect of these proposals in early 2020 and there will be an opportunity to provide submissions on these important changes. 

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