5 Steps Every Franchise Should Take for Commerce Act Compliance

In September of this year, the Commerce Commission alleged that Harcourts Group Limited and four Christchurch-based Harcourts franchisees had breached section 30 of the Commerce Act 1986 by entering into agreements that affected prices charged to customers, including real estate commission rates. 

As Commerce Commission Chair Dr John Small noted, “Where franchisees are in competition, the law that prevents cartel conduct applies to them, just like any other business.” The case highlights the need for franchises to be proactive in ensuring compliance with the Commerce Act.

Competition law barrister Anna Ryan said, “Franchise systems often involve close coordination between businesses, which is part of their strength - but there are legal limits on the degree of coordination that is permitted. A clear understanding of where competition law draws the line, and regular compliance training, should be part of every franchise system.”

Here are five practical steps every franchise should take to stay on the right side of the law.

1. Understand When Franchisees (and Franchisors) Compete

Franchise systems often define exclusive territories to avoid internal competition. But where franchisees overlap - whether geographically or online - they may be competing. Any agreement that limits prices, discounts, or service offerings between them risks breaching the Commerce Act.

It’s also important to recognise that franchisors themselves can sometimes compete with their franchisees - for example, when the franchisor operates company-owned outlets or sells directly to customers online. In such situations, franchisors must take particular care that their communications or policies do not amount to agreements that illegally restrict competition with their own franchisees.

2. Avoid Price or Commission Discussions

Unless guided by specialist competition law advice, franchisors and franchisees should never discuss or agree on prices or fees charged to customers where there is competition between them. Even informal understandings can amount to a cartel provision.

3. Review Franchise Agreements

Franchise documentation should be specifically reviewed for compliance with competition law. Clauses that influence pricing, marketing, or customer allocation must be assessed carefully to confirm they do not breach section 30 of the Commerce Act.

While exclusive territories are lawful in most franchise models, franchisors should clearly document the commercial rationale for granting them. The franchise documentation should then be reviewed to ensure this rationale is not contradicted or undermined by other provisions - for example, clauses that effectively allow or encourage franchisees to compete across boundaries. Such inconsistencies could indicate that, in practice, exclusive territories are not reasonably necessary, increasing the risk of Commerce Act concerns.

4. Provide Regular Compliance Training

Franchisors should train both management and franchisees on the Commerce Act, using clear examples of what constitutes cartel conduct. Training should be refreshed regularly and incorporated into onboarding for new franchisees.

5. Seek Early Legal Advice

If there is uncertainty about whether franchisees compete, or whether restrictions on competition between franchisees are legally permissible, seek specialist competition law advice early. Preventing a breach is far less costly than defending one.