FANZ Address to Franchise Law Symposium

As a franchisor and Chairman of the Franchise Association of New Zealand, I am not a lawyer.  What I bring to this forum is 15 years' practical experience as a franchisor, a franchisee and a practitioner in franchising. As Chairman, I also represent our Association on the World Franchise Council and the Asia Pacific Franchise Confederation, so my comments are in the full knowledge of the issues surrounding franchising worldwide.

As an Association we are fully supportive of the decision made by the Minister of Commerce, that the current regulatory framework of generic business law and self-regulation through the Franchise Association is sufficient to address concerns. This combination of generic business laws and self-regulation is the approach taken in many countries such as the UK, Singapore and Hong Kong.

Other countries, such as Australia, have adopted franchise specific laws to varying degrees, but to say that regulation has solved all the issues that they set out to address would be naïve. The Australian franchise sector, with their regulatory regime, still reports numerous complaints and reports of abuses, despite three inquiries into the regulation of the sector in the past two years, with the fourth currently underway.

The Ministry of Economic Development noted that self-regulation in the UK was considered to be the most effective, and that in the New Zealand context the status quo appeared to be working well. This was a view that was not altered as a result of the handful of submissions that supported regulation.

There is little doubt that there are a small number of problem franchisors who damage the reputation of the franchise sector. If legislation were to rid franchising of problem franchisors then it would be well worth it, but the evidence is clearly to the contrary. There is little evidence anywhere in the world that franchise regulation inhibits or deters the behaviour of rogue or fraudulent franchisors. The occurrence of such behaviour from time to time is not unique to franchising.

Although the public perception of franchising - often driven by sensational articles contributed to the media - might have been improved through the introduction of legislation, there is no compelling reason to single out franchising from any other method of doing business.

Franchising is a method of doing business, which transcends many industries, a problem in one franchised industry is not necessarily a problem in another franchised industry, and New Zealand has never had the same level of franchise disputes as Australia.

Legislation would certainly have meant more compliance costs and, unlike Australia, most of our franchises here are relatively small, meaning that the additional costs would have been spread over a much smaller number of franchisees and, ultimately, the consumer. For example, the updating of their disclosure document, which was the result of recent franchising Code of Conduct changes, resulted in a cost to McDonald's Australia of some $150,000.

New Zealand's contract law and the Fair Trading legislation already provide protection for franchisees. The Australian experience, on the other hand, suggests legislation would slow growth dramatically in the sector for several years while it is tested.

A mandatory system of disclosure would not in itself deal with any issues of misrepresentations concerning the franchise system, and proper disclosure is a requirement under the Association codes in addition to mediation as a first step in the resolution of disputes. It is the experience of our Australian colleagues that compliance with the Franchising Code in Australia has become so onerous and detailed that few, if any, franchisors have the ability to prepare a compliant disclosure document. Many prospective franchisees do not read the disclosure document because it is so complex and detailed that those reading it often find it difficult to comprehend.

Any perceived issues of ‘contractual imbalance' between franchisors and franchisees are necessary given the nature of the franchising method of doing business; this is essential for the protection of the franchise business format itself. The prescriptive nature of a franchise is the reason it is successful and the reason it is attractive to prospective franchisees in the first place. If an imbalance of power is too oppressive, then this is something which can currently be dealt with by the courts on a case-by-case basis.

Generally speaking, it is uncommon for franchise agreements to be open to termination by a franchisor at any time without cause, as appears to be the main cause for complaint by the MTA, and almost all franchise agreements deal with issues of renewal and transferability in a sensible manner. Nevertheless, if such termination clauses are in a franchise agreement and the potential franchisee, following proper legal advice, proceeds with the purchase, it is essentially a matter of free choice.

Through the Government's decision not to introduce specific legislation we have avoided ongoing high costs that would be passed on to consumers, complex disclosure requirements that create more confusion than clarity, and legislation that still would not impact the few unscrupulous operators.

As the Court of Appeal has ruled, once full and proper disclosure with independent legal advice has been taken, the relationship between a franchisor and franchisee should not be treated as a ‘special case', but simply as a commercial relationship between informed parties negotiating from positions of equality.

This is the position of mature responsibility that the Association supports and encourages through its development of codes of practice for its members and the education of current and prospective entrants into the franchise sector.

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