By Rosemary Wallis

New Zealand

In New Zealand there is no franchise specific legislation, nor is there any specific legal definition of a franchise. The normal laws of contract apply.

There was an attempt by Justice Hammond at first instance in a recent New Zealand case on franchising, Dymocks Franchise Systems v Bilgola Enterprises, to develop a type of relational contract, containing elements of good faith behaviour and a requirement that such agreements should not be lightly terminated. He was, however, roundly criticised by the Court of Appeal for this. The Court of Appeal reverted to a strictly formal analysis, on the basis that franchise agreements are very detailed agreements in which the parties specifically spell out the extent of their respective rights and obligations.

The closest New Zealand has at present to a legal framework outside standard laws, is the Franchise Association of New Zealand voluntary Code of Conduct. This is estimated to cover about half the franchised outlets in New Zealand.

Under the Code's rules, a franchise is defined as:

A contract, agreement or arrangement, whether express or implied, whether written or oral, between two or more persons ("the franchise agreement") by which a party to the franchise agreement ("the franchisor") authorises or permits the other party to the franchise agreement ("the franchisee") the right to engage in the business of offering, selling or distributing goods or services within New Zealand and containing at least the following obligations or provisions:

- The franchisee has the right to use the mark in a way so that the business carried on by the franchisee is identified by the public as being associated with the mark identifying the franchisor;
- The franchisee is required to conduct the business in accordance with the marketing, business or technical plan or systems specified by the franchisor; and
- The franchisor provides on-going marketing, business or technical assistance during the term of the franchise agreement.

The franchise code contains disclosure requirements a cooling off period, a requirement for a dispute resolution procedure and a code of ethics.

While New Zealand has so far escaped franchise failures on the scale and prominence of the Cut Price and Top Slice Deli failures in Australia, the failure of a prominent system in New Zealand might well provoke the enactment of legislation or regulation similar to that which applies in Australia.


Australia

Australia has specific federal legislation, by way of the Franchising Code of Conduct, prescribed under section 51AE of the Trade Practices Act 1974, and which came into effect on 1 July 1998. It applies to all agreements that have been entered into, renewed, or extended after 1 October 1998. Where any clause in an existing agreement is inconsistent with the Code, that clause is unenforceable.

The compulsory Code grew from a voluntary code which itself developed out of dissatisfaction with franchise failures. When only about half the franchise systems elected to buy into the code, the Australian government legislated.

The Australian Code has rigorous disclosure requirements about:

- the franchisor's business and business experience
- any current litigation affecting the franchise, the franchisor or the franchisor's principals
- existing franchises and any sales, transfers or buy-backs
- intellectual property
- the franchised territory
- supply requirements
- site selection
- marketing funds
- payments - establishment, royalty and others
- financing conditions
- franchisor's obligations
- franchisee's obligations
- a summary of the conditions of the agreement

The franchise agreement must include:

- a cooling off period
- copy of the lease
- marketing funds
- transfer
- termination.

If there is no dispute resolution clause in the agreement then the Code procedure involving the use of an appointed mediation advisor applies.

The provisions of the compulsory Australian Code are considerably more stringent than those of the voluntary New Zealand code.

The Code is policed and enforced by the Australasian Competition and Consumer Commission (ACCC) which has been more pro-active to date than New Zealand's Commerce Commission.


The Franchise Agreement

Franchise agreements are usually very comprehensive and cover a much wider range of areas than a normal trade mark licence. The franchise agreement is both the linchpin of the franchise network and the framework for the setting up of the franchisee's business. Unsurprisingly they are heavily weighted in the franchisor's favour, and are not readily negotiable for individual franchisees, consistency being a primary requirement for a successful franchise network. This is because one of the essential features of a business format franchise is that each franchise must operate in a similar fashion.

It is the franchisee's obligation to conduct the business, protect the franchisor's intellectual property, and pay royalties. The franchisor must protect the brand, provide assistance, advice, training and consultation, and promote good relationships between franchisees.

The franchise agreement will also have an impact on advertising, deal with transfers, termination, dispute resolution and so on.

Because it may be essential for a franchisor to have a franchise in a particular location, the franchisor may own the lease, or have a right of first refusal on an assignment in the event that a franchisor wishes to cease trading. In major shopping malls, mall owners often require the lease to be directly with the franchisor who on-leases to the franchisee.


Cooling Off Period

One of the unusual features of a franchise is the provision for what is known as a "cooling off period".

This is a period of seven days from the date of entering an agreement or paying any money under an agreement that allows the franchisee to change its mind in a way that is not dissimilar to a hire purchase agreement. The mechanism under which it applies in the two jurisdictions is slightly different but the principle is the same. It is a legal requirement in Australia and a requirement imposed in New Zealand by the Franchise Association of New Zealand on its members.

One reason for this is that franchisees may be carried away with enthusiasm about the prospect of taking on a franchise. A few days later, they may have second thoughts.

A franchise is a substantial commitment often involving people mortgaging their homes and putting everything they own on the line. For that reason, to protect franchisees from their own enthusiasm and the franchisor from having a franchisee whose commitment evaporates, there is a period of a week in which the franchisee can pull out.

The cooling off period also protects the franchisee from the possibility of being pressured into buying a franchise by the franchisor. A franchise is often sold to people who are inexperienced in business, and this is one way of protecting them.


Franchise Documentation

Besides the franchise agreement there may be other documents involved in a franchise:

1. A disclosure document (in New Zealand, this is a requirement if the franchisor is a member of the Franchise Association, and it is a regulatory requirement in Australia).
2. Manuals: these contain the instructions to a franchisee on how the franchised business is to operate.
3. Confidentiality agreements: these should be signed before a prospective franchisee has a look at the internal workings of a franchise system, otherwise there is a risk of the franchisee picking up the knowledge of the franchisor and instead of signing up for a franchise, starting up his own independent business.
4. Lease documents.
5. Fit-out Contracts.


Franchises and Intellectual Property

One of the main issues for a franchise is its intellectual property, particularly its trade marks. Trade marks are a key element of a franchise system. The franchisor's trade name is crucial to the strength of franchise and franchisees should expect these to be properly registered and looked after, and defended from encroachment by other traders. Trade marks should preferably be registered.

The possibility of expansion overseas should figure in the calculations. Too often franchisors have failed to secure trade mark rights in those countries where they later want to expand, and find to their dismay there is a small local outlet in the way of the expansion of the franchise network and have to re-brand. Burger King and Hungry Jack's are an example of that in Australia and Signarama and Speedy Signs in New Zealand.

Australia also has a system of business name protection that does not apply in New Zealand

Copyright is also important. There is usually copyright in manuals. If these are not written by the franchisor there will need to be an assignment of copyright to the franchisor. There can be copyright in logos and designs, in store fit-outs, and in architectural drawings. It is crucial for the franchisor to have control of these rights. Sometimes an architect or designer may retain copyright ownership by spelling this out in the small type or even on the drawings themselves. When the franchisor wants to replicate the design elsewhere it may find it cannot do so without further payment.

The overall branding and get-up of a franchise can be protected by the New Zealand Fair Trading Act 1986 and passing off (and to some extent copyright).

Confidential information has a big role to play in protecting business methods. No franchisor should discuss a franchise with a prospect until there is a signed confidentiality agreement. A prospective franchisee may elect not to buy a franchise but steal the concept to set up its own business.

Franchise manuals should be marked as confidential and preferably lent to the franchisee, to be returned at the end of the franchise, with no copies made.

There may also be issues relating to protection and licensing of patents and designs, depending upon the particular type of franchise.

This is a general summary only and should not be taken as a substitute for specific advice.

Web site: Baldwin Shelston Waters

Email: email@bsw.com
July 2001