Franchising in New Zealand
Franchise Insider Blog 06/06/19 Stewart Germann, Robert A. Smith
New Zealand is an exciting and fast developing market for franchising. The population of New Zealand is about 4.6 million and there are over 630 franchise systems—one for every 7,400 people—which is very high in comparison with other countries. Why? As a whole, New Zealanders love brands and businesses that succeed, and franchising offers people a chance to leave the security of employment and purchase a franchised business which should succeed provided the system is followed.
In 2017, a survey of New Zealand franchising was conducted by Massey University (Auckland) and Griffith University (Queensland, Australia). Highlights from that survey are as follows:
- The number of business-format franchise systems operating in New Zealand has increased, with 631 business-format franchise systems operating in 2017, compared with 446 in 2012.
- It is estimated that franchised businesses contribute around NZ $27.6 billion to the New Zealand economy.
- The number of units operating with business-format franchise systems has also increased, with an estimated 37,000 units, compared with 23,600 in 2012.
- There are an estimated 124,200 employees of New Zealand business-format franchise systems, up from 80,400 in 2012, with approximately 60 percent of the employees estimated to be in permanent full-time employment.
- Franchising covers a wide range of industry categories and sub-sectors. Predominant sectors included "retail trade" (23 percent), "other services" (20 percent), "accommodation and food retail" (18 percent), and "administration and support services" (8 percent).
- The median total start-up cost for a franchise was NZ $308,500 for retail and NZ $87,550 for non-retail.
- The median initial franchise fee was NZ $35,000.
- Fifty percent of franchise systems have been operating since before 2000.
- The overall level of disputes per franchised unit was low (1.9 percent). Only 22 percent of franchisors experienced a substantial dispute with a franchisee within the last 12 months.
There are no franchise-specific laws in New Zealand; however, there are existing laws which protect franchisees. The primary laws are Fair Trading Act 1986, Commerce Act 1986, and Contract and Commercial Law Act 2017. These statutes focus on misrepresentations and restrictive trade practices, including anti-competitive behavior.
The Commerce (Cartels and Other Matters) Amendment Act 2017 became law in New Zealand in August 2017. This new Act amended the Commerce Act 1986 and key changes include:
- Cartel Conduct Prohibitions
Broadly speaking, there are three new "cartel conduct" prohibitions that are unlawful unless an exemption applies: (a) a prohibition on competitors fixing prices; (b) a prohibition on competitors jointly restricting output; and (c) a prohibition on competitors colluding to allocate markets.
These new prohibitions clarified the law in New Zealand and will have a far-reaching impact on business. However, some types of anti-competitive arrangements (summarized below) are exempt from the cartel prohibitions.
- Collaborative Activity Exemptions
This exemption applies to cartel conduct by competitors in a "collaborative activity" where the cartel provision is reasonably necessary for the purpose of the collaborative activity. Competitors can seek clearance for proposed collaborative activities that contain a cartel provision to ensure that the proposed activities will not breach the Commerce Act.
The collaborative activities exemption is an important exemption for franchisors, since some provisions in franchise agreements may be regarded as cartel provisions (such as territory allocation and noncompetes). Accordingly, a franchisor entering New Zealand will want to obtain legal advice that this exemption applies to any cartel provisions in the proposed franchise agreement.
- Vertical Supply Contract Exemption
This exemption recognizes that there may be circumstances where a supplier and a customer may be in competition with each other and, as a result, provisions in their supply agreement risk being cartel provisions. This exemption allows cartel provisions that are included in vertical supply contracts where certain requirements are met.
- Joint Buying and Promotion Agreements Exemption
This exemption may apply when competing buyers arrange to purchase goods or services together on terms that, individually, the competitors could not negotiate on their own. This exemption applies only to price fixing and not to other forms of cartel conduct.
Because the amendments to the Commerce Act impact key provisions typically found in franchise agreements, it is very important to explain the basis for a number of common franchise agreement provisions. These include approved products, approved services, geographic scope and term of the noncompete, and the location of a franchised operation.
Franchise Association of New Zealand
There is no mandatory disclosure regime in New Zealand, but there is the Franchise Association of New Zealand (FANZ), which was formed in 1996. A foreign franchisor is not required to become a member of the FANZ in order to franchise in New Zealand.
The Rules of the FANZ define a "franchise as:
“Franchise” means the method of conducting business under which the right to engage in the offering, selling or distributing of goods or services within New Zealand includes or is subject to at least the following features:
- the grant by a Franchisor to a Franchisee of the right to the use of a mark, in such a manner that the business carried on by the Franchisee is or is capable of being identified by the public as being substantially associated with a mark identifying, commonly connected with or controlled by the Franchisor; and
- the requirement that the Franchisee conducts the business or that part of the business subject to the Franchise Agreement, in accordance with the marketing, business or technical plan or system specified by the Franchisor; and
- the provision by the Franchisor of ongoing marketing, business or technical assistance during the term of the Franchise Agreement."
The Rules also define a Franchise Agreement as “a contract, agreement or arrangement, whether express or implied, whether written or oral, between two or more persons by which one party to the agreement ('the Franchisor') grants, authorises or permits the other party to the agreement ('the Franchisee') the right to operate a Franchise. Any contract, agreement or arrangement which purports to be a Franchise Agreement shall be deemed to be a Franchise Agreement for the purposes of this definition, notwithstanding that it may lack any or all of the requirements or attributes referred to in the definition of 'Franchise'."
FANZ – Code of Practice and Code of Ethics
The FANZ publishes the Code of Practice and the Code of Ethics and all members of it must comply with both Codes. The Code of Practice has four main aims which are as follows:
1. To encourage best practice throughout franchising.
2.To provide reassurance to those entering franchising that any member displaying the logo of the FANZ is serious and has undertaken to practice in a fair and reasonable manner.
3. To provide the basis of self-regulation for franchising.
4. To demonstrate to everyone the positive will within franchising to regulate itself.
The Code applies to all members including franchisors, franchisees or affiliates such as accountants, lawyers, and consultants, and all prospective new members of the FANZ must agree to be bound by the Code before they can be considered for membership.
What Does the Code Cover?
1. Compliance – All members must certify that they will comply with the Code and members must renew their certificate of compliance on an annual basis.
2. Disclosure – A disclosure document must be provided to all prospective franchisees at least 14 days prior to signing a franchise agreement. This disclosure document must be updated at least annually and it must provide information including a company profile, details of the officers of the company, an outline of the franchise, full disclosure of any payment or commission made by a franchisor to any adviser or consultant in connection with a sale, listing of all components making up the franchise purchase, references and projections of turnover, and possible profitability of the business.
3. Certification – The Code requires franchisors to give franchisees a copy of the Code and the franchisee must then certify that he or she has had legal advice before signing the franchise agreement.
4. Cooling-off Period – All franchise agreements must contain a minimum seven-day period from the date of the agreement during which a franchisee may change his or her mind and terminate the purchase. This is very important and the cooling off period does not apply to renewals of term or resales by franchisees.
5. Dispute Resolution – The Code sets out a dispute resolution procedure which can be used by both the franchisor and the franchisee to seek a more amicable and cost-effective solution. The Code requires all members to try to settle disputes by mutual negotiation in the first instance and this process does not affect the legal rights of both parties to resort to litigation.
6. Advisers – All advisers must provide clients with written details of their relevant qualifications and experience, and they must respect confidentiality of all information received.
Code of Ethics – All members must subscribe to the Code of Ethics which sets out the spirit in which the Code of Practice will be interpreted.
All franchisor members of the FANZ must have a franchise agreement, which contains a dispute resolution clause and a cooling-off provision. In order to resolve disputes, mediation is the favored method and has a high success rate in relation to franchising disputes.
Tax is payable on all income earned in New Zealand. The current rate for companies is 28 percent. The goods and services (GST) tax rate is 15 percent, and it is added on to all goods and services with no exceptions. Although there are no restrictions on the transfer and remittance of currency from New Zealand to an overseas jurisdiction, the tax laws must be complied with. In relation to the payment of royalties, dividends, or interest, non-resident withholding tax (NRWT) must be deducted by the payee before funds are remitted to the overseas entity. The tax deduction must be paid by the payer to the New Zealand Inland Revenue Department (IRD), but a tax credit would be available to the overseas company. The rate of tax varies on the country involved, and New Zealand has double taxation treaties with a large number of countries. For example, for Australia, Japan, Singapore, and the United States, the rate of NRWT is 5 percent in relation to royalties, and for Canada, China, Taiwan and the UK, the rate is 10 percent. With respect to Fiji, Indonesia, Malaysia, and the Philippines, the rate is 15 percent.
Royalties means “payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematographic films, films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. The term ‘royalties’ also includes income or gain from alienation of any property or rights described in this paragraph to the extent that such income or gains are contingent on productivity, use or disposition of such property or rights.”
The clause above means that an overseas franchisor would receive royalty payments net of any taxes.
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New Zealand is a sophisticated market and fairly deregulated with respect to business. The FANZ has been very successful in promoting self-regulation and high standards in franchising, and its Code of Practice is widely understood and accepted by franchisors in New Zealand.
Stewart Germann is the founding partner of Stewart Germann Law Office in Auckland and has over 35 years of franchising experience, including both nationally and internationally. Bob Smith is a partner in the Washington, DC office of Quarles & Brady LLP. He has represented franchisors for almost 40 years in a variety of transactions, including franchise deals in more than 80 countries.
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