Franchising in New Zealand

There is a very positive climate in relation to franchising in New Zealand where over 300 systems exist. Franchising has been growing at about 20% per annum during the past 5 years and although there is no mandatory legislation, there is a Code of Practice which is mandatory for members of the Franchise Association of New Zealand.

The Code of Practice has 4 main aims:

1. To encourage best practice throughout franchising.
2. To provide reassurance to those entering franchising that any member displaying the logo of the Franchise Association of New Zealand is serious and has undertaken to practise 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. All prospective new members of the Association 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 7 day period from the date of the agreement during which a franchisee may change its 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 franchisor and franchisee to seek a more amiable and cost effective solution rather than litigation. The Code requires all members 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.
7. 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.

PRIVY COUNCIL DECISION IN THE DYMOCKS CASE

Dymocks is a well known franchisor in Australia and New Zealand and the product is books and plenty of them. A Dymocks store is similar to Borders except that there are only books and some computer games with no magazines, CDs and the like.

Late in 2002 the Privy Council in London released its decision in relation to the case of Dymocks Franchise Systems (NSW) Pty Limited v Bigola Enterprises Limited and Todd.

The Privy Council decision overturned the New Zealand Court of Appeal and ruled that Dymocks was justified in terminating franchise agreements with John and Alicia Todd who had repudiated their contracts.

The Todds and their companies, Bigola Enterprises Limited and Lambton Quay Books Limited, operated three franchises in New Zealand. They claimed that Dymocks had misrepresented the initial position in relation to the expected turnover and in opening 20 to 25 outlets around New Zealand. Dymocks blamed the fall off of sales and profitability on inefficient management by the Todds who strongly criticised Dymocks in a letter to other franchisees, adding that they were going to refuse to take part in any activities of Dymocks.

Dymocks as the franchisor viewed the letter as inciting other franchisees to revolt. Dymocks said that the letter "clearly indicated the Todds no longer wanted to work within the franchise system" and it terminated the franchise agreements.

The High Court at Auckland rejected the claim of the Todds that Dymocks had misrepresented the business and ruled that the termination was lawful. However, the New Zealand Court of Appeal quashed that decision which forced the appeal to the Privy Council.

Meanwhile, Dymocks had taken control of the stores, managed them for some time and subsequently sold them to new franchisees. Had the Todds won then their remedy would have been in damages which would have been substantial. However, the Privy Council said it was clear both as a matter of commercial common sense and from contractual provisions that one of the great advantages of franchise trading was that a larger group, if coherent and disciplined in its activities, was a more powerful market unit than each of the franchisees individually. The Privy Council said that "a refusal to conform to the norms of general behaviour is damaging not only to Dymocks as the franchisor but also to all franchisees in the group. In a non-technical sense the franchisor and all the franchisees are engaged in a joint venture."

I disagree with the comments made by the Privy Council about joint venture. To me franchising and joint ventures are quite different.

The case was tried under Australian law in the New Zealand High Court, the Court of Appeal and the Privy Council. The decision has ended four years of legal action and the Todds have been ordered to pay the costs of all hearings which are estimated to exceed AUD$4 million.

The case is very important in the area of franchising for it confirms that the obligations between the parties are paramount and must be adhered to. What the Privy Council decision did not comment upon was the submission of Dymocks in relation to an implied obligation of good faith. Although the contract did not mention it, Dymocks maintained that franchisees must act properly and must show good faith towards the franchisor. I agree with that submission but it remains to be judicially tested as far as I am aware. Certainly, there are some cases in the US which have gone a long way towards implying a duty of good faith but this doctrine has yet to be developed in New Zealand and Australia.

Stewart Germann is the principal of Stewart Germann Law Office, Attorneys at Auckland, New Zealand who specialise in franchising and licensing. Stewart Germann is also a member of the Board of the Supplier Forum of the IFA and Stewart Germann Law Office is the only New Zealand member of the IFA.