Franchising across the Ditch

In his recent article “Structuring considerations for a move across the Tasman”, Duncan Cotterill Partner Bruce Patterson observed

(1):“New Zealand and Australia have a common heritage. We look much the same. We see the same brands in the marketplace. So it is quite surprising to many people just how far apart we are from a legal and regulatory perspective”.

This article was directed more towards comparisons of tax laws, however this observation is equally true when applied to the franchising scene.

As a firm Duncan Cotterill are often engaged in considering adaptive requirements for franchise systems that are imported into New Zealand (very often from Australia), or for New Zealand systems that are exported. The changes required are not comprehensive, but there does need to be a clear understanding of the differences. In particular with franchise systems that are being exported to Australia, full compliance with the Australian Code and preparation of a Disclosure Document are necessities. There is also a need to consider customising references to local laws, statutes and currencies. Dispute resolution processes and choice of law are also necessary considerations.

Australia has for some time had a statutory regime for franchising, by way of the Franchising Practices (Industry Codes - Franchising) Regulations 1998 (known as the Australian Franchising Code).

The Australian Franchising Code requires a disclosure document, independent advice, minimum contractual terms, and prohibits other terms. There is a requirement for formal dispute resolution through a mediation service.

The disclosure document requirements are very detailed and prescriptive. To compile a disclosure document that meets Australian Code requirements needs a significant amount of time care and attention, not a lot less than that required to put together the franchise agreement itself.

These obligations must be taken seriously. In one well publicised recent Australian case, “Ketchell’s Case”(2) it took an appeal to the High Court of Australia to overturn a New South Wales Court of Appeal decision that found a franchise agreement to be illegal and unenforceable where the formalities of obtaining a certificate of independent advice were not met.

By contrast in New Zealand there is no franchise specific law so no legal obligation to observe these standards. There is however a voluntary franchising code, similar but slightly less onerous that the Australian one, observed by franchise systems which choose to belong to the Franchise Association of New Zealand “FANZ”. This is an organisation established by leading industry players, however membership is purely voluntary and a number of the largest and most well known brands do not belong .

Recently in New Zealand there was a review undertaken by the Ministry of Economic Development to consider whether a compulsory code is required. In part the catalyst for this was a well publicised fraud carried out by a master franchisee of a local home services system

Of the 33 submissions the predominant theme was a preference for maintaining the status quo- ie no regulation. Most submitters considered there was no evidence of a crisis worthy of intervention, and that the industry was generally self regulating in an effective manner. Across this side of the ditch there is a strong view that overly demanding disclosure regimes can be self- defeating. And with a recent change of Government in New Zealand during the time between the paper’s formulation and assessment of submissions, from a protectionist left leaning administration to a more centrist free market leadership elected on a platform of less regulation, it was not too surprising that the outcome was a decision not to legislate.

Accordingly New Zealand remains as one of the few countries in the Western World that has no franchise-specific regulation governing it. Having said this there are a large number of consumer protection statutes which have relevance to the activities of franchising, and must be taken into account. Also for any franchise system that intends to become a member of FANZ there is a need to comply with its Code, disclosure requirements, and compulsory provisions.

Duncan Cotterill are in the unique position of having offices and franchise specific expertise in both jurisdictions. This places us in a unique position to assess all of the issues that face a franchise system which is “crossing the ditch”. Of course that includes also the structral and tax considerations discussed in Mr Patterson’s article.

[1] Published in Business Broker Magazine Autumn 2009 Edition and found on www.duncancotterill.com

[2] Master Education Services Pty Limited v Ketchell [2008] HCA 38

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