Recent legislation changes affecting franchising and the direction of legislation changes in the sector generally

Some years ago, proposed legislation regulating franchising in New Zealand did not gain universal approval and was eventually ditched.

I, and one or two other concerned lawyers, have long held the view the effect of that would be the gradual introduction, by degree, of other laws which look to catch franchising up in its swoop and purview. And that is exactly what has happened. We saw last year the Cartels Bill and the proposed changes to the Employment Relations Act in relation to vulnerable employees.

Franchising will continue to face the threat of changes in legislation to regulate the sector, improve standards in franchising and ensure vulnerable franchisees are protected. It is utterly naive to expect the industry will not continue to meet these challenges.

Against that background, as many lawyers in franchising will be well aware, there has been considerable work, in the last (nearly ten) years, on the amendment of Consumer Laws in New Zealand.

The process has recently resulted in six separate Acts being enacted including the Fair Trading Amendment Act. Some of the changes to the Fair Trading Act will have consequences for franchising.

A key change, in so far as it affects franchising, is the Contracting out provisions of the Fair Trading Act.

The Fair Trading Act has been amended to specifically provide for businesses to contract out of Fair Trading Act obligations in their relationships with other businesses. This question typically arises in disputes between franchisor and franchisee where the franchisee alleges misrepresentation or breach of the Fair Trading Act (misleading and deceptive conduct).

In such cases, typically, the franchisor seeks to rely on what is commonly known as “entire agreement” clauses which are clauses which acknowledge that a party to the agreement does not rely on any representations or conduct of the other party to the agreement.

The new changes to the Act have the effect of clarifying the limited circumstances in which businesses may contract out of their liability under the Fair Trading Act. The amendment in summary provides that a party can contract out of the Fair Trading Act if:-

a) All parties to the agreement are in trade and agree to contract out;

b) The agreement is in writing;

c) The goods, services or interest are supplied and acquired in trade; and

d) It is fair and reasonable that the parties are bound by the provision in the agreement regarding the contracting out.

Obviously this leads to then be determined the question of what amounts to “what is fair and reasonable”?

The Act provides specific matters that a court must take into account in deciding what is fair and reasonable. These include:

- What is the agreement about?

- How valuable are the goods or services?

- Did one party have more bargaining power than the other?

- Was each party able to negotiate the terms of the contract?

- Was one party required to either accept or reject the agreement?

- Did the party wanting to rely on a contracting out clause know they were making a representation that would have breached the Act?

– Did either party get legal advice?

The amendment clarifies that the primary question is whether the contracting out clause is fair and reasonable. Commonly, franchisees do get legal advice and the parties are at an arms-length bargaining scenario. This might not however be the case in franchise systems where the initial investment is low, the franchisee is either an immigrant or from a low socio-economic group and the franchisee does not obtain legal advice.

Good franchisors will have no need to worry, because they are not making misrepresentations or being misleading and deceptive anyway! But the changes do show in my view, by degree, the incremental regulation of franchising, and one which all in the industry need to be aware of.
April 2014