Franchise documents provide critical protections for a franchisor's brand and reputation in the market. But what if the clauses and concepts providing these protections are unenforceable and of no use?
If you are a franchisor operating in the New Zealand market, upcoming changes to unfair contracts law should be at the forefront of your mind. These changes will apply across your entire suite of franchise documents – it is unlikely that only updating your template franchise agreement will provide you with the maximum protection for your brand and reputation. Related documents, such as supply agreements, operating manuals, confidentiality agreements, deeds of restraint and deeds of surrender or termination are just as important to get right.
Now is the time to start reviewing and updating key clauses in all documents designed to protect those invaluable rights and concepts such as brand, reputation, breaches, restraints, customer databases, renewal process and end of term arrangements. It is also time to reflect on whether processes and systems adopted by franchisors when dealing with franchisees may be seen as unfair.
The changes better align New Zealand's unfair contracts law with Australia. For franchisors that operate in both Australia and New Zealand, these changes will likely result in adopting most of the changes you would have incorporated in your Australian template franchise documents when similar unfair contracts law were introduced in Australia in 2016. That speeds up the review process by leveraging work that has already been done and adds to consistency across franchised networks in both Australia and New Zealand.
Changes to the Fair Trading Act 1986
Unfair contract terms
On 16 August 2022, amendments to the Fair Trading Act 1986 come into force and will extend the existing unfair contracts regime (which currently only applies to standard form consumer contracts) to also apply to standard form business-to-business contracts with an annual value of less than $250,000 (including GST).
Whether a contract is "standard form" depends on (among other things) relative bargaining power, who the contract was drafted by, whether the contract was offered on a "take it or leave it" basis, and whether there was an opportunity to negotiate the terms. In most cases, it is likely a franchise agreement will fall within this definition.
An unfair contract term is one that:
- would cause a significant imbalance in the parties' rights and obligations arising under the contract;
- is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
- would cause detriment (whether financial or otherwise) to a party if it were applied, enforced, or relied on.
There are a number of concepts and clauses in franchise documents that may be at risk of being considered unfair. Often, these are the very clauses which a franchisor would expect to rely on when enforcing or terminating a franchise agreement. The key lies in striking a balance between protecting the franchisor's brand and reputation and not being so onerous as to be deemed unfair.
In addition, the amendments will also introduce a new law against unconscionable conduct."Unconscionable conduct" is not specifically defined as it intends to capture a broad range of activity. There is a non-exhaustive list of factors for a court to consider in determining whether conduct is conscionable, such as relative bargaining power, good faith, unfair pressure and adequate disclosure. The test is highly contextual with a particular focus on the operational relationship between the parties.
The new unfair contracts and unconscionable conduct laws will apply to all actions of a franchisor, not just the terms of a franchise agreement. For example, this will affect the way franchisors approach breach notices, terminations and decisions whether or not to renew a franchise agreement.
What's next for Franchisors?
We have significant experience advising franchisors operating in Australia and New Zealand. Our highly relevant experience and knowledge of both markets means we are in a position to readily assist you in dealing with the upcoming changes. We can help your team to identify vulnerabilities in franchise documents and suggest edits to counter those. Moreover, from a strategic and operational perspective, we can advise changes to the way you manage your network and engage with prospective and current franchisees – driving best practice in franchising is the objective. That in itself will enhance franchise relationships and avoid issues such as important clauses being ruled unenforceable, or conduct being deemed unconscionable.
You have everything to lose or everything to gain. Get in touch to get this important project underway.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.