Khushbu Sundarji
Auckland , May 16, 2022
A Franchise Agreement is a specialised commercial contract which details the method of marketing goods and services.
There is no franchise specific law in New Zealand, so the parties rely on the terms of the Franchise Agreement and general contract law, as well as laws relating to employment, health and safety, fair trading, consumer law and tax to form the basis for the operation of the franchised business and the relationship between the parties.
The clauses that must be reviewed prior to signing the Franchise Agreement include the following:
Territory
Franchisees are usually given a specific territory which also includes an area to conduct local marketing. The franchisee can only seek clients or customers within their territory and is not permitted to solicit clients or customers outside of the territory.
Franchisor obligations
The franchisor has various obligations to the franchisee under the Franchise Agreement including providing the equipment, manuals and stationery needed to operate the business as well as training, guidance and support to the franchisee during the term of the Franchise Agreement.
Good Faith
Good faith is an important and reciprocal obligation in franchising. Franchising is about relationships and the parties must be open, and honest and communicate with each other on a regular basis.
Franchisee obligations
The franchisee has a range of obligations to the franchisor under the Franchise Agreement. One of the main obligations includes paying the royalty, marketing and other fees for the use of the franchise system and the intellectual property. Other obligations include operating the business in accordance with the operations manual and Franchise Agreement, keeping all information provided by the franchisor in relation to the business confidential, and keeping and maintaining financial and employee records. Each of these obligations is mandatory and if the franchisee fails to comply with any of the obligations, it will be considered a breach of the Franchise Agreement.
Intellectual property
Under the Franchise Agreement, the franchisee is allowed to use the intellectual property of the franchisor for the sole purpose of running the business. All trademarks, operations manuals and any other material associated with the system will be considered the intellectual property of the franchisor. The franchisee cannot claim ownership of the intellectual property or use it for any other purpose apart from running the business and any attempt to do so will be a breach of the Franchise Agreement and a cause for immediate termination of the Franchise Agreement.
Restraint of trade
When the franchise term ends the franchisee will be restrained from being involved in a similar business for a period of time and its territory as the franchisee has been given access to confidential information and trained in a new business. After the Franchise Agreement ends the franchisee cannot immediately set up a competing business using the franchisor’s confidential information and methods. The courts in New Zealand acknowledge that although restraints may be restrictive as it stops franchisees from earning a living, commercially the restraints are necessary to protect the franchisor and its business. As long as the restraint is reasonable, the Courts will enforce the restraint.
Dispute Resolution
The Franchise Agreement will set out the methods to resolve disputes between the parties. Until both parties have complied with the dispute resolution process contained in the Franchise Agreement, neither party can commence court proceedings in relation to any dispute. The clause should be comprehensive as to the timelines and the manner in which the parties must try to resolve any dispute. If the franchisor belongs to the Franchise Association of New Zealand (FANZ) then the Code of Practice sets out the dispute resolution clause that must be in the Franchise Agreement.
Termination
Generally, there are two classes of terminations. There are events that are grounds for termination, but you will still have an opportunity to remedy the breach. These grounds include not paying the royalty or any other payment due to the franchisor. The second class are events that will mean immediate termination of your Franchise Agreement with no opportunity to remedy the breach. These grounds include damaging the intellectual property of the franchisor, receiving two or more notices of the breach within a certain time period, attempting to sell the business without the consent of the franchisor and if the franchisee goes into receivership or liquidation.
A Franchise Agreement is a legally binding contract, and any potential franchisee must obtain expert legal advice regarding the agreement. Issues usually arise when franchisees have not clearly understood their obligations and incur significant monetary consequences as a result of breaching their agreement.
Khushbu Sundarji is a Partner at Stewart Germann Law Office and can be contacted on (09) 308 9925 or at khushbu@germann.co.nz, or visit the website www.germann.co.nz
