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1. Law Conference 2001
Session Reference:S09
Surname:Germann
First Name:Stewart
Title of Presentation:
LawAsia/New Zealand Law Society
Conference 2001
___________________________________________________________
SGL
STEWART GERMANN LAW OFFICE
Lawyers, Notary Public
Germann S F09 paper
15/09/2001
INDEX
Section Page No.
1. NEGOTIATION OF FRANCHISE AGREEMENTS 1
2. BRANDING 4
3. FRANCHISING CODE OF PRACTICE 5
4. NEW ZEALAND SURVEY 2001 6
LAWASIA/NEW ZEALAND LAW SOCIETY
CONFERENCE 2001
2. NEGOTIATION OF FRANCHISE AGREEMENTS
As a franchising lawyer in New Zealand I come across many forms of
franchise agreements. I have seen and advised on franchise agreements for
use in New Zealand, Australia, Singapore, the United Kingdom, Canada, and
different parts of the USA. In all cases the agreements are similar but different
and I now want to highlight what to look out for.
1 Intellectual Property
It is important to always identify the intellectual property (IP) owned
by the franchisor and to be included in the franchise. This IP can
include registered trade marks, patents, trade secrets and other forms of
confidential information. The franchising lawyer must understand the
IP implications and when drafting a document must allow for the grant
of franchise to a franchisee to include the right to use a franchisor's IP.
2 Governing Law
This is always an interesting one. Most franchisors want the governing
law to be where the franchisor operates and lives. Therefore, a US
franchisor will want the governing law to be in the relevant state of the
US. While this may seem sensible, from a practical and enforcement
point of view it can be far from cost effective. If a franchisee defaults
and steps have to be taken and the franchisee is in New Zealand, it is
far better for the governing law to be New Zealand, in my opinion.
Many will disagree but there is always room for a healthy debate in
this area.
3 Territorial Restrictions
It is important for the grant of franchise to include either a reference to
a territory or to no territory. If a territory is being used then the grant
of franchise will usually allow the franchisee to have an exclusive
territory. However, some agreements provide for a non-exclusive use
of territory and the distinction must be understood and explained so
that there is no confusion. Careful drafting is required in this area so
that the intention of the franchisor and the interpretation of the clause
are ad idem.
4 Cooling Off
Many countries have Codes of Practice which contain cooling off
provisions. In Australia the Code of Practice is mandatory. In New
Zealand the Code of Practice is only mandatory upon franchisors who
belong to the Franchise Association of New Zealand. The Code of
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Practice provides for a 7 day cooling off period after execution of the
franchise agreement and this is sensible because of the relationship
aspect of the parties.
5 Royalties/Service Fees
Great care must be taken in the drafting of clauses relating to royalties
or service fees. The clause must be unambiguous and must also allow
for Government taxes to be added to any percentage amount. Recently
I gave advice to a franchisor where the intention had always been to
charge a service fee of 5% plus GST. Unfortunately, the way the
clause was drafted resulted in the clause being interpreted as a charge
of 5% including GST. This meant that the franchisor would only
receive 4.445% instead of 5% so that there was a definite monetary
loss for the Franchisor. At all times there should be no ambiguity and
these clauses need careful scrutiny when the agreements come in from
overseas.
6 Taxation Aspects
If a New Zealand person or company takes a master franchise from the
US then both parties must understand the taxation implications. For
example, if any money has to be paid from New Zealand to the US
then the New Zealand Inland Revenue require a 10% withholding tax
to be deducted. This is in the nature of a non-resident withholding tax
(NRWT) since the US franchisor (entity) is deemed to be a non-
resident. Some US franchisors want to receive the full amount which
means that the amount payable has to be grossed up and the extra is an
additional cost for the New Zealand master franchisee. When royalty
income is repatriated from New Zealand to the US once again non
resident withholding tax has to be deducted. There is a double taxation
treaty between New Zealand and the US (as with many other countries)
which means that the US entity can claim a tax credit and does not
have to pay double taxation. It is important for the parties to obtain
expert taxation advice from local tax experts so that there is no
misunderstanding of the taxation position as the result can be
disastrous if there is.
7 Dispute Resolution
I have noticed that some foreign agreements do not contain the normal
dispute resolution or alternative dispute resolution clause where
mediation is the favoured option. In Australia, dispute resolution is
mandatory under the Code and mediation is used extensively. In New
Zealand, mediation is widely accepted and widely used and I am sure
that the same will apply in many other overseas jurisdictions.
Mediation has the advantage of being quick, confidential and cost
effective.
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Some agreements provide for arbitration as the only means of
resolving a dispute. Although mediation is preferred, arbitration is
acceptable and is widely used. Great care must be taken in drafting the
appropriate dispute resolution clause so that the implementation is
exactly as contemplated by the parties.
8 Onerous Obligations
Some franchise agreements in my opinion contain obligations which
are far too onerous and border on being unfair. We all know that
franchise agreements are weighted in favour of the franchisor but at the
end of the day they must be fair documents. Some agreements are
draconian in which case I have no hesitation in recommending a
franchisee not to sign the agreement. Assuming the agreement is fair,
the obligations of both franchisor and franchisee should be carefully
scrutinised. The obligations of a franchisee should be capable of being
carried out and should not unfairly unprejudice a franchisee. The
obligations of a franchisor must not be superficial and must include
obligations for the franchisor to train, to update and to re-train, to
protect the brand, to take steps if there is an infringement, to support
the franchisee and to do other many important functions. Some
franchise agreements I have seen contain far too brief obligations on
the franchisor and far too onerous obligations on the franchisee so care
must be taken in this area.
9 Products
If a franchisor wants a franchisee to purchase products from the
franchisor then the agreement will explicitly state this. A franchisee
must consider the price of the products to be fair. If a franchisor is
going to make profit out of the products then this must be disclosed to
the franchisee. In New Zealand, if there is non-disclosure of any secret
profit then this is deemed to be a secret commission which would
infringe the Secret Commissions Act 1910. Any infringement would
mean that the profit is illegal and has to be paid back. Because
franchising is based on a relationship of mutual trust and respect there
must be no secrets and no hidden charges. Many franchisors pass on
products at cost and really want to make their money out of the
ongoing royalty or service fee. Other franchisors will want to make a
profit out of products but will reduce the percentage payable by way of
ongoing royalty or service fee to compensate. Greedy franchisors
make a profit out of products and have a high percentage or ongoing
service fee but those franchisors often have unhappy franchisees in the
system.
10 Restrictive Trade Practices
A franchise agreement by its very nature can be considered to be a
restrictive trade practice. However, careful drafting can avoid an
infringement of the Commerce Act 1986 in New Zealand and the
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Trade Practices Act 1974 in Australia. Great care must be taken in this
area and lawyers must understand the implications of any restrictive
practice in a local jurisdiction which is why expert legal advice should
always be sought in a foreign jurisdiction.
11 Initial Term and Right of Renewal
The initial term plus rights of renewal must be carefully considered. In
New Zealand the common term is 5 years with one or two rights of
renewal of 5 years each. There are agreements which go for 10 plus 10
but these are probably the exception. In the US many franchise
agreements are for 15 or 20 years so the length of the term must be
understood and explained by the franchising lawyer to a potential
franchisee. The longer the term, the less flexible and restrictive for a
franchisor to update the franchise agreement so I favour an initial term
of 5 years. At the end of the first 5 years this allows the franchisor,
subject to the franchisee exercising its right of renewal for a further
term, to require the franchisee to sign the then current agreement being
used by the franchisor. This will update the documentation which is
good for both parties as it is essential to have the latest provisions.
3. BRANDING
• Successful branding is of paramount importance.
• Marketing plan and branding initiative are different.
• Branding is promise of a company and its products or services and thus
the brand is the company. For example, the IBM brand expresses the
highest level of technological support. NZ Couriers equates with
promise of delivery and reliability.
• Marketing plan involves the five "P's" - people, product, price, place
and promotion.
• Branding and marketing plans are distinct but yet closely intertwined.
There are four steps to successful branding:
1 Achieve internal consensus about the corporate vision and the
supporting role branding should play within it.
2 To enhance the probability of success, ensure the strategic branding
process is a thorough one.
3 Senior management should visibly support the ongoing branding
endeavour to all shareholders and franchisees.
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4 Understand the market opportunity presented by the economy and the
importance a successful branding initiative plays in exploiting it.
4. FRANCHISING CODE OF PRACTICE
As I mentioned earlier, there is no franchising legislation in New Zealand.
The Franchise Association of New Zealand which was formed in 1996 has a
Code of Practice which is mandatory upon all members of the Association.
The Code of Practice has four 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
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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.
Please note that the Code of Practice is not supported by legislation, nor is it
compulsory for franchisors to be members of the Franchise Association of
New Zealand. However, when a purchaser buys a franchise from a member of
the Franchise Association of New Zealand, he or she does so in the knowledge
that the member has undertaken to operate according to the standards laid
down in the Code. In the event of a member failing to abide by the Code then
such member can be investigated with the ultimate sanction being expulsion
from the Franchise Association of New Zealand and probably litigation.
I attach the Franchising Code of Practice which I ask you to read. In
particular, please note the Disclosure Document Requirements which are not
onerous but which are very important. I know that the Australian Code goes a
lot further than from the New Zealand Code and requires lots of additional
information. Regardless of the jurisdiction, it is important to have full
disclosure of all relevant information. You will be aware that in the US there
is a federal requirement to publish what is called Uniform Franchise Offering
Circular (UFOC). This is a comprehensive document which is actually
registered and binding on all franchisors. The penalties for non-disclosure or
for improper or inaccurate disclosure of information are severe which is why
legal advice should always be sought in this area.
5. NEW ZEALAND SURVEY 2001
The Franchise Association of New Zealand has conducted an annual survey
during the past 4 years. The 2001 survey being the fifth survey has confirmed
that the franchise sector is not only growing but it is growing at a very fast rate
in New Zealand.
Key facts from Survey 2001 are as follows:
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• The New Zealand franchise sector is estimated to account for total
annual turnover of NZ$10 billion.
• The number of people working in franchising totals approximately
70,000.
• The number of franchised and company-owned units is estimated to be
14,000.
• Turnover, number of outlets and those employed in them exhibit 15-
25% growth pa.
• Business and Property Services (up 18%), Construction and Trade
sectors (up 16%) and Personal and Other services (up 6%) are all
experiencing growth.
• 77% of franchise systems operating here originate in New Zealand.
• The average failure rate of franchised units is less than 6% within 3
years.
• The median total start-up cost for a franchise is $125,000.
A key statistic is the growth rate which has been between 20 and 25% during
the past 2-3 years. I consider this to be a world leader and recently I attended
the International Franchise Association (IFA) at Washington DC where I
presented the New Zealand Survey Results. The IFA was astounded by the
maturity and diversity of franchising in New Zealand. A most interesting
statistic is that 77% of franchise systems operating here actually originate in
New Zealand. It is easy for the public to think that New Zealand is dominated
by overseas systems but this is not the case. Certainly the overseas systems
have wonderful branding and exposure but that is what franchising is all about.
I trust that I have covered some topics which are both topical and of great interest.
Franchising is exciting and very powerful but it must be done properly. High
standards must be maintained at all times and it is very important for lawyers involved
in franchising to be not only technically competent but also well aware of what is
happening within the franchising sector.
Stewart Germann
Auckland
New Zealand
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FRANCHISING CODE OF PRACTICE
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FRANCHISING CODE OF PRACTICE
CONTENTS PAGE
1. ADMINISTRATION AND INTERPRETATION
2. COMPLIANCE
3. NON-COMPLIANCE
4. DISCLOSURE
5. CERTIFICATION
6. PREPAYMENTS AND COOLING OFF PERIOD
7. STANDARDS OF CONDUCT
8. DISPUTE RESOLUTION
9. IDENTIFICATION
10. AFFILIATE MEMBERS AS ADVISERS
DISCLOSURE DOCUMENT REQUIREMENTS
“FRANCHISING CODE OF PRACTICE”
(“the Code”)
1. ADMINISTRATION AND INTERPRETATION
1.1 The Association has established and administers the Franchising Code of
Practice (“the Code”).
1.2 Terms and expressions used in the Code shall be interpreted and defined and
have the same meanings as provided for in the Rules.
2. COMPLIANCE
2.1 The Association seeks compliance with the Code on an annual basis by all
Members of the Association (referred to throughout this Code as “Members”.)
2.2 Franchisor Members of the Association certify that they agree to comply at all
times with the Code (including any modifications from time to time made to
the Code by the Association) and in particular (and without limiting the
foregoing) shall comply in relation to each Franchise granted and shall include
in each new Franchise Agreement a provision also requiring the Franchisee to
act in accordance with the Code. By this method, new Franchisees of such
franchise systems are covered by the Code. In respect of existing Franchisees,
Franchisor Members will represent to such Franchisees that they have agreed
to comply with the Code and shall seek and encourage the agreement of such
current Franchisees to comply with the Code. Where a Franchisee does not so
agree to comply with the Code then the Franchisor shall not be deemed to
have failed to comply with the Code in respect of any conduct by that
Franchisee.
2.3 Where a national Franchisor is a Member and has granted a master franchise
to a Sub-Franchisor (Master Franchisee) and the Sub-Franchisor grants a
franchise to a Franchisee, and the national Franchisor is not a party to the
Franchise Agreement, then the Sub-Franchisor in addition to the national
Franchisor shall be required to be a Member of the Association as a
Franchisor.
2.4 Affiliate Members certify that they agree to comply with the Code in respect
of those provisions which apply to them. Where the Affiliate is a firm and not
an individual the Affiliate shall nominate the individuals within the firm who
hold themselves out to be advisers to Franchisors or Franchisees.
2.5 The Association shall have the right to request and examine copies of any
documents or parts of any documents required to be produced pursuant to this
Code by a Member. That Member must provide the Association with copies of
such documents within fourteen (14)days of request.
3. NON-COMPLIANCE
3.1 The Association has the power to remove from its membership a Member if:
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3.1.1 In the event that the Association has reason to believe or has received advice
or information that a Member is not complying with the Code, it will notify
the Member concerned in writing requesting that the Member show cause why
it should not be removed from the membership of the Association within thirty
(30) days of the date of the notice. Prior to issuing this notice the Association
may make such informal investigations as to the allegations of non-
compliance as it thinks appropriate.
3.1.2 In the event that the Member fails to respond within the said thirty (30) days,
then the Board may remove that Member from membership of the
Association.
3.1.3 In the event that the Member responds a sub-committee of not less than three
(3) members of the Board will consider all issues relating to the said response
and will determine if the Member has failed to show cause why it should not
be removed. In the event that the sub-committee determines that the Member
has failed to show cause why it should not be removed from membership the
said Member will be notified of that decision in writing and the Member’s
name will be removed from the membership of the Association, subject to an
appeal being lodged in accordance with provision 3.1.4 hereof, within twenty
one (21) days after written notice has been given to the Member.
3.1.4 In the event that the Member disputes the findings of the sub-committee it may
within the said twenty one (21) day period lodge a written appeal with the
Association. The matter will then be referred to the full Board for its
deliberation. The members of the sub-committee referred to in provision 3.1.3
shall not vote in relation to any resolution in relation to the said appeal. The
Board may refer this appeal to an independent third party for expert opinion
and/or recommendation to the Board. In the event that the Board determines
that the Member has failed to show cause why it should not be removed from
the membership of the Association then the Board will so notify the Member
and the name will be removed seven (7) days after the date of the said notice
from the Board.
3.2 A Member that has been removed from membership of the Association for
whatever reason may reapply for registration after six months from the date of
removal from the membership of the Association provided it can demonstrate
to the satisfaction of the Association that it is prepared and able to comply
with the Rules and the Code in all respects.
3.3 Where a Member has been removed from the membership of the Association:
3.3.1 And is a Franchisor it must promptly notify all of its Franchisees in writing
that it has been so removed.
3.3.2 It must make no further representations that it is a member of the Association.
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4. DISCLOSURE
4.1 Franchisors who are Members will provide disclosure by way of a Disclosure
Document in accordance with the provisions of this Code.
4.2 The Disclosure Document will be updated at least annually and be provided to
all prospective Franchisees at least fourteen (14) days prior to signing a
Franchise Agreement. A Disclosure Document is required to be provided to
an existing Franchisee in conjunction with the renewal of the Franchise
Agreement within one month of being requested by the Franchisee.
4.3 The Disclosure Document is to comply with such contents of this Code as are
applicable to the relevant Franchise System and the contents of the Disclosure
Document shall set a minimum standard which may be exceeded by supplying
more information than is necessary.
4.4 The financial disclosure contained within the Disclosure Document, as
updated on an annual basis, will be provided to any existing Franchisee at any
time upon request by the Franchisee.
4.5 A Franchisor will be at liberty to add further comment by way of more
elaborate explanation or clarification to further explain the financial
disclosure, e.g. where the Franchisor company is part of a group of companies
or trusts and the basic information may not present the financial position most
appropriately.
4.6 Where a Franchisor and Sub-Franchisor (Master Franchisee) enter into a
contractual arrangement with a Franchisee, the Disclosure Document will
contain material information in relation to both the Franchisor and Sub-
Franchisor including financial disclosure relating to both the Franchisor and
the Sub-Franchisor.
4.7 Where the Franchisor is not in a direct contractual arrangement with the
Franchisee by way of a Franchise Agreement and the Franchise Agreement is
only a two-party Agreement between the sub-Franchisor and the Franchisee
then the Disclosure Document need only contain information relating to the
sub-Franchisor and the Franchise System generally.
4.8 Financial disclosure will be provided by a vendor Franchisee which is a
member of the Association to an approved purchaser of that Franchisee’s
business and such financial disclosure will include the accountant’s or
auditor’s reports as the case may be.
5. CERTIFICATION
5.1 Prior to the execution of the Franchise Agreement a Franchisor who is a
member of the Association will require each Franchisee to certify that the
Franchisee has received and has read the following documents:
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5.1.1 The Disclosure Document at least fourteen (14) days prior to the signing of the
Franchise Agreement
5.1.2 A copy of the Code of Practice
5.1.3 A copy of the Code of Ethics.
5.2 Prior to the execution of the Franchise Agreement, a Franchisor Member
will require each Franchisee to produce a certificate from a solicitor certifying
that the solicitor is acting independently for the Franchisee and has explained
the Franchise Agreement to the Franchisee. Alternatively, the Franchisee is to
sign a statement that the Franchise Agreement has been explained by a
solicitor or that the Franchisee declines to take independent legal advice.
6. PREPAYMENTS AND COOLING OFF PERIOD
6.1 Where a Franchisor requires any payment prior to the signing of a Franchise
Agreement, the Franchisor shall clearly specify in writing to the prospective
Franchisee the purpose for which the moneys are required the terms and
conditions governing the refunding or application of such moneys and identify
who shall hold such moneys.
6.2 The following provisions must apply:
6.2.1 Either Franchise Agreements must contain a minimum seven (7) day cooling
off period as from the date of the Franchise Agreement within which time a
Franchisee may terminate the Franchise Agreement.
6.2.2 Or where a Franchisor and a prospective Franchisee enter into a definite
“agreement to agree” to enter into a Franchise Agreement and the Franchise
Agreement and Disclosure Document have been provided the seven (7) day
cooling off period may be contained in that “agreement to agree” and shall not
be required to be repeated in the Franchise Agreement.
In the event that the Franchise Agreement is so terminated an amount to cover
reasonable expenses incurred by the Franchisor (relative to the induction of the
Franchisee) and provided that such amount is clearly specified in the Franchise
Agreement or “agreement to agree” and Disclosure Document, may be
retained by the Franchisor from the initial fees. All other moneys will be
refunded to the Franchisee.
6.3 The cooling off period need not be contained within a Franchise Agreement
upon renewal of a franchise by a Franchisee or a Franchise Agreement that is
to be entered into upon the sale of a franchise by a Franchisee provided that in
the latter circumstances the Franchise Agreement and the documents set forth
in paragraph 5.1 are provided to the potential Franchisee at least seven (7)
days before the signing of the new Franchise Agreement in relation to the
renewal of a franchise.
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7. STANDARDS OF CONDUCT
7.1 Franchisors and Franchisees shall act in an ethical, honest and lawful manner
and endeavour to pursue best franchise business practice of the time and place.
They shall in their dealings with one another at least avoid the following
conduct where such conduct would cause significant detriment to either
party’s business:
7.1.1 Conduct which is unnecessary and unreasonable in relation to the risks to be
incurred by one party.
7.1.2 Conduct that is not reasonably necessary for the protection of the legitimate
business interests of the Franchisor, Franchisee or Franchise system.
8. DISPUTE RESOLUTION
8.1 The Association requires all Franchisor Members to have a dispute resolution
clause in their Franchise Agreements. If a Franchisor has a dispute resolution
clause in its current form of Franchise Agreement then the provisions of that
clause shall prevail. However, if a Franchisor does not have a dispute
resolution clause in its current form of Franchise Agreement then the Board
recommends that the procedure as set out in paragraph 8.2 is followed in order
to resolve any disputes.
8.2 The Franchisor and the Franchisee should comply with the following dispute
resolution procedure:
8.2.1 Where a dispute arises between the Franchisor and the Franchisee (“the
Parties”), the complainant will set out in writing the nature of the dispute.
8.2.2 Both Parties will make every effort to resolve the dispute by mutual
negotiation.
8.2.3 In the event that the Parties are unable to reach a resolution of the dispute,
either party may by notice in writing (“the Notice”) advise the other Member
that it seeks to have the dispute resolved by mediation. Either party may
notify the Association of the dispute. If so notified, the Association will
provide assistance for facilitating resolution of the dispute but will not itself
act as a mediator and the Association may charge a fee to both parties.
8.2.4 Within twenty-one (21) days of the date of the Notice or such other time
period as set forth in the Franchise Agreement, the Parties may refer the matter
to a mutually agreed mediator . In the event that no agreement can be reached
on an appropriate mediator, the dispute will be referred to a mediator
(“Mediator”) to be chosen by the Parties from a List of Mediators to be
provided by the Association.
8.2.5 The Mediator will have the right to determine procedures and may or may not
allow the appearance of lawyers on behalf of the Parties and may co-opt other
expert assistance.
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8.2.6 The Mediator is to be satisfied that both Parties have made a determined and
genuine effort to resolve the dispute and have co-operated with the Mediator.
8.2.7 Proceedings of the Mediator will be as informal as is consistent with the
proper conduct of the matter and shall allow the Mediator to communicate
privately with the Parties or with their lawyers.
8.2.8 The Parties to the mediation will agree that:
• Everything that occurs before the Mediator will be in confidence and in
closed session;
• All discussions will be without prejudice; and
• No documents brought into existence specifically for the purpose of
the mediation process will be called into evidence in any subsequent
litigation by either party.
8.2.9 It will be the role of the Mediator to act fairly, in good faith and without bias
with the purpose of seeking a resolution of the dispute and the Mediator shall
treat all matters in confidence.
8.2.10 Each Party will have the opportunity to adequately present its case.
8.2.11 The Mediator shall have regard to the fairness and reasonableness of any
matters pertaining to a dispute and the need for the Franchisor to maintain the
integrity of its name, image and the Franchise System.
8.2.12 The Mediator shall deal with any matter as expeditiously as possible but no
later than fourteen (14) days after referral to the Mediator.
8.2.13 The parties to the mediation shall bear the mediation costs on an equal basis
and grant immunity from liability to the Mediator.
8.2.14 The Parties will report back to the Mediator within fourteen (14) days of the
end of the mediation hearings on actions taken, based on the outcome of the
mediation.
8.3 Nothing contained in the dispute resolution procedures above will deny a Party
to a Franchise Agreement the right to seek injunctive relief from an
appropriate Court, where failure to obtain such relief would cause irreparable
damage to the Party concerned or the Franchise System. Further, such dispute
resolution procedures will not apply to events giving rise to the immediate
termination of the Franchise Agreement where such events are clearly
specified in the Franchise Agreement and Disclosure Document, and there is
no legitimate dispute as to the interpretation of their meaning or factors
giving rise to such events.
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9. IDENTIFICATION
9.1 A Franchisor Member will require each Franchisee to clearly identify both
within business premises and on appropriate stationery, that the Franchisee’s
business is being operated under Franchise from the Franchisor.
10. AFFILIATE MEMBERS AS ADVISERS
10.1 Affiliate Members who are acting as advisers to Franchisors and Franchisees
and the relevant nominated persons pursuant to paragraph 2.4 will:
10.1.1 Provide a client or prospective client with a written resume or profile of any
relevant qualifications of the nominated person(s) together with true
representations of their franchising education and experience.
10.1.2 Respect the confidentiality of all information received concerning a client’s
business which is not in the public domain and will not disclose or permit
disclosure of any such information without the client’s prior permission in
writing.
10.1.3 Disclose to a client or prospective client any personal or financial interests or
other material circumstances which may create a conflict of interest in respect
of that client and in particular without derogating from the generality of the
foregoing:
• Any directorship or significant interest in any business which competes
with the client.
• Any financial interest in goods or services recommended by the
Adviser for use by the client.
• Any personal relationship with any individual in the client’s
employment.
• The existence but not the name of any existing franchise client of the
Adviser whose business may directly compete with that of the client or
prospective client.
10.1.4 Not advise any Franchisee or prospective Franchisee in relation to any
franchise opportunity offered by any Franchisor for whom the Adviser has
acted without full disclosure of relevant circumstances.
DISCLOSURE DOCUMENT REQUIREMENTS
(i) Name and registered office of the Franchisor. State if a member of any other
relevant trade or industry association.
(ii) Names, job descriptions, qualifications (if any) of the Franchisor’s
directors/executive officers/principals.
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(iii) A detailed resume of the business experience of the Franchisor (and any
related entities) and its directors/secretary/executive officers/principals
including:
(a) Length of experience in the type of business offered in the franchise.
(b) Length of experience in operating or offering the franchise.
(c) Length of experience in operating or offering other franchises and a
description of those franchises.
(iv) Viability statement with key financial information in respect of the Franchisor
from the Franchisor’s directors/principals in terms of Appendix 1. The
information and statements set forth in Appendix 1 shall not be required to be
provided by a Franchisor which is a wholly owned subsidiary of a public
company whose shares are publicly traded on the New Zealand Stock
Exchange where:
(a) The Franchisor or its parent company has obtained from the New
Zealand Securities Commission an exemption for the provision of
separate accounts for subsidiary companies; and
(b) The Franchisor provides in place of the information and statements set
forth in Appendix 1 the audited annual report of the parent company
containing consolidated financial statements including that of the
Franchisor.
(v) Details of any bankruptcies, receiverships, liquidations, or materially relevant
debt recovery, criminal, civil or administrative proceedings which are current
or have occurred or for which judgment has been entered against the
Franchisor (and any related entities) or any of its directors/executive
officers/principals within the last ten (10) years.
(vi) Summary of the main particulars and features of the franchise including:
(a) Nature and period of existence of the franchise system and how it has
developed.
(b) Examples of any trade mark, logo, symbol, etc used to market the
Franchisor’s goods or services and steps taken to protect these and
details of any threatened or pending litigation in relation to these.
(c) Details of payments to be made by the Franchisee to the Franchisor
(including method of calculation if applicable). Amount refunded by
Franchisor if Franchisee terminates Franchise Agreement within the
cooling off period.
(d) Particulars of any restrictions imposed on the Franchisee (e.g.
territorial, or offer on competing franchises).
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(e) Summary of the terms and conditions for the purchase of services,
goods, fixtures, property, etc from the Franchisor and the situation
pertaining if source of goods/products supplied by Franchisor fails.
Relevant comments/conditions in respect to rebates etc from suppliers.
(f) Basis of Franchisor’s involvement/approval for site selection.
(g) Summary of terms and conditions relating to termination, renewal,
goodwill and assignment of the franchise.
(h) Summary of the main obligations of the Franchisor (including initial
and ongoing training to be provided).
(i) Details of any payment or commission made by the Franchisor to any
adviser or consultant in relation to the sale of that franchise.
(vii) A tabulated list of components making up the franchise purchase e.g.
franchise fee, stock, fixtures/fittings, working capital, etc with (estimated)
individual cost then totalled to reflect the full outlay. A summary of those
items which could be leased and (estimated) costs involved being part of the
full outlay.
(viii) Details of any financial requirements by the Franchisor of the Franchisee, e.g.
a specific amount of non-borrowed capital towards the franchise purchase
price.
(ix) (a) Number of existing franchises and company or principals’ outlets.
A list of existing Franchisees (including address and phone number of
each and year commenced business) should be available for referee
purposes. Should a full list be impractical then a list of all Franchisees
in each city or town as appropriate to the circumstances should be
provided.
(b) Number of Franchises terminated or not renewed over the past year.
(c) Details of any current unresolved litigation with any existing or
former Franchisees.
(x) (a) Where written projections are provided in respect to levels of potential
sales, income, gross/net profits or other financial projections etc from
the franchise or franchises of a similar nature particulars of the
basis/assumptions upon which the representations are made shall be
provided.
(b) Each page of the projections should be qualified in respect of such
basis/assumptions, for example: These figures represent ACTUAL
performance by either the Franchisor or a Franchisee.
• There is no guarantee that you will achieve these figures and
nor is it intended that you should rely on them as a guarantee.
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OR
• These figures indicate the gross profit margins and revenue
expenses at stated turnover levels which have been
experienced by (the Franchisor in its own operations) or (the
Franchisees on average in the last profit and loss accounts
which have been supplied to the Franchisor). There is no
guarantee that you will achieve the same results, nor is it
intended that you should rely on them as a guarantee.
(c) A clear statement whether or not depreciation and any salary/wages
for the Franchisee and the cost of servicing loans are included.
(xi) Statement as to whether the territory or site to be franchised has been subject
to any trading activity, particularly a previous franchise in the same Franchise
System, and if so, the history and details including the circumstance of any
cessation of the franchise.
(xii) A statement in it indicating that “this Disclosure Document should help you
make up your mind. While it includes some information about your Contract
(Franchise Agreement) don’t rely on it alone to understand your Contract.
Read all of your Contract carefully. Buying a franchise is a serious
undertaking. Take your time to decide. You are also required to have the
Contract explained to you by an experienced solicitor and you should seek
accountancy and financial advice on the franchise proposition from an
accountant.”
(xiii) A Certificate in a similar form as follows: “The Directors (or, if the Franchise
is not owned by a Company, the “Proprietors”) of the Franchisor have
reasonable grounds to believe that the Franchisor will be able to pay its debts
as and when they fall due and the Franchisor is solvent as at today’s date.”
Each Director or Proprietor providing the certificate should sign it, date it and
add his or her name legibly underneath their signatures and their office (e.g.
“Director” or “Proprietor”).
(xiv) Each Disclosure Document should also be signed and dated at the end by the
same persons as are required to execute any Franchise Agreement for the
Franchisor each of whom shall also add his or her name legibly underneath
their signatures and their office (e.g. “Director” or “Proprietor”).
DATED 2001
__________________________________ _________________________________
Chairperson Secretary
