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Have you considered buying a franchise if you want to get into the business? Franchising is a popular business model for business owners as it allows them to expand their business quickly. It is also a good way for prospective business owners to get into business as they are buying into an established brand. However, given the nature of franchising, the arrangement may attract New Zealand’s exclusive dealings laws. This article will explain whether a franchisor is able to force a franchisee to buy their goods in New Zealand. 

What Is a Franchise Agreement?

A ‘franchisor’ is the person who is expanding their business. Additionally, the person who is buying the rights to use a franchisor’s branding is known as the ‘franchisee’.

Franchise agreements are the legally binding contract used to regulate a franchisor and a franchisee’s relationship. This document may have certain clauses that benefit either party. 

What Is the Law Around Exclusive Dealing in New Zealand?

Exclusive dealing refers to when a contract requires one party to only buy goods from another party. This forces the party buying the goods to only sell goods from one business. Consequently, the business enforcing the contract benefits since their competitors cannot sell goods through the retailer. Therefore, they ensure that they have a bigger market share. However, in New Zealand, exclusive dealing is generally considered illegal. 

The main reason exclusive dealing is generally considered illegal is because it makes it hard for competitors to enter the market. This is because the retailer may be the first port of call for customers. Therefore, if they are only selling one type of product, customers will never get a chance to try other competitors’ products. 

There is no law that explicitly deems exclusive dealing as illegal. However, the law does prohibit businesses with substantial market power from engaging in anti-competitive behaviour.

A business engages in anti-competitive behaviour if it restricts new market entrants, which is exactly what exclusive dealing does. 

To summarise, the law explicitly prohibits anti-competitive behaviour, but not exclusive dealing. As a result, there may be cases where exclusive dealing is permissible. 

Can a Franchisor Force me to Buy Their Goods?

Technically, entering into a franchising agreement is exclusive dealing. However, it is unlikely that franchising raises any legal issues in New Zealand. This is because franchised businesses act under a head office. In some cases, the business might have separate individual owners. 

It is also important to note that exclusive dealing is only illegal if it substantially lessens competition. Therefore, a franchisor can force a franchisee to only buy their goods. Such a practice does not substantially lessen competition as it is unlikely that a franchisee will want to buy goods from another provider. Indeed, it is a good thing for franchisees to remain consistent with each other to reap the rewards of franchising. 

However, there may be situations where the Commerce Comission deems the franchise as dealing in an anti-competitive situation. In this case, the franchise can apply to the Commerce Commission to approve their anti-competitive practice. This will only receive approval if the franchisor can prove that they need exclusive dealing to preserve their franchises’ quality of product. Importantly, if a franchisor can prove that their business will suffer without this clause, then the Commerce Commission may allow them to use it. 

Key Takeaways

If you are wanting to become a business owner in New Zealand but do not know where to start, you should consider buying a franchise. This is one of the easiest ways to open a business as you benefit from established brand recognition. Therefore, you will likely receive revenue as soon as you open. 

A franchise agreement is the document that governs the relationship between a franchisor and the franchisee. This document may contain an exclusive dealing clause that requires the franchisee to only buy goods from the franchisee. 

Exclusive dealing is illegal if it substantially lessens competition. However, in franchising, it usually does not lead to reduced competition. This is because most franchisees would want their products to be consistent with other franchises. Also, if it does substantially lessen competition, the franchisor can apply to the Commerce Commission for an exemption. 

For legal advice on franchising, contact LegalVision’s franchise lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Can the Commerce Commission decline my request to exempt a franchisor’s exclusive dealing clause with their franchisee?

Yes, the Commerce Commission can decline a franchisor’s request if they decide an exclusive dealing clause is not needed for the success of a franchise.

What happens if I am caught using an exclusive dealing clause illegally?

If you are illegally using an exclusive dealing clause, the Commerce Commission can impose a fine on you. This can severely impact your business. Therefore, it is important to ensure you know the rules around when exclusive dealing is permissible.

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