A franchise agreement sets out the obligations of the franchising relationship as agreed to by both the franchisor and franchisee. Being the most critical document regulating the franchise business – and legally binding – your franchise agreement should be drafted by a professional with specific franchising experience. This article will explain why you should work with a specialist franchise lawyer when drafting a franchise agreement in NZ.
Legal Compliance
A franchise agreement is a legal document, meaning it is essential that it complies with the law. An experienced franchise lawyer will be well aware of your legal obligations as a franchisor and can help ensure you are complying with the law when drafting your agreement.
In New Zealand, there is no specific franchising legislation. However, there is general legislation that regulates certain aspects of franchising.
1. Fair Trading Act
The Fair Trading Act 1986 protects consumers from misleading and deceptive behaviour and unfair trading practices. This covers issues including:
- false claims about what a product is made from or where it comes from;
- unfair sales practices; and
- hiding key details in the fine print.
Your franchise agreement must not contain any information that might breach this Act.
2. Contract and Commercial Law Act
The Contract and Commercial Law Act 2017 came into force in September 2017. This Act combines 12 commercial acts into one. Accordingly, it serves as a “one-stop shop” Act to deal with contractual and commercial law matters.
Your franchise agreement is a contract between you and your franchisee. As such, your franchise agreement is bound by the provisions of this Act. A franchise lawyer can ensure your agreement does not breach this Act, thereby minimising contractual disputes.
3. Code of Practice and the Code of Ethics
Members of the Franchise Association of New Zealand (FANZ) must abide by the Franchising Code of Practice and the Code of Ethics. Although you do not have to join the FANZ, membership has several benefits.
The Code of Practice has four main aims, being to:
- encourage best practices throughout the franchising community;
- reassure those entering franchise agreements that FANZ members display a commitment to behaving fairly and reasonably;
- serve as the basis of self-regulation; and
- show the positive will within franchising to regulate itself.
Ensure Enforceability
After preparing a franchise agreement, you must ensure it is enforceable. Thus, you must write and execute the agreement to be legally binding.
Firstly, you must offer the agreement to the franchisee in a clear manner. This illustrates the intention to enter into the agreement. Next, the franchisee must accept the agreement. The agreement must be accepted in its entirety. If there is a provision that the franchisee does not want to sign, ensure you amend the agreement prior to signing. Moreover, ensure that all contractual terms are certain. Any vague or confusing terms should be rewritten.
After that, the franchisee must provide ‘consideration’ to enter the franchise agreement. Typically, this is an upfront payment to enter the franchise network.
A franchise lawyer can ensure you execute each step properly.
Continue reading this article below the formInclude All Key Terms
An experienced franchise lawyer will also know what terms to include in your franchise agreement.
For example, key terms that a franchise lawyer can help you draft and negotiate include:
- the upfront costs and ongoing royalty fees payable by franchisees;
- the franchise period and any renewal terms;
- terms concerning the franchise premises, be it a licensing agreement to use an established property or the requirement of the franchisee to have a direct lease with a landlord;
- training that must be provided to the franchisees;
- intellectual property, including how to use any trade marks;
- performance criteria;
- guidelines for marketing the franchise business; and
- limits on what goods and services the franchisee can supply.
A well-drafted franchise agreement will also leave sufficient space for business growth, which is where a franchise lawyer comes in as an invaluable resource.
This publication provides you with the fundamentals for franchising your New Zealand business, including set up, branding and management.
Key Takeaways
Being the most important document of your entire franchise – and legally binding – your franchise agreement must be drafted by a professional with substantial experience. Some key ways a franchise lawyer can assist is by ensuring your franchise agreement:
- is legally compliant;
- enforceable; and
- includes all key terms.
If you need assistance drafting a franchise agreement, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.
Frequently Asked Questions
A franchise agreement is a legally binding contract. It sets out the obligations of the franchising relationship as agreed to by both the franchisor and franchisee.
As one of the most important documents in the franchise relationship, a professional with substantial experience should draft your franchise agreement. A franchise lawyer can assist by ensuring your franchise agreement is legally compliant, enforceable and includes all key terms.
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