Buying a NZ Franchise: Check Its Litigation History

A franchise can look attractive while carrying unresolved legal problems. Before buying, investigate disputes involving the business you are acquiring and the franchise network behind it. The aim is not to reject every brand that has faced a claim: it is to understand whether a dispute could disrupt trading, create unexpected costs or expose a recurring problem within the franchise community.

1. Ask about disputes, not just court cases

A question such as “Are there any court proceedings?” is too narrow. A significant disagreement may still be at the complaint, negotiation or mediation stage. Equally, a concluded case may reveal an issue that has not been resolved operationally.

Ask the seller and franchisor separately for written details of current, threatened and significant past disputes relevant to the proposed purchase. Your lawyer can help set an appropriate scope and review period.

Useful categories include:

• Claims between the franchisor and current or former franchisees.
• Disagreements involving the particular outlet, its landlord or key suppliers.
• Employment claims affecting the business being sold.
• Challenges to ownership or use of the brand’s intellectual property.
• Regulatory investigations or enforcement action relevant to operations.

For each matter, request the parties’ legal names, the nature of the disagreement, its current status and any continuing obligations. Where proceedings exist, ask for the court or tribunal and case reference.

Distinguish an allegation from an established finding. A claim does not prove wrongdoing, and a settlement does not necessarily involve an admission of liability.

2. Check the answers against available evidence

Give your lawyer the correct legal names of the seller, franchisor and any relevant related entities. Trading names alone can make searches incomplete or misleading. Ask whether former company names should also be included.

Your lawyer can identify suitable court, tribunal and public decision searches, alongside relevant regulator publications. Public records are useful, but they are not a complete litigation history. Not every dispute produces a published judgment, and private settlements or confidential processes may leave little public information.

Request supporting documents where appropriate, such as relevant judgments, orders, settlement terms or correspondence confirming that a claim has ended. There may be legitimate confidentiality, privacy or legal privilege restrictions. Ask whether a suitably redacted document or a narrower factual confirmation can address the concern without breaching those restrictions.

Compare what you receive with the seller’s accounts and explanations. For example, ask your accountant whether legal expenses, provisions or unusual payments warrant further questions. Such entries are prompts for investigation, not proof of a hidden dispute.

Keep a simple record showing the issue, evidence requested, response received and outstanding questions. An unanswered question should remain visible rather than disappear into a reassuring conversation.

3. Understand New Zealand’s legal framework

New Zealand does not have franchise-specific legislation or a compulsory government franchise registration system. There is also no universal statutory franchise disclosure regime requiring every franchisor to provide a prescribed litigation history before sale.

General laws still apply. The Fair Trading Act 1986 prohibits misleading or deceptive conduct and unsubstantiated representations in trade. Contract law also matters when assessing statements, contractual promises and possible remedies. Whether an omission or answer is legally misleading depends on its context; do not assume every undisclosed dispute automatically creates a claim.

The Franchise Association of New Zealand (FANZ) Code of Practice imposes disclosure obligations on member franchisors. Membership is voluntary, and the code is not a government licensing scheme. If the franchisor is a member, have your lawyer check its disclosure against the applicable code requirements.

Neither membership nor receipt of a disclosure document replaces independent investigation. Ask your lawyer to assess discrepancies before you become committed, rather than relying on the possibility of a later legal remedy.

4. Decide what the dispute means for your purchase

Focus on commercial consequences as well as legal merits. An isolated, resolved disagreement may present little continuing risk. Repeated disputes about the same practice deserve closer examination, especially where the franchisor’s explanation does not match the documents.

Ask your advisers:

• Could the outcome interrupt access to premises, essential supplies or brand rights?
• Could an order or settlement require changes to the outlet’s operations?
• Who bears any existing liability, and could it affect the proposed transaction?
• Is the problem genuinely resolved, or merely absent from current court proceedings?

Do not automatically accept the seller’s statement that a dispute “stays with us”. Its practical effects may continue even where legal liability does not transfer. Have your lawyer identify any protection or resolution needed before completion, and ask for an update if circumstances change during negotiations.

Practical takeaway: Request a written dispute history, verify what can be checked and assess the effect on your future business. Proceed only when significant unresolved questions have a clear, evidence-based answer.