Buying a NZ Franchise: Check Liability Limits and Disclaimers

A franchise agreement may describe what the franchisor will provide, then limit its responsibility if those promises are not met. Before joining New Zealand’s franchising community, read these provisions together. A useful contractual promise can offer much less protection than you expect if another clause restricts the compensation available when something goes wrong.

1. Find the clauses that shift risk

Ask your franchise lawyer to identify every provision that limits liability, excludes particular losses or requires you to compensate the franchisor. These provisions may appear under different headings, rather than in one clearly labelled section.

Look especially for:

• Liability caps: limits on how much one party must pay for a claim.
• Exclusions of loss: clauses removing responsibility for specified losses, such as lost profits or business interruption.
• Disclaimers: statements denying responsibility for particular information, services or outcomes.
• Indemnities: promises to reimburse another party for defined losses, claims or expenses.
• Claim deadlines: contractual requirements to notify or bring a claim within a particular period.

Do not assess these clauses in isolation. For example, a franchisor might promise access to a central ordering system but exclude liability for interruptions. Ask what practical remedy remains if you cannot place orders and trading suffers.

Distinguish a reasonable statement that business success is not guaranteed from wording that attempts to remove responsibility for failing to perform an express obligation.

2. Test the protection using real trading scenarios

Choose several situations that could materially affect your proposed business. These might include a prolonged booking-system outage, incorrect operational instructions or a claim arising from centrally supplied promotional material.

For each scenario, ask your lawyer to work through five questions:

1. What obligation does the agreement actually impose?
2. Who controls the activity that caused the problem?
3. Which losses could you claim, and which are excluded?
4. Does a cap or notification deadline restrict recovery?
5. Could an indemnity require you to pay the franchisor instead?

Pay attention to how a cap is calculated. A cap linked to fees paid over a stated period may provide little protection early in the relationship. Check whether it applies separately to each claim or collectively to all claims, and whether related incidents are treated as a single event.

Avoid assuming that “indirect” or “consequential” loss has an obvious everyday meaning. The effect depends on the wording and applicable law. Ask your adviser specifically whether lost sales, wasted stock and the cost of temporary workarounds would be recoverable.

3. Understand the New Zealand legal position

New Zealand has no franchise-specific legislation governing the ongoing franchisor–franchisee relationship and no government franchise registration requirement. General law therefore matters alongside the agreement.

The Contract and Commercial Law Act 2017 is relevant to contractual remedies, including remedies for misrepresentation and certain breaches. The Fair Trading Act 1986 prohibits misleading or deceptive conduct, unsubstantiated representations and unconscionable conduct in trade. An agreement does not simply replace these legal protections.

However, do not assume every disclaimer is ineffective. In qualifying business-to-business arrangements, parties can contract out of certain Fair Trading Act provisions where statutory conditions are met, including that doing so is fair and reasonable. Ask your lawyer whether any contracting-out provision applies to your purchase and what rights it would affect.

An “entire agreement” clause generally aims to identify the documents containing the parties’ agreement. A “non-reliance” acknowledgement may state that you did not rely on statements outside those documents. Neither should be treated as harmless boilerplate or as automatically defeating every possible claim.

Membership of the Franchise Association of New Zealand is voluntary, but members must comply with its Code of Practice and Ethics. That code is not legislation and does not remove the need to review liability provisions independently.

4. Seek targeted changes before signing

Rather than asking for every exclusion to disappear, identify the risks that could make the purchase unacceptable. Request clear responsibility for activities the franchisor controls and a meaningful remedy if essential obligations are not performed.

Possible negotiation points include a higher liability cap, exceptions for specified serious conduct, narrower indemnities and reasonable claim-notification procedures. Where an indemnity covers third-party claims, clarify who controls the defence, approves settlements and pays legal costs.

Keep a written record of important assurances and ask for agreed changes to appear in the signed documents. Do not sign an acknowledgement that inaccurately describes the information or advice you received.

Practical takeaway: Before committing, have your lawyer explain one realistic claim from breach to recovery. If the promised protection disappears through exclusions, caps or indemnities, resolve that gap before buying.