Check Unfair Franchise Contract Terms in New Zealand

Turning an existing New Zealand business into a franchise means deciding how much control your agreement should give you. Protecting the brand matters, but broad powers to change costs, withhold consent or impose consequences deserve careful scrutiny. Before recruiting franchisees, review potentially unfair terms with a franchise lawyer so your agreement supports a workable franchising community, rather than relying on control you may struggle to justify.

Understand the legal framework

New Zealand has no franchise-specific legislation governing the ongoing franchise relationship and no government franchise registration requirement. That does not leave franchise agreements outside legal scrutiny. General contract law applies, alongside legislation covering competition, intellectual property, employment, privacy and consumer protection.

For this review, the key legislation is the Fair Trading Act 1986. It prohibits misleading or deceptive conduct, unsubstantiated representations and unconscionable conduct in trade. It also contains an unfair contract terms regime covering qualifying standard form small trade contracts, as well as consumer contracts.

A franchise agreement is a business contract, but that alone does not exclude it from the small trade contract protections. Ask your lawyer whether the proposed agreement falls within the regime, taking account of the statutory trading-relationship value test, the circumstances of contracting and whether the agreement is standard form. Allowing a prospect to negotiate a few details does not necessarily settle that question.

Broadly, the unfairness test considers whether a term creates a significant imbalance between the parties, is not reasonably necessary to protect the advantaged party’s legitimate interests, and would cause detriment if applied or relied upon. Transparency and the contract as a whole also matter. A tough clause is not automatically unfair, and a clearly written clause is not automatically fair.

Membership of the Franchise Association of New Zealand (FANZ) is voluntary, but members must comply with its Code of Practice and Ethics. Code compliance does not replace compliance with the Act.

Review powers, not just payment amounts

Start with clauses that allow one party to make consequential decisions without meaningful limits. The objective is not to remove essential brand protections, but to identify where their reach exceeds their purpose.

Create a review table covering:

• Unilateral changes: Can you introduce new obligations or costs without stating the circumstances or boundaries?
• Consent decisions: Can you refuse a request without reasons, criteria or a response timetable?
• Breach consequences: Does a minor administrative mistake trigger consequences designed for serious misconduct?
• Indemnities and liability: Does the franchisee bear losses caused by matters outside its control, including your own actions?
• Evidence and interpretation: Can you determine conclusively that a breach occurred or that your interpretation must prevail?

For each clause, record the business risk it addresses, who controls that risk, its likely financial effect and any safeguard available to the franchisee. Include documents incorporated into the agreement: a broadly drafted power may sit in a schedule or manual rather than the main contract.

Use pilot experience to justify proportionate protections

Your existing operation can provide practical evidence of why a contractual protection is needed. Use actual operating problems rather than assumptions about what future franchisees might do.

For example, protecting product consistency may justify mandatory specifications. It does not automatically justify unrestricted power to require any equipment purchase at any time. Record the operational reason for replacement, the expected useful life of equipment and whether a staged transition is feasible.

Similarly, protecting confidential methods may justify firm restrictions on disclosure. That purpose should be distinguished from restrictions that prevent a franchisee from sharing information with independent professional advisers.

Ask your lawyer to consider narrower alternatives: objective criteria, reasonable notice, written reasons, consultation, cure periods where appropriate, and exceptions for urgent risks. These are drafting options, not universal legal requirements or guarantees of compliance.

Keep a short justification file explaining the interest being protected and why a less burdensome approach would not adequately protect it. Commercial convenience alone should not end the discussion.

Test the agreement before issuing it

Run realistic scenarios through the draft. What happens if an approved machine becomes unavailable, a franchisee submits a report late, or you decline a proposed operational variation? Check the result against the seriousness of the problem.

Have someone other than the drafter explain each high-impact clause in plain English. If the explanation sounds substantially broader than the protection you intended, revisit the wording. Make sure recruitment explanations and operating documents do not promise safeguards absent from the agreement.

Assign responsibility for legal review when templates change. A balanced first agreement can become problematic if later amendments progressively widen discretion or shift risk without equivalent safeguards.

Practical takeaway: Before recruitment begins, identify your five broadest contractual powers. Document why each is needed, test its consequences and ask a franchise lawyer to confirm both its scope and the applicable unfair contract terms rules.