Govt's claims on franchising `a mockery'

Date AddedJune 22, 2009 11:34:22 AM

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FRANCHISE EXPERTS are warning people using redundancy money to buy a franchise that they should be careful they don't land themselves in a situation worse than just losing their jobs.

Auckland University Business School law lecturer Gehan Gunasekara says Appeal and Supreme Court decisions on the fallout from a failed franchise relationship involving an Australian home cleaning service "make a mockery" of government claims that the franchise industry does not need its own laws.

Commerce Minister Simon Power released a paper this month saying existing legislation such as the Fair Trading Act provided adequate protection for franchisees.

But Gunasekara says the outcome of the case involving James' Home Services would be "the last straw" for franchisees who believed they could rely on that act to ensure they get a fair deal.

On Thursday, Power will front up to a university-organised symposium to defend his decision that New Zealand's largely self-regulated franchise sector doesn't need its own laws.

But Gunasekara believes the sector is a "wild west", and says his research has revealed that while franchise businesses account for 10-12% of economic activity, franchisees represent around 30% of all claims brought under the Fair Trading Act for misleading conduct in relation to the sale of a business.

Gunasekara also says the recent decision of the Appeal Court in the David & Anor v TFAC case had upset a lot of people in the industry and would be a talking point at the symposium.

The high court two years ago found the franchisor defendants were in breach of section 9 of the Fair Trading Act when they sold a franchise authorising TFAC to sell sub-franchises to provide a successful Australian home services brand in New Zealand. Section 9 concerns misleading conduct and misrepresentation in trade.

But in March the Appeal Court overturned Justice Baragwanath's decision, ruling that the prospective franchisees had sought independent legal advice and had entered the agreement on the basis of their own judgement. It also said claims of misleading and deceptive conduct in breach of the Fair Trading Act had to be assessed at the time alleged misrepresentations were made.

Last month the Supreme Court refused leave to appeal that decision, saying that even if the applicants correctly identified an error of law by the Court of Appeal, "it would not involve any question of general or public importance".

Longstanding franchise lawyer Stewart Germann said that judgement was a bold call. "I would have thought the case was of considerable importance to the little people who want to take up franchises."

Germann said section 9 of the Fair Trading Act was the most powerful of its kind in New Zealand law. Even if someone made innocent claims that turned out to misleading, then those claims were still covered by the act. "I would have liked to see the Appeal Court decision tested further, but the case is finished and that is now the law."

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It was also a new warning to people considering a franchise business that if they were not careful they stood to lose not just their jobs but their homes and other collateral if things went wrong.

While the franchisee lost out in that case, Gunasekara's research found that 68% of all claims for misleading and deceptive conduct brought to the courts were successful, and the overwhelming number were brought by franchisees.

That could mean the Fair Trading Act was working for them, he says. But winning a court case did not mean franchisees would get their money back. Often it was the case that franchisors were wound up, with nothing left for the franchisee.

One answer, says Gunasekara, was specific and compulsory disclosure laws such as those enshrined in Australian franchise law a decade ago.

"It's said the Australian laws were overkill, but the fact remains a lot of the disputes we have here on misleading conduct don't arise there any more because of their disclosure requirement."

Gunasekara says the government review, which concluded that current franchising regulations were adequate, was disappointing.

The many problems which arise with franchises came down to a lack of understanding of what a franchise really was, "and sadly that is reflected in the government review which blandly states a franchise is no different from any other commercial arrangement, which is not true".

He says a franchise is a one-sided affair weighted in favour of the franchisor, who under present law could alter a contract in a way that was unfair to the franchisee.

However, Gunasekara takes heart from the fact the review bases its stand on "current evidence" regarding the working of the franchise industry. He was working to provide evidence he believes will force the government to reappraise its position.