Laws to prevent fraud wanted

A government decision to not regulate New Zealand's franchise industry leaves franchisees vulnerable to deception and fraud, an Auckland University academic says.

Commerce Minister Simon Power said an Economic Development Ministry review of the industry after allegations of fraud found franchisees were adequately protected by business law and voluntary self-regulation by the Franchise Association of New Zealand.

But University of Auckland Business School senior lecturer Gehan Gunasekara said existing law did little to protect or provide remedy for deceived franchisees, and not all franchises were members of the association.

Franchisors were not required to disclose any information about the condition of a business or its prospects to potential franchisees and were not required to justify any predictions they made.

Many contracts included clauses that stated the franchisee was relying on his or her own judgment and had had recourse to legal advice, effectively absolving the franchisor of liability, he said. "It effectively says franchisees go in with their eyes wide open but they don't."

A study by the business school revealed that over a 20-year period, 30 per cent of court cases about the purchase of a business were brought by franchisees.

In one of the most well-known cases, former Green Acres master franchisee Keith Lapham is alleged to have deceived 172 people into paying $3.5 million for non-existent Green Acres sub-franchises. Mr Gunasekara said that in one recent case, the claimant had bought a regional master franchise from an Australian business but was not told the only other regional master franchise in New Zealand had not sold a franchise in years.

The court ruled the defendant had a reasonable basis for his predictions that the franchise would succeed in New Zealand and was therefore not liable for deceptive or misleading conduct.

Mr Gunasekara said the Government's decision not to regulate was "extremely disappointing".

Franchise Association executive director Graham Billings said the organisation favoured self-regulation.

"Our primary purpose is to encourage people to become members ... and to abide by our voluntary code of practice."

- © Fairfax NZ News