Franchise disputes: When things do not go to plan

Purchasing a franchise usually provides the comfort of an established brand and structured business system. It does however come at a cost, both to buy into the system and with on-going marketing levies and royalties.

Like any business however, there is uncertainty and risk and when things do not go to plan, often the Franchisor is the first port of call.

What goes wrong?

As with any business, you can be impacted by the economic climate, but there are also a number of other complications which can occur between a Franchisor and Franchisee. Common issues which may arise include:

  • The business does not meet the projections provided by the Franchisor at the outset;
  • The marketing fund does not provide any real benefit;
  • The impact of another Franchisee opening nearby;
  • The Franchisor refusing to renew for a further term;
  • The Franchisor issuing one or more default/breach notices.
What can be achieved?

The difficulty which invariably exists is that the Franchise Agreement is heavily weighted in favour of the Franchisor. The vast majority of Franchise Agreements will have disclaimers to try and avoid any potential liability, particularly in relation to financial projections.

Despite this, we can often negotiate on behalf of our clients to ensure their investments are protected and/or their losses are minimised. What can be achieved often depends on:

  • The wording of the Franchise Agreement (including obligations of “good faith”);
  • The paper trail with the Franchisor;
  • Whether other Franchisees will support the position;
  • How concerned the Franchisor is about public relations.
What should you do?

The starting point is to talk to your Franchisor. Ultimately the Franchisor wants you to do well as it is a reflection on their business model and your success results in a financial return to them. Depending on their response, there are a number of strategies to escalate the issues if necessary. Things to bear in mind from the outset:

  • Take legal advice sooner rather than later. It is important from an early point that you have an understanding of your legal position and the potential consequences if you get the process wrong;
  • Remember it is a relationship business. Once damaged, the relationship between the Franchisee and Franchisor is difficult to repair;
  • Manage the paper trail and assume anything put in writing could be relied upon later;
  • Be mindful of how you may have contributed to the issues. Have you complied with procedures. Have you accepted feedback from the Franchisor?
  • Determine whether other Franchisees are facing the same issue/s. There is power in numbers and also the ability to share costs.
Summary

Overall, your Franchisor should be there to help. Regardless of the reasons, the failure or success of a Franchisee reflects on the brand and, in turn, the ability of the Franchisor to sell more franchises and maintain a sustainable and profitable model.

Daniel is a Director in our Dispute Resolution Team and can be contacted on 07 958 7477.

Disqualification order under the Charities Act

Introduction

Are you an officer of a charity? Perhaps you are on the committee of the local swimming club, or a trustee of a charitable trust. If so, you need to be aware of the increased attention being paid to charitable officers.

The Charities Act 2005

The Charities Act 2005 (the Act) is a relatively recent development in charities legislation. The Act established a Charities Commission, now called the Charities Board (the Board) with the function of promoting public trust and confidence in the charitable sector. The Board encourages good governance and management practices, by providing educational material and other help to enable organisations to be more effective. To perform these functions, the Board has wide powers under the Act. In June 2012, the Board (then the Charities Commission) made its first significant order disqualifying an individual from being an officer of a charitable entity for a period of three years. The Board found that Mr Smyth engaged in conduct that amounted to “serious wrongdoing” under the Act.

Serious wrongdoing

The Act sets out that serious wrongdoing is:

  • An unlawful or a corrupt use of the funds or resources of the entity; or
  • An act, omission, or course of conduct that constitutes a serious risk to the public interest in the orderly and appropriate conduct of the affairs of the entity; or
  • An act, omission, or course of conduct that constitutes an offence; or
  • An act, omission, or course of conduct by a person that is oppressive, improperly discriminatory, or grossly negligent, or that constitutes gross mismanagement.

The Act also provides that the Board may, if it has removed an entity from the charities register, make an order disqualifying an officer from being an officer of a charity for a period of up to five years.

A person must not state or imply that an entity is registered under the Act when that entity is not registered. Every person who does so may be liable for a fine not exceeding $30,000.

Decision of the Board

After an extensive investigation, the Board found that Mr Smyth had engaged in a number of activities that were breaches of the Act, constituted serious wrongdoing, could mislead the public, and erode the public’s trust in the charitable sector. These included:

  • Using a false name on behalf of a registered charity;
  • Stating that the false name held status as a trustee of a registered charity;
  • Listing the false name as a primary contact on another entity for which Mr Smyth was trustee, and that sought registration with the Board;
  • Posting six online auctions, indicating that the auctions were on behalf of a registered charity when in fact, the charity had been deregistered;
  • Posting a further online auction after receiving a formal warning not to engage in such conduct;
  • Failing to respond to notices sent by the Board without reasonable excuse;
  • Failing, significantly and persistently, to attend to the Trust’s administrative duties and its obligations under the Act to the point the Trust was being grossly mismanaged.

Mr Smyth was disqualified from being an officer of a charity for a three year period.

Comment

It is clear from the facts that Mr Smyth was actively involved in breaches of the Act: he was not an “innocent victim” of the Board. What this case does show is that there are real consequences for those involved with charities (or non-charities, as the case may be).

Tips to avoid disqualification

We recommend all charities adopt the following practices:

  • Be familiar with your rules and follow them;
  • Keep accurate records of all meetings and correspondence;
  • Consider engaging an administrator to assist with compliance;
  • File annual returns under the Act;
  • Do not ignore communication from the Board.

If you would like further information please contact Jessica Middleton on 07 958 7436.

The water ownership debate

How to determine ownership of water has recently become a highly controversial and much debated topic.  Indeed the media has largely focused its reporting around the question: can water be “owned”, and if so, how should we determine who is entitled to it?

Unsurprisingly, the discussion has stirred up intense emotion in both camps.  So why is this such an sensitive subject?  One explanation is that water is quickly becoming a scarce and highly valuable natural resource and therefore, it is turning into a tradable commodity.  These days, control of water translates into income, earnings or simply put – money.

However, the issue of ownership is of course not a new topic, nor is it specific to New Zealand.  In fact, the rights of Indigenous people in a general sense has heated up in the last decade or so, culminating in the adoption by the General Assembly of the United Nations Declaration on the Rights of Indigenous Peoples (UNDRIP) in 2007 (which New Zealand affirmed in 2010).  On top of that, there are numerous examples of other nations facing the same dilemma, some of which extend as far back as 200 years.

The purpose of this article is to put the water ownership-debate into perspective.  It examines key historical and comparative developments from New Zealand and overseas, some of which are based on recent publications on this topic, and informs the reader of how this debate has evolved.

Differing concepts

It is important to understand that the Western world’s relationship to water differs greatly to that of Māori.  As can be understood from the media emphasis in the recent debate, the Westernised legal view of water focuses on common access and regulation of usage.  The Māori view however focuses on the life force, or mauri, of water.  In the Māori world, all water bodies such as rivers, lakes or streams have always been highly valued for spiritual and cultural reasons, for the simple reason that they are living beings and/or ancestors.  Therefore, access to water was always jealously guarded and controlled by iwi/hapū.  Others could only travel through, fish in or otherwise use the water body with the permission of the tribe who held mana over that particular body.  Tribal identity as a whole was (and still is) intimately linked to geographical landmarks, which includes freshwater resources.

Whilst Māori did not go as far as exert ownership (in a legal sense) over the water, the exercise of mana and control over stretches of rivers and/or lakes can be likened to that of ownership as defined by settlers.

International protections

As has happened with most fundamental and profound declarations proposed by the UN, the UNDRIP has since its adoption been the subject of much debate and criticism.  Supporters have raised concerns about what effect a non-legally binding and “toothless” document will have, whereas others have condemned the declaration for failing to ascertain a clear, universal principle making it unworkable in Western democracies established under constitutional governments.

While UNDRIP does not determine principles confirming Indigenous ownership of water, Article 25 recognises that:

Indigenous peoples have the right to maintain and strengthen their distinctive spiritual relationship with their traditionally owned or otherwise occupied and used lands territories, waters and coastal seas and other resources to uphold their responsibilities to future generations in this regard. (Author emphasis)

However you choose to interpret the reference to “waters and coastal seas”, it is unarguably a momentous assertion of some form of right to such resources for all Indigenous peoples. The question then becomes – how should it be implemented?  Given the relatively recent adoption of UNDRIP, it is a question that largely remains to be answered through the actions of the many nations that have chosen to accept (in some shape or form) the rights outlined by the declaration.

There are a number of other international instruments that aim to protect or affirm rights to water in its various forms.  For example, the United Nations Millennium Declaration (setting out the Millennium Development Goals) aspires to reduce by 50% the 1 billion people lacking access to clean drinking water by 2015, the Rio Declaration on Environment and Development declares that States should recognise and duly support Indigenous peoples’ identity, culture and interests in environmental management, and Agenda 21 observes that some Indigenous peoples may require greater control over their lands, self-management of their resources, participation in development decisions affecting them, and participation in the establishment or management of protected areas.

There is however no single international, legally-binding document or treaty which ensures the protection and recognition of Indigenous peoples’ right to water (whether through ownership or other means).  For now, UNDRIP is the most far-reaching attempt in ensuring such a right and time will tell whether this declaration will be able to deliver on the many expectations it has given rise to.

Around the world

New Zealand is by no means the only country faced with objections from its Indigenous population when it comes to water resources.  The issue is as old as colonisation and has been the topic of negotiations and Court cases for centuries.

United States of America

In the U.S., most Native American Indian tribes were (and to an extent, still are) highly dependent on salmon.  The result of this dependency is that retention and control over water has always been critical to the preservation of the traditional Indian lifestyle.

In 1908, the U.S. Supreme Court determined one of the first Court cases relating to recognition of a tribal water right in Winters v United States 207 U.S. 564 (1908).  The dispute in Winters was set in the inland U.S., a semi-dry and sparsely populated landscape which was inhabited by a number of Indigenous tribes who relied on what the ecosystem had to offer for food and shelter.  In 1888, two of the tribes entered into The Fort Belknap Treaty with the U.S. Government whereby a 640,000 acre reservation was established along the Milk River, the intent being that the tribes would take up agriculture.

In the years following the Treaty, it became evident that the River was incapable of meeting the water demands of both Indians and non-Indians.  Unsurprisingly, a dispute arose with the matter ultimately being brought before the Courts.  The U.S. Supreme Court held that while the Treaty made no mention of water rights, it was inconceivable that the Indians would have given up so much land (millions of acres in fact) without also intending to reserve sufficient water resources to survive, seeing how agriculture in this landscape was heavily reliant on active irrigation.

Three canons/rules of construction which U.S. Courts use to interpret treaties between the U.S. Government and Indian tribes formed the basis for the decision:

  • The tribes owned all resources pre-treaties and therefore, any rights not explicitly granted to the U.S. by the treaties were presumed retained by the tribes.
  • Treaties were to be construed as the tribes would have understood them at the time as opposed to according to some technical, legalistic interpretation.
  • Because the treaties were written in English, any ambiguities were to be resolved from the standpoint of the Indians.

The Winters doctrine gave rise to extensive litigation in subsequent decades, some of which resulted in what has been described as successful and modern settlement agreements relating to recognition of tribal water rights. While different in content, the common denominator for these agreements is the creation of modern tribal governmental estates which allow tribes to work in cooperation with the U.S. Government and, in some cases, single-handedly run tribal natural resource management programmes.

Australia

While tribes in the U.S. and New Zealand have largely underpinned their claims to tribal water rights on treaties, the situation in Australia is very different.  Given the lack of enforceable treaty rights, Australian Aboriginal tribes have faced considerable challenges in seeking recognition for Indigenous involvement in natural resource management.  In a general sense, Indigenous rights in Australia are often regarded as “second order rights” which are assessed only after other, more concrete rights, have been taken into account and guaranteed through legislation.

In spite of this, some movement towards recognising Aboriginal customary law has been made, initially through the release of the Australian Law Reform Commission report The Recognition of Aboriginal Customary Laws in 1986.  The report advocated “functional recognition” of customary law, aimed at ensuring recognition on a case-by-case basis whilst avoiding a “freezing” of Indigenous rights systems through static and universalistic legislation.

The densely populated south-eastern region of Australia has served as a focal point for recent water management initiatives, largely due to major droughts and ensuing over-appropriation of the Murray-Darling River.  The main developments were the introduction of the National Water Initiative in 2004 and the enactment of the Water Act 2007 (Cth).

While the purpose of these developments was not to ensure recognition of Indigenous water rights, the Initiative at least provides an inter-governmental framework for Indigenous access to water.  In addition, the principles of cultural heritage values in water were incorporated in the Water Act, which focuses on addressing environmental degradation, water shortages and water quality issues.  However, while the Act provides for Indigenous involvement in water planning processes, critics have expressed concerns that this is just one of a dozen principles without any internal priority structure.  In particular, while tribal participation in the process is guaranteed, there is nothing in the Act which expressly requires substantive recognition of Indigenous interests in water.

New Zealand developments

As outlined by Linda Te Aho in her recent article Ownership and governance of water (NZLawyer, Issue 195), claims to ownership of waterways by Māori are far from new.  Rather, New Zealand has seen a number of settlements between the Crown and iwi/hapū relating to management and governance of water in the last century.  However, all of these negotiated arrangements have, from the Crown’s perspective, been based on the doctrine of publici juris (water is common to all who have access to it and is not capable of being owned by anyone).  As such, it is not surprising that Māori claims to water have remained unresolved to this day.

In light of the above and as a response to the proposed sale of power-generating SOEs, the New Zealand Māori Council filed a claim with the Waitangi Tribunal in February 2012, seeking recommendations regarding the determination of Māori claims to water.  After the urgent hearing in June, the Tribunal released The Interim Report on the National Freshwater and Geothermal Resources Claim (Wai 2358, 24 August 2012), noting that Māori presented conclusive evidence that hapū and iwi had customary rights and authority over water bodies (as distinct from land) in 1840, which could be likened to that of “ownership” in English law.  This in turn provides Māori with residual proprietary rights today.

In response to the extensive public criticism for accepting the claim, the Tribunal commented as follows in the cover letter of Interim Report:

In our view, the recognition of the just rights of Māori in their water bodies can no longer be delayed.  The Crown admitted in our hearing that it has known of these claims for many years, and has left them unresolved. The issue of ‘ownership of water’ was advanced by the Crown as a deal breaker but it need not be. Māori do not claim to own all water everywhere.  Their claim is that they have residuary proprietary interests in particular water bodies.

Since the Government announced that it was refusing to offer Māori any special shareholding or engage in further negotiations with Māori to recognise water rights, the Māori Council has decided to seek injunctive relief via an application for judicial review in the High Court.  The hearing has been set down for 26 November 2012 and will take place in Wellington.

Conclusion

Water is fundamentally different from other more fixed resources, such as land.  This article has traced a range of historic and international developments in respect of water rights.  The next steps in New Zealand are unknown – but we are better placed to take them if we understand the context in which they exist.

If you would like further information please contact Renika Siciliano on 07 958 7429.

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