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If you are a franchisor, you should be aware that upcoming changes to Australia’s unfair contract terms (‘UCT’) regime can impact your franchise system. In early 2021, the government passed laws that aimed to protect small businesses from unfair contract terms. Despite the changes, the Australian Competition and Consumer Commission (‘ACCC’) has recently acknowledged that businesses have not been complying with unfair contract term laws. As a result, the government has expanded Australia’s UCT regime in respect of ‘small businesses’, with changes to come into effect on 9 November 2023. This article explains how these changes affect franchise agreements.
What Are the Changes to the Unfair Contract Terms Regime?
The changes relate to penalties on consumer and small business contracts. Currently, the law defines a small business as having fewer than 20 employees. Additionally, the law defines standard form contracts to include contracts with:
- up to $300,000 payable under the contract; or
- $1 million payable under the contract but lasting 12 months or longer.
However, the November 2023 changes will see the definition of ‘small business’ widen to include businesses that employ:
- fewer than 100 people; or
- those that have a turnover of less than $10 million per annum.
What Are the New Penalties For Unfair Contract Terms?
For a corporation under the new UCT laws, penalties per contravention can be the greater of:
- $10 million; or
- three times the value of the benefit obtained.
If the court cannot determine the value of the benefit, the corporation can attract a penalty of 10% of its annual turnover in the 12 months prior to the act or omission.
For other breaches of consumer law, the maximum penalty can be the greater of:
- $50 million; or
- three times the value of the benefit obtained.
If the court cannot determine the value of the benefit, the corporation can attract a penalty of 30% of its adjusted turnover during the breach turnover period.
The adjusted turnover is the sum of the value of all the supplies that the body corporate (and any related body corporate):
- has made; or
- is likely to have been made during the breach turnover period.
However, there are some exceptions to this calculation, including supplies:
- between related bodies corporate;
- not made in connection with the body corporate’s business;
- that are input taxed; and
- that are not for consideration and are not taxable.
How Do the Changes Affect Terms in Franchise Agreements?
The upcoming changes are particularly relevant to franchising arrangements since:
- franchise agreements are likely standard form contracts; and
- at least one of the parties to the agreement will be a small business under the widened definition.
What Should Franchisors Do To Prepare?
As part of the annual review of their disclosure document, franchisors should also undertake a review of their franchise agreement to identify potentially unfair contract terms. Franchisors should consider either:
- amending these terms; or
- removing them to reduce the risk of the term being void and to avoid penalties.
Franchisors should also review supply chain arrangements between franchisors and suppliers of franchise networks. You should also consider whether the arrangements raise competition concerns such as exclusive dealing or cartel conduct.
How Does the Fuji Case Regarding Unfair Contract Terms Apply?
Although the Fuji case was not about franchise agreements, the case did prompt all business owners to assess whether their contracts included unfair contract terms. There were four types of clauses the court held to be unfair in the Fuji case that also commonly appear in franchise agreements. We explain these below and how you can avoid attracting penalties.
1. Unilateral Variation Clauses
It is common for franchise agreements to allow franchisors to unilaterally vary some costs, primarily where a franchisor may engage services on behalf of the network. Careful drafting will be required to justify any term that allows unilateral variation of any costs payable by a franchisee.
Additionally, it would be best if you incorporated appropriate qualifications and notice provisions into the relevant term prior to engaging third-party services on behalf of the franchise network. These provisions give the franchisor the ability to reasonably notify the franchise network of price changes.
2. References to Extraneous Documents
Franchise agreements typically contain a clause that:
- allows the franchisor to vary an operations manual during the term of a franchise agreement; and
- a franchisee’s failure to comply with a manual is considered to be a breach of the franchise agreement.
This clause is likely unfair because the franchisor:
- can unilaterally change the operations manual; and
- has no obligation to give notice of the variation.
3. Disproportionate Termination Rights
The Fuji decision suggests that disproportionate termination rights are “unfair”. Luckily, the Franchising Code of Conduct (the Code) already limits a franchisor’s ability to terminate the franchise agreement. A franchisee may propose early termination, but the Code does not oblige a franchisor to agree to such a proposal.
That said, termination rights for a franchisor are essential. Therefore, if there is a risk that a term allowing for termination is unfair because a similar right does not exist for a franchisee, franchisors and their advisors may need to consider whether express termination rights are written into template franchise agreements.
4. Assignment
In the Fuji case, the court decided that one party’s ability to assign the contract without consent was an ‘unfair’ term, especially where the other party had to seek consent to assign it. In franchising, it is common to have an assignment term to this effect. However, there are often legitimate reasons to include ‘without notice’ assignment rights in favour of a franchisor. Nevertheless, you should seek legal advice before including such a term in your franchise agreement.
Making the decision to franchise your business can be difficult. This Franchisor Toolkit covers all the essential topics you need to know about franchising your business.
This Toolkit also contains case studies from leading franchisors including leading Australian franchises including Just Cuts, FlipOut and Fibonacci Coffee.
Key Takeaways
Whether a term is ‘unfair’ is ultimately a matter for the courts. However, the ACCC can take action, regardless of whether a franchisor is seeking to rely upon a particular term or not. When drafting or reviewing your franchise agreement, you should be wary of:
- unilateral variation clauses;
- references to extraneous documents;
- disproportionate termination rights; and
- assignment clauses.
If you need advice or assistance reviewing your documents, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
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