Franchisors need to be aware of new laws coming into force in 2016. These laws may require you to update your franchise agreement and remove any unfair contract terms. This article will help get you up to speed.

Background to the Unfair Contract Terms Legislation

The Australian Consumer Law (ACL) is set out in Schedule 2 of the Competition and Consumer Act and contains important protections for Australian consumers in their dealings with businesses. When the ACL came into effect on 1 January 2011, it included provisions that protected consumers from unfair contract terms.

In 2013, the regulator in this area, the Australian Competition and Consumer Commission (ACCC), conducted a review of unfair contract terms in various industries, including airlines, telecommunications providers, gyms and car rental agencies.

However, until recently, the ACL provided no protection against unfair contract terms for small businesses.

Unfair Terms in Small Business Contracts

In October, both houses of Federal Parliament passed the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015. The legislation received assent on 12 November 2015.

The new legislation extends the scope of the unfair contract terms regime in the ACL to “small business contracts”. Once the legislation comes into operation on 12 November 2016, a term in a small business contract will be void if the term is:

  • In a standard form contract; and
  • If found to be void, the term does not bind the parties to the contract. The remainder of the contract will continue to bind the parties if it is capable of operating without the unfair term.

For more detail about these reforms, please see our update on unfair contract terms and small businesses.

Relevance for Franchisors

The reforms to unfair contract terms are relevant to franchise agreements because, in most cases:

  • the franchisee employs less than 20 people, and so the franchise agreement would qualify as a small business contract for the purposes of the legislation; and
  • the franchisee is not given a genuine opportunity to negotiate the terms of the contract – and so the franchise agreement might be considered a standard form contract.

At a recent franchise conference attended by LegalVision, an ACCC representative identified five types of clauses in franchise agreements that are likely to cause issues under the amended unfair contract terms legislation:

  1. clauses that allow franchisors to terminate the franchise agreement without cause;
  2. clauses that allow franchisors to vary the agreement unilaterally;
  3. clauses that penalise franchisees;
  4. clauses that require franchisees to provide broad indemnities for franchisors; and
  5. clauses that restrict the ability of franchisees to take action against franchisors.

So, if you are a franchisor, you have less than 12 months to review your franchise documentation and make sure you remove any unfair terms. This might come as frustrating news for franchisors as the industry was only recently required to update its contracts with the introduction of the new Franchising Code of Conduct on 1 January 2015.

Other strategies may also be available to franchisors, such as:

  • Ensuring franchisees have a genuine opportunity to negotiate the terms of the contract (meaning that the contract is less likely to be considered a standard form contract); or
  • Ensuring that the value of the franchise agreement is above the threshold for the application of the new laws.

If you are reviewing franchise agreements and identifying terms that may be unfair, it’s best to have the assistance of a specialist lawyer. At LegalVision, we have great experience drafting and reviewing franchise agreements. We can help you identify a strategy for your franchise network in time for the commencement of the new laws.

Questions? Please get in touch on 1300 544 755.

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