On 12 November 2016, the Treasury Legislation Amendment (Small Business and Unfair Contract Terms Act 2015) (Cth) (the Act) came into effect. The Act seeks to extend unfair contract protections to small business contracts and will impact franchise agreements, leases and other related contracts to a franchise. Below, we explain how the new unfair contract laws could impact your franchise as well as practical tips for franchisors.
When Does the Act Apply?
The contract must be ‘standard form’ and the business must fall under the ‘small business’ thresholds regarding the upfront price payable under the contract and number of employees. Consequently, the regime may apply to some franchisees in a franchise network and not others. The Act will likely apply to a new franchisee, even if the new franchisee will not be a ‘small business’ by the time it commences operations or in the near future.
What Terms in the Franchise Agreement May be Considered Unfair?
As a general guide, a term in a standard form contract will be regarded as unfair if it satisfies the following:
- The term causes a significant imbalance in the parties’ rights;
The term is not reasonably necessary to protect a party’s legitimate business interests; and
- The other party would suffer a detriment (financial or otherwise) if it relied on the term.
Some examples of unfair terms in a franchise agreement may include:
- An unconstrained right for the franchisor to unilaterally vary a franchise agreement or operations manual without first consulting with the franchisee;
- Broad restraints of trade attempting to stop the franchisee earning an income after leaving the franchise;
- Excessive liquidated damages provisions; and
- Unreasonable termination rights.
What Terms Could Be ‘Unfair’ in a Franchise Agreement?
Practically, the following terms could fall foul of the Act.
A term could be unfair if it allows the franchisor to either:
- Introduce an Operations Manual during the term and oblige the franchisee to comply with it; or
- Vary the Operations Manual at any time in any manner without the consent or consultation with the franchisee.
Clauses That Retain the Right to Increase Fees
A term that allows the franchisor to increase fees or impose new fees during the term of a franchise agreement could potentially be considered unfair.
Renewals, Options & Transfers
An unfair term may be one that requires the franchisee to enter into “the then current agreement” at the time an option is exercised which may change the terms to something materially different to the original agreement.
Indemnities and Disclaimers
A term that requires the franchisee to indemnify the franchisor for all liabilities howsoever caused (including through the franchisor’s negligence) may be considered unfair.
Termination and Step in Rights
Terms may also be unfair if they provide for the following:
- Breach of one agreement constitutes grounds for terminating all ancillary agreements associated with that site or all sites, such as franchise agreement, licence to occupy, etc;
- Franchisor will step in and manage the business where there has been a breach; or
- Liquidated damages.
Restraint of Trade
Unfair terms could be those that provide for:
- A restraint where no compensation or consideration is given; or
- A non-solicitation clause.
Practical Tips For Franchisors
Franchisors should manage the contractual process by taking the following steps:
- Preliminary meetings: Conduct initial meetings at which parties discuss the proposed terms of the contract before presenting a draft contract.
- Opportunity for negotiations: Make it clear to the other party and their advisors that you will provide due consideration to any comments or queries. This might include providing the other party with a template contract and giving them the opportunity to provide comments and conduct negotiations before circulating a proposed final copy. It also needs to involve a proper review and assessment of requests for changes.
- Tailored contracts: Similarly to the previous point, ensure that contracts are tailored to the particular circumstances and party before circulating the agreement.
- Balanced terms: Ensure that the contract takes into account the interests of both parties and does not include any unnecessary or onerous terms. This does not mean all clauses need to be mutual, but rather you should justify any departures from mutual clauses.
- Mandatory legal advice: Require the other party to seek legal advice and not accept the position where the other party elects not to do so.
- Clear and consistent communications: Ensure that all representatives (including external advisers) are consistent in the manner in which they communicate with the other party, particularly concerning requested changes. If changes are not accepted, or not accepted in their entirety, the party should provide commercial justification for not taking the position.
- Record-keeping: Ensure that records of all meetings, communications, negotiations and draft contracts are retained on file for future reference if required.
If you have any questions about how the new unfair contract laws could affect your franchise or would like assistance reviewing your franchise agreement, get in touch with our franchise law team on 1300 544 755.