When it comes to being a franchisee purchasing a franchise, a working knowledge of the Franchising Code of Conduct will go a long way to assist you in negotiating and bargaining with the franchisor. However, many people don’t consider how the provisions of the Australian Consumer Law (ACL) may come into play. This article will discuss franchise contracts through the lens of the ACL.
Does the Australian Consumer Law Apply to Franchise Contracts?
When one thinks of a consumer, they will not necessarily think that the laws relating to consumers would be relevant to a business or a business contract. However, amendments to the ACL in 2015 extended the definition of “consumer contract” to also account for small business contracts.
What is a Small Business Contract?
A small business contract requires several elements present before it can apply. Firstly, the contract needs to relate to the supply of goods and services or the sale of interest in land. Secondly, one of the contracting parties needs to be a business that employs less than 20 people. Thirdly, the contract should be based on either:
- An upfront price not exceeding $300,000; or
- An upfront price not exceeding $1,000,000 and the contract period is more than 12 months.
Many businesses in the franchising context would fulfil these elements. For franchisees entering into a franchise agreement, it is important to know that you may have extra protections through the ACL. For franchisors, it is important to ensure that the franchise agreement you use for your franchisees is in compliance with the ACL.
What Protection Does the ACL Provide?
Section 24 of the ACL provides protection for unfair contract terms. However, the prevention of unfair contract terms does not necessarily mean that there cannot be commercial terms that may benefit one party over the other. More specifically, the ACL determines that a term in the contract will be unfair if:
- The term causes a significant imbalance in the rights and obligations of the parties;
- The term is not reasonably necessary to protect the legitimate interests of the party who receives the advantage of the term; and
- The term will cause a detriment (financial or otherwise) to a party.
The above summary provides a general description of unfair contract terms, but this will always depend on the circumstances of the matter and how the parties formed the contract.
For example, the court will consider whether each party was transparent to the term and the contract. The court will also look at the unfair contract term in light of the contract as a whole as this forms the entire agreement between the parties.
How Does this Relate to Franchising?
Franchising is undoubtedly renowned for an imbalance in the business relationship. This imbalance is particularly the case when it comes to larger franchisors as they are likely to have more established franchise systems in place that are not easily negotiable. When looking at franchise agreements, a court will consider whether one party can:
- Limit performance of the contract;
- Vary the terms of the contract without any rights of the other party to terminate; and
- Unreasonably terminate the contract.
As noted above, the court will consider the entire contract as a whole. In the franchising contract, this will likely entail an analysis of what the franchisor provides in return for any terms that the court considers as unfair.
For all franchisees and franchisors, having a thorough understanding of not only the Franchising Code of Conduct but also the Australian Consumer Law will allow you to be better informed of your bargaining position and how the terms of the franchise agreement will hold up against the law.
It is important to note that with the legislative amendments, the ACL will now govern certain franchise arrangements. Franchisors and franchisees alike should know their rights and obligations. If you have any further questions or need assistance, get in touch with our franchise lawyers on 1300 544 755.