The Impact of New Unfair Contract Law on Franchise Documents

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Table of Contents

• What is the New Unfair Contract Law?
• What Does This Mean For You?
• What Can You Do?

The new unfair contracts law is set to commence from 12 November 2016. The practical reality of such developments for franchisors and franchisees is that certain new contracts, renewed contracts and terms of contracts that are varied after 12 November will be subject to far greater legal scrutiny. Such contracts likely include the all-important franchise agreement (and, by reference, the disclosure document), the Operations Manual and even standard terms and conditions.

What is the New Unfair Contract Law?

For the unfair contract laws to apply, certain criteria must be satisfied. A clause may be deemed ‘unfair’ (on application by the ACCC or otherwise) and consequently void, if all of the following are met:

1. The term must cause a significant imbalance in the parties’ rights and obligations under the contract;
2. The term is not reasonably necessary to protect the legitimate business interests of the party advantaged by the term; and
3. Operation of the term would cause detriment (whether financial or otherwise) to the weaker party if they relied on it.

What Does This Mean For You?

As there are no judicial determinations on these provisions within franchising, how the law will interpret them is still somewhat open for discussion. However, there are many clauses within franchise agreements that are susceptible to being caught under the new legislation, including:

1. Clauses entitling the franchisors to vary the exclusive territory of the franchise unilaterally;
2. Clauses authorising the franchisor to have ‘final say’ concerning fee-related disputes;
3. A blanket refusal on the part of the franchisor to negotiate its terms;
4. A far-reaching and broadly drafted restraint clause;
5. A provision entitling the franchisor to amend the manual at will, with such amendments to operate immediately;
6. Unreasonable termination rights;
7.  Clauses that entitle the franchisor to increase fees at will;
8. A term requiring the franchisee to enter into the ‘then current’ franchise agreement as at the time of termination; and
9. A clause requiring the franchisee to have no other business interests.

If your franchise agreement contains any such clause, you should obtain a legal review immediately.

What Can You Do?

From a practical perspective, there are some easy changes franchisors can make to their systems to better protect their position, including:

1. Only providing the franchise documents to the incoming franchisee once the franchisor has tailored them (i.e. with parties’ names, territory details, and special conditions or warranties outlining anything agreed during pre-contractual negotiations). The likely result is the franchise agreement is less likely to be characterised as a standard form contract, and so avoiding the application of these laws altogether;
2. Abandoning any blanket policy against negotiating terms, and not using the phrase “standard terms” at all;
3. Only making changes to the system (including the Operations Manual) after consultation and proper investigation; and
4. Of course, amending your master franchise document so as to comply with this new law.

The very worst thing you can do concerning this legislative change is to ignore it. With the ACCC cracking down on more franchisors than ever before, the franchise community needs to be proactive in addressing this change of law.

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Unsure how the new legislative changes will affect your franchise? Get in touch with our expert franchise lawyers today on 1300 544 755.