Do the Laws Around Unfair Contract Terms Affect Franchisors?

In Short:

• New amendments to Australian Consumer Law now apply unfair contract term laws to most franchise agreements.

• Penalties for non-compliance can be up to $50 million for corporations and $2.5 million for individuals.

• Franchisors should ensure their agreements are compliant, especially regarding standard form contracts and small business contracts.

Tips for Businesses:
Review your franchise agreements to ensure compliance with the new unfair contract term laws. Provide franchisees with the opportunity to negotiate terms, include reciprocal rights in the contract, and ensure transparency. Consult with a franchise lawyer to mitigate the risk of penalties and protect your business from legal challenges.

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Table of Contents

• What is a Standard Form Contract?
• What is a Small Business Contract?
• What are Unfair Contract Terms?
• Penalties for Non-Compliance 
• Key Takeaways

As a franchisor, laws relating to unfair contract terms could affect your business. Amendments to the Australian Consumer Law (ACL), which came into effect on 9 November 2023, now mean that unfair contract term laws will apply to most franchise agreements. The potential penalties for breaching these laws are up to $50 million for body corporates and $2.5 million for individuals. Accordingly, non-compliance carries serious consequences. As a franchisor, you need to know how these laws could affect your business and what steps you can take to comply with them. This article explores how laws around unfair contract terms will affect franchisors. 

What is a Standard Form Contract?

Under the ACL, laws about unfair contract terms will only apply to ‘standard form contracts’. These contracts are often known as ‘take it or leave it’ agreements, where one party prepares the document and provides it to the other to sign with little to no discussion or negotiation about its terms.

When determining whether a contract is ‘standard form,’ a court will consider the following factors: 

• the relative bargaining power of the parties involved and, in particular, if one of the parties has all or most of the bargaining power;
• if one party prepared the contract without discussing it with the other;
• if one of the parties was effectively required to either accept or reject the terms presented to them (i.e. ‘take it or leave it’);
• whether there was an effective opportunity for negotiating the contract’s terms; 
• whether parties could customise or adjust the terms; and
• if the contract takes into account the specific characteristics of another party or the particular transaction.

As a franchisor, you should also note that just because a franchisee may have the opportunity to negotiate some terms of the franchise agreement does not guarantee that it will not be considered standard form. 

What is a Small Business Contract?

As well as being a ‘standard form’ contract, for the laws on unfair contract terms to apply, the ACL also requires the contract to be either a consumer or a small business contract. 

The law has increased the scope of ‘small business contracts’ to now include contracts for the supply of goods and services where one of the parties is a ‘small business’. This means that they either:

1. employ fewer than 100 people when they enter into the contract; or
2. have a turnover of less than $10 million in the last financial year.

Considering the financial circumstances of most franchisees, it is extremely likely your franchise agreement will be a ‘small business contract.’ Therefore, unfair contract term laws will apply.

What are Unfair Contract Terms?

An unfair contract term is one that:

• causes a significant imbalance in the rights and obligations of the parties;
• is not reasonably necessary to protect the legitimate interests of the party it benefits; and
• causes detriment to one party if the other party seeks to rely on it.

As a franchisor, some common terms in your franchise agreement that are likely to be considered unfair include:

• automatic renewal clauses;
• unilateral variation clauses allowing the franchisor to vary the contract terms without consulting the franchisee; and
• clauses referencing extraneous documents to incorporate additional contract terms, for example, pointing to the operations manual to impose disproportionate termination rights.

Penalties for Non-Compliance 

Previously, if a court found a contract term unfair, it would be void, meaning a party could not enforce the term. However, changes to the law have significantly increased the consequences for breaching unfair contract term laws.

These new penalties can have significant financial, legal and reputational consequences for your franchise network. 

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Key Takeaways

As a franchisor, your franchise agreement will likely be both a standard form and a small business contract. Accordingly, you need to be aware of new laws around unfair contract terms and their potential penalties. Some steps to consider to avoid breaching these laws include:

• ensuring you discuss the terms of the franchise agreement with the franchisee before issuing it to them;
• providing the franchisee with the opportunity to negotiate the agreement;
• being open to implementing a franchisee’s amendments; and
• ensuring your agreement has reciprocal rights as much as possible, particularly concerning rights to terminate the contract, indemnity clauses and limitations of liability.

For assistance reviewing your franchise agreement for any unfair contract terms, 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.