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New Laws relating to Unfair Contracts could affect Franchisor Compliance

Often, businesses utilise a ‘standard form contract’ to illustrate the relationship and agreement between parties. This kind of contract requires very little (if any) negotiation and usually only one party prepares the contract (for the other party’s signature). This allows parties to engage in agreements efficiently and to ensure that the Terms and Conditions apply to each new customer/client in the same way. The concern for some Franchisors is that these consumer protection laws could soon cover small businesses as well.

For some time, ‘standard form contracts’ have allowed the larger and more influential businesses to dominate the commercial realm by including ‘unfair’ terms and/or provisions (often without the knowledge/consent of the smaller businesses). More often than not, the smaller businesses are unaware of these ‘unfair terms’ due to their presumption that this is normal procedure.

What are the Risks to larger businesses?

If larger businesses are passing risks onto the consumer, which are constituted as ‘unfair’, it is probable that they may be liable under the Australian Consumer Law (“ACL”). Generally speaking, if there are any provisions in the ‘standard form contract’ that allow the subject business to alter/change the terms, terminate the contract or adjust the costs or category of goods or services supplied (at their own discretion) will constitute ‘unfair terms’ to the ‘standard form contract’.

However, the consumer is now protected under certain provisions of the ACL. The provisions are considered ‘consumer friendly’ as they oppose any terms of the ‘standard form contract’ that are deemed to be ‘unfair’.

The ACL requires that the below three conditions must be met in order for a term in a ‘standard form contract’ to be considered ‘unfair’:

  • The ‘unfair contract terms’ provisions of the ACL relate to ‘consumer contracts’, which are contracts for the supply of goods or services, or a contract for the sale or grant of an interest in land to a purchaser whose acquisition of the good, services or interest is for personal use;
  • The contract must be a ‘standard form contract’ that was neither negotiated nor prepared by both parties (i.e. unilaterally prepared) causing a significant imbalance of the parties’ rights and obligations; and
  • The contractual term/s would place one of the parties at a significant disadvantage (i.e. whether financial or otherwise) and be deemed unnecessary in order to protect the legitimate interests of the other party.

These provisions have only been recently implemented and so the ACCC have since compiled an online record of all issues and concerns presented to them. This online record provides easy access to small businesses on the definition and scope of what is considered ‘unfair’ in this context.

Do the Consumer Protections also extend to small businesses?

The definition of a small business varies depending on the laws they administer. In a general sense, a small business can possess the following characteristics:

  • One that is not listed publicly;
  • One where the annual revenue is below a certain value:
  • One where the consolidated gross assets are less than a certain amount at the end of the financial year; or
  • One where the number of employees is below a certain threshold.

For example, ASIC regulates many small businesses (referred to as ‘small proprietary companies’) and requires them to have:

  • An annual revenue of less than $25 million;
  • Less than 50 employees at the end of the financial year; and
  • Consolidated gross assets of less than $12.5 million at the end of the financial year.

Therefore it is not difficult to imagine a Franchisee being categorised as a small business taking into account the above characteristics.

What do Franchisors need to be aware of?

If Franchisees fall within the scope of this definition of ‘small business’, the Franchisors who employ such ‘standard form contracts’ on a regular basis will be required to consider two factors:

1. the application of the Franchising Code of Conduct (especially since it is currently under review); and

2. the application of the provisions of the ACL to small businesses (if appropriate).

The potential inclusion of Franchisees under the definition of a small business could lead to the Franchisors taking immediate action to have their ‘standard form contracts’ reviewed to ensure that there are no ‘unfair’ terms.

Conclusion

The Government is currently reviewing any submissions on the amendments to the Franchising Code of Conduct proposed by the public. It will be interesting to see how the Franchising Code of Conduct will influence or affect (if at all) the application of the ACL provisions relating to unfair contractual terms. If the scope of the provisions are extended to cover Franchisees, it may be essential for the ‘standard form contract’ to be reviewed by a solicitor to ensure that there are no ‘unfair terms’. LegalVision has a dedicated team of franchise lawyers who provide expertise in franchising and will ensure that your interests are protected.

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