Following on from the recent updates to the Franchising Code of Conduct, the Australian Government has recently passed a new act to increase protection for small businesses. The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth) (the Act) will increase the protections available to small businesses by prohibiting unfair contract terms in “standard form” contracts.

Previously under the Competition and Consumer Act 2010 (Cth) and Australian Securities and Investments Commission Act 2001 (Cth), protection against unfair contract terms applied only to consumer contracts. This new Act will be a significant change to the franchise industry and will require franchisors to review their Franchise Agreements to ensure compliance with the Act.

The changes will affect any “standard form” contracts entered into on, or after, 12 December 2016. The changes will also apply to current contracts that are renewed or varied after this date. The changes will cover a contract if at the time it is entered into:

  • at least one of the parties to the contract is a small business (a business employing less than 20 people. In calculating the total number of employees, casual employees are not considered part of the total number if they are not employed on a regular and systematic basis); and
  • either of the following applies:
    • the contract does not exceed $300,000 for the upfront price payable; or
    • the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.

What is a “standard form” contract?

What you and I commonly understand to be a “standard form” contract is pretty much what a “standard form” contract is. Nevertheless, in some cases it can be difficult to determine and the ACL provides us guidance on what courts will look at when determining whether a contract is a “standard form” contract or not. These are:

  • whether one of the parties has all or most of the bargaining power;
  • whether the contract was prepared by one party before any discussion relating to the contract occurred between the parties;
  • whether one party was effectively required to “take it or leave it”;
  • whether one party had an opportunity to negotiate the terms of the contract; and
  • whether the terms of the contract take into account the specific characteristics of another party or the transaction.

Some common examples of “standard form” contracts include mobile phone plans, airline sales terms and conditions and gym memberships. In most cases Franchise Agreements would satisfy most if not all of the above categories however there are obviously certain Franchise Agreements where it would be less clear. Most Franchise Agreements would be considered “standard form” and therefore regulated by the Act.

What are unfair contract terms?

Section 24 of the ACL (and as amended by the Act) sets out the test for determining whether a contract term is unfair. Section 24 states a term of a contract is unfair if:

  • it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
  • it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
  • it would cause detriment if it were to be applied or relied on by a party (which may be financial or otherwise).

It is important to note that the Act amends Section 24 of the ACL rather than inserting a new section. What this means is that any existing decisions on what is considered an “unfair” term would be therefore also likely apply to the amended ACL. Terms have been found to be unfair where:

  • it was drafted too broadly and would allow one party to terminate the contract even in circumstances where it was not reasonably necessary to protect the legitimate business interests of that party (Director of Consumer Affairs Victoria v AAPT Limited [2006] VCAT 1493);
  • it allows one party to unilaterally vary the contract and operate in an unexpected way to the other party’s detriment (Director of Consumer Affairs Victoria v Trainstation Health Clubs Pty Ltd (Civil Claims) [2008] VCAT 2092). In this case, it was also relevant that the other party was not specifically drawn to this term; and
  • it operates to permit one party to unilaterally vary the characteristics of (e.g. the supplier of or how much is charging for) a product to the extend so as it conflicts with the other party’s expectation regarding the product (Director of Consumer Affairs Victoria v AAPT Limited [2006] VCAT 1493).

Consequences of an Unfair Term

If a term of your Franchise Agreement is considered an “unfair” term, then it will be voided and no longer form part of the Franchise Agreement. This means the rest of the Franchise Agreement can still operate as normal unless the voiding of the “unfair” term renders the Franchise Agreement unworkable.

Good Faith

As you would all know the Code now expressly contains a provision in relation to “good faith” and this has resulted in most Franchise Agreements needing to be amended to have some of their stricter provisions removed or redrafted and therefore arguable that most Franchise Agreements may already have most of their “unfair” terms removed. “Good faith” and “unfair” contract terms however are not entirely the same. For example, a clause that allows you to issue a termination notice to a franchisee for any breach of a Franchise Agreement cannot be exercised in bad faith however it is still valid. If however it is found to be an “unfair” term however (e.g. too broad in its application) then it may be voided in its entirety and, you will not be able to rely on it at all!

Conclusion

As most Franchise Agreements would likely be considered a standard contract, it is vital that you have your Franchise Agreement reviewed. Even if you are not considered a small business, the chances are your franchisees would. The Act will not be coming into force until 12 November 2016. Therefore, there is some time to have it reviewed but just like how the new Code crept up all of a sudden, it’s worthwhile to ensure this is done as soon as possible.

Masao Watanabe

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