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In early 2021, the government published a draft of legislative changes relating to unfair contract terms. Although the commencement of these changes has not been published, small businesses are reviewing their current contracts to determine whether there are potential issues, including to see whether their current terms would lead to a potential breach of any legislation (e.g. the Competition and Consumer Act 2010 (the Act)). Here, we set out how these changes may affect franchisors and franchisees and what you can do to prepare.

Why Are Franchisors and Franchisees Affected?

The draft legislation will affect the majority of  franchisors and franchisees that enter into or renew franchise agreements as the laws aim to:

  • amend the definition of standard form contracts;
  • increase the contract thresholds;
  • allow courts to take wider action where the court deems a term unfair, including deeming the entire contract as void; and
  • allow penalties for each unfair contract term to be treated as a separate contravention of the laws.

Franchise Agreements and the Proposed ‘Contract Thresholds’.

The draft changes expand the definition of a small business. This means unfair contract terms will apply to contracts that satisfy the criteria of:

  • being a contract for the supply of goods or services, or to sell or grant an interest in land; and
  • one party being considered a small business.

Under the draft legislation, a party is now considered a small business if:

  • its turnover is less than $10,000,000; and
  • it has fewer than 100 employees (not including casual employees).

Many franchise agreements fall under this criteria, noting that:

  • a franchisor supplies goods or services; and
  • either the franchisor or franchisee may legally fall under the small business criteria (i.e. less than 100 people employed with turnover commonly below $10,000,000).

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Are Franchise Agreements Caught as ‘Standard Form Contracts’?

The Australian Competition and Consumer Commission (ACCC) describes a standard form contract as one which a party provides to another where there is little basis for them to negotiate the terms.

Under the changes, the court may now also determine something is a ‘standard from contract’ by considering the number of times a party has prepared and entered into a contract on the same or similar terms.

Given franchise agreements typically favour the franchisor, it is common that the bargaining power of the franchisee to amend the terms of the franchise agreement is minimal. As a result, a franchise agreement will most likely be subject to unfair contract laws. Notably, these laws now capture the franchise grant process of the franchisor and will apply together with the Franchising Code of Conduct.

What do Franchisors Need to be Aware of?

Franchisors need to know about the implication of the unfair contract laws and should determine whether they need to update their franchise agreements to comply with the new legislation. Unfair contract terms may include terms that:

  • limit only one party’s obligations;
  • only allow one party to terminate the contract; and
  • allow one party to breach or terminate the contract or vary the terms of the contract.

Franchisors should also understand how the unfair contract laws may benefit their business. For example, the unfair contract terms as they apply to retail leases will protect franchisors who operate from a premises and take out a lease on behalf of their franchisees.

Relevantly for franchisors, documents that form part of the contract will be considered part of the contract. Therefore, they will be subject to the same unfair contract provisions (e.g. the operations manual).

What do Franchisees Need to Know?

Franchisees who are considering purchasing or renewing a franchise agreement will need to know that the unfair contract laws will apply. This may place potential franchisees in a stronger bargaining position as they will have more protections available to them according to these new provisions around unfair contract terms.

Franchisees who would be considered small businesses also need to be aware that any standard contract forms that they use with other businesses will also be subject to the unfair contract laws and will also need to comply. For example, this may include: 

  • supply agreements; 
  • employment agreements; and
  • terms and conditions.

What Are the Effects of Not Complying?

If a small business does not comply, the ACCC has several enforcement options available. Further, if a party in the standard form contract were to commence legal proceedings in a court stating that a specific clause is unfair, the breaching party may be subject to further action. 

Under the draft legislation, the actions taken by the court have also expanded, giving the court the power to:

  • deem an entire contract void;
  • make orders to vary the contract;
  • make an order to prevent the inclusion of any similar terms in further contracts;
  • impose monetary penalties for each contravention, with a maximum penalty of $10,000,000; and
  • take large recovery action such as making orders they see fit to ensure parties do not suffer losses or damages.

Key Takeaways

Although the legislation is still in draft form, franchisees should consider seeking out advice on any new franchise agreement they are provided. Further, franchisors should consider reviewing and updating their agreements to comply with the prospective laws. If you need advice or assistance reviewing your documents, LegalVision’s 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.

Frequently Asked Questions

What is a standard form contract?

It is a contract that one party provides to another where there is little basis for them to negotiate the terms.

What are some examples of unfair contract terms?

Unfair terms may include terms where there is a significant imbalance between the parties. For instance, terms that limit only one party’s obligations or only allow one party to terminate the contract. Additionally, they may allow one party to breach or terminate the contract or vary the terms of the contract.

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