Many small businesses are updating their standard form contracts to prepare for the new legislative changes relating to unfair contract terms. Small businesses are still using the transition period between now and 12 November 2016 to review their current contracts and 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)). We set out how this change can affect franchisors and franchisees and what you can do to prepare.
Why are Franchisors and Franchisees Affected?
The implementation will affect some franchisors and franchisees that enter into or renew franchise agreements on or after 12 November 2016. The law aims to protect small businesses entering into a standard form contract from terms that may be considered unfair. The law applies to contracts that satisfy the following:
- Is a contract for the supply of goods and/or services and/or to sell or grant an interest in land; and
- Have the involvement of one small business.
The contract also has to be for an upfront price of up to $300,000 or $1 million in the case of contracts with a term exceeding 12 months.
Many franchise agreements fall under this criteria, noting that a franchisor supplies goods and/or services, may legally fall under the small business criteria (i.e. less than 20 people employed) and franchise fees are commonly below $300,000.
Are Franchise Agreements 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 terms to be negotiated. Franchise agreements typically favour the franchisor to protect their interests. Although franchise agreements may be subject to negotiation between parties, the bargaining power of the franchisee to amend the terms of the franchise agreement is minimal. A franchise agreement will most likely be subject to unfair contract laws, noting in particular that these laws 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, including determining whether their franchise agreements need to be updated to comply with the new legislation. Unfair contract terms may include the following:
- Terms that limit only one party’s obligations;
- Terms that only allow one party to terminate the contract; and
- Terms that allow one party to breach or terminate the contract and/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 to form a part of the contract and so 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 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 (e.g. supply agreements, employment agreements, terms and conditions) will also be subject to the unfair contract laws and will also need to comply.
What are the Effects of Not Complying?
If a small business does not comply, the Australian Competition and
Consumer Commission (ACCC) have several enforcement options available to them. 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 an injunction, and order to redress and/or other orders that are available to the court, for instance, damages.
As the new legislation comes into effect, franchisors have one month to ensure their documents comply and should be ready for the potential consequences of non-compliance. If you have any questions or need assistance reviewing your franchise documents, get in touch with our franchise team on 1300 544 755.