Following the Fuji case, the Treasury Laws Amendment (More Competition, Better Prices) Bill 2022 (the Bill) was passed on 9 November 2022 to broaden the scope of unfair contract regime by expanding the small business threshold and including higher penalties for breaches. The Bill, once made law, will amend the Competition and Consumer Act, including the Australian Consumer Law, to include potential maximum penalties of $50 million for body corporates and $2.5 million for individuals. These penalty provisions are five times what they previously were.
As such, it is evident that unfair contract terms are a very serious issue. Consequently, the risks of breaching the relevant unfair contract laws are severe. As a franchisor, you should know what that means for your franchise agreement.
Do the Unfair Contract Provisions Apply to Me?
The unfair contract provisions apply to small business contracts and consumer contracts, where they are standard form contracts.
A standard form contract is a “take it or leave it” contract. One party typically prepares it before discussions with the other party, and the other party has no opportunity to negotiate. However, having the opportunity to negotiate a standard form contract does not guarantee it will not be considered standard form.
As such, given that most franchise agreements are pre-prepared agreements provided to prospective franchisees and accounting for the power imbalance between the franchisor and franchisee, it is likely that they are considered standard form contracts. Again, even where franchisees receive an opportunity to negotiate, it likely remains the case that your franchise agreement is a standard form contract. However, this will depend on the unique facts of each relevant case.
Given the likelihood of your franchise agreement being considered a standard form and the high fines associated with a failure to comply with the unfair contract provisions, we suggest that franchisors err on the side of caution and ensure their franchise agreement does not contain any unfair contract terms. Indeed, this will also tie into your overarching obligation under the Franchising Code of Conduct to act in good faith.
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What is an Unfair Contract Term?
In addition, this may also include terms that enable one party (but not the other) to:
- avoid or limit their obligations under the contract;
- terminate the contract;
- penalise the other party for breaching or terminating the contract; or
- vary the contract.
What Steps Should Franchisors Take?
Similar to engaging a lawyer to ensure you draft your franchise agreement in accordance with the Franchise Code of Conduct, we suggest you have a lawyer review it for any unfair contract terms. Taking this step is essential to ensure you are not violating the law and potentially liable for significant penalties.
Consequences of a Failure to Comply
As noted above, a failure to comply can result in substantial penalties of up to $50 million. Furthermore, where a court determines a provision is an unfair contract term, they have the discretion to:
- deem an entire contract void;
- vary the contract;
- impose penalties;
- award monies for any losses or damages; and
- make an order against the inclusion of similar terms in future contracts.
Key Takeaways
Prohibiting unfair contract terms is not novel. Nevertheless, with the increasing scope and penalties, ensuring your franchise agreement complies with these laws is more important than ever. The new laws affect small business contracts and standard form contracts, which are likely to include your franchise agreement. As such, it is essential to avoid terms that cause an imbalance between you and the other party, that are unnecessary to protect your interests, and that will cause a detriment to the other party if you rely on them.
If you need help ensuring your franchise agreement is free of 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.
Frequently Asked Questions
An unfair contract term 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.
Moreover, it may provide one party with options that the other party does not have, including limiting obligations under the contract, allowing one party power to terminate the contract, penalising only one party for breach or termination and allowing only one party to vary the contract.
When drafting your franchise agreement, consider whether any terms are likely to fall under the unfair contract term scope mentioned above. Given the potential penalties, we recommend you engage a franchise lawyer to review your franchise agreement.
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