ACCC Update: New Protections From Unfair Contract Terms Apply to Some Franchising Agreements

Franchisors may need to adjust terms in franchise agreements, as new laws protecting small businesses from unfair terms in standard form contracts come into play in November 2016. Standard form contracts are offered on a “take it or leave it” basis. Often, one side to the contract will prepare the terms, leaving the other side with little or no opportunity to negotiate.

The new law will apply to standard form contracts where one of the parties has less than 20 employees and where the upfront price payable is less than $300,000 (or $1 million for multi-year contracts). This means the protections will cover some franchise agreements.

What’s unfair and who decides?

The Government extended the Australian Consumer Law to allow a court or tribunal to void unfair terms in standard form small business contracts.

The judge can find a contract term unfair if three conditions are met: Would the term cause a significant imbalance? Is it reasonably necessary? Would it cause detriment to one of the businesses concerned?

In deciding if a contract term is unfair, the judge may consider whether the term is clear and presented in plain language. The judge will also assess the term in light of the whole contract, as there may be counterbalancing terms that limit “unfairness”.

If the court or tribunal finds a term unfair, the term will be void and treated as if it never existed. However, the rest of the contract will continue to bind the parties.

The new laws cover most terms in a standard form contract. However, terms that set out the upfront price and define the main subject and terms required or permitted by other laws or codes (such as the mandatory national Franchising Code of Conduct) are exempt from the new rules.

Possible franchising concerns

There is a 12-month transition before the law applies. During this time, the ACCC will be working with franchisors to remove or amend unfair terms in their franchise agreements. Terms in franchise agreements likely to raise concerns include: •  Terms that allow the franchisor to unilaterally vary the agreement •  Terms that allow the franchisor to terminate the agreement without cause (i.e. even if the franchisee has not breached the agreement) •  Broad indemnity clauses that limit the franchisor’s liability more than necessary to protect their legitimate interests •  Terms limiting a franchisee’s ability to take action against the franchisor (e.g. a franchisee in WA might only be allowed to start court action in NSW) •  Terms that fine or penalise the franchisee (but not the franchisor) for breaching the agreement. Clearly, there are going to be some issues that all franchisees and franchisors will need to be aware of, and we will be providing more information and guidance as it becomes available.