Franchisees Stand to Benefit from New Unfair Contract Terms Protections

Raynia Theodore, Principal, MST Lawyers

Currently, the Australian Consumer Law (‘ACL ’) and the Australian Securities and Investments Commission Act 2001 (Cth) (‘the ASIC Act’) contain provisions which protect individual consumers from unfair contract terms in standard form contracts.

Section 23 of the ACL states that a term of a consumer contract is void if the term is unfair and the contract is a standard form contract. Section 12BF of the ASIC Act contains similar wording, however applies to contracts for financial products or for the supply or possible supply of services that are financial services.

The protections are potentially available where one party to a contract for goods or services or a sale or grant of an interest in land is an individual and the individual’s acquisition is wholly or predominately for personal, domestic or household use or consumption. For example, a consumer entering into a contract with a telecommunications provider would be protected by the unfair contract terms provisions, provided that the terms in question were proven to be unfair.

On 24 June 2015, the Federal Government introduced a Bill into parliament containing new laws that propose to extend the protections against unfair terms to small businesses. The Bill if passed will give courts the ability to declare terms contained in standard form contracts between businesses void, if they are deemed unfair. The Federal Government expects that these new laws will be passed and effective by mid-2016.

The Explanatory Memorandum for the Bill acknowledges that small businesses, like consumers, are vulnerable to unfair terms in standard form contracts. It states that the changes “will reduce the incentive to include and enforce unfair terms in small business contracts, providing a more efficient allocation of risk in these contracts and supporting small business’ confidence in agreeing to contracts”.

It is important to note that these unfair contract terms provisions will apply to a wide range of contracts, such as supplier contracts, lease agreements, manufacturing contracts and franchise agreements. This article focuses on the application of the proposed new laws to franchise agreements.

If passed, the laws will apply to unfair terms in franchise agreements, provided that the following requirements are met:

1. the contract is ‘standard form’;

2. the contract is a ‘small business contract’; and

3. the term in the contract is ‘unfair’.

Meaning of ‘Standard Form’

Typically a standard form contract is a contract that is prepared by one party to the contract, is not subject to negotiations between the parties and offered on a ‘take it or leave it’ basis. Other elements of a standard form contract include where the contract is prepared by one party prior to any discussion with the other party or where the terms of the contract do not take into account any particular characteristics of the other party or the transaction itself. Those experienced in the franchising industry are unlikely to deny that transactions involving entering into  franchise agreements often exhibit these elements.

Definition of ‘Small Business Contract’

A contract will be a small business contract if:

• at the time of entering the contract, at least one party to the franchise agreement is a business which employs fewer than 20 people; and

• either the upfront price payable under the contract does not exceed $100,000 or the contract has more than a one year term and the upfront price payable does not exceed $250,000.

Most franchise agreements are for a five or ten year term and the upfront price payable to the franchisor is often less than $250,000 depending on the nature of the franchise system. As such, it is expected that many franchise agreements will fall within the definition of a small  business contract. In determining the number of persons employed by a business, a casual employee is not to be counted unless he or she is employed by the business on a regular or systematic basis. Again, this increases the likelihood of franchise agreements meeting the above criteria, as many franchised businesses employ casual staff members especially those in retail and hospitality.

Meaning of ‘Unfair’

Whether or not the terms of a contract are unfair will depend on the particular circumstances of each contract. The ACL states that a term of a consumer contract is unfair if it:

1. would cause a significant imbalance in the parties’ rights and obligations arising under the contract;

2. is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and

3. would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

All three of the above points must be proven for a court to decide that a term is unfair. Furthermore, in determining whether a term of a consumer contract is unfair, the courts must give consideration to the contract as a whole and whether the term in question is expressed in reasonably plain language, legible and presented clearly.

Potential terms that may be unfair in a franchise agreement include terms that permit the franchisor to:

1. vary the terms of the contract without recourse to the franchisee, such as unilaterally changing the franchise territory, varying prices or services at any time;

2. renew or not renew the contract at the franchisor’s sole discretion; or

3. terminate the contract without reason.

Will these protections apply to current franchise agreements?

Provided that the above requirements are met, the unfair term protections will apply to standard form small business contracts entered into after the date that the laws take effect. It is important for both franchisors and franchisees to note that the laws will not only apply to new contracts, but renewals or variations of existing franchise agreements. If some of the terms in a contract are found to be unfair this will not invalidate the entire contract. To the full extent possible, the remaining terms will be enforceable.

What does this mean for franchising?

In light of the proposed changes to the current law, franchisors will need to review their franchise agreements as amendments may be required to ensure that vital terms of the franchise agreement are not at risk of being deemed ‘unfair’ and remain enforceable. This is the case even  where the franchisor is not itself a small business, as only one party to the contract must be a small business.

The benefits of these new laws for franchisees include:

1. existing franchisees may see amendments to their franchise agreements trickle through when the time comes to renew their franchise agreements;

2. franchisors may choose to refrain from acting on potentially unfair terms across the franchise network, to maintain consistency in how franchisees are treated; and

3. prospective franchisees may have increased negotiating power prior to signing up to franchise agreements.

Other businesses that sell goods and services to franchisees pursuant to standard form contracts, such as equipment providers and financiers, may also be caught by the new laws. As a result, some terms of their standard terms and conditions may no longer be enforceable.

Where franchisors are seeking to establish supplier agreements to secure favourable terms, it will be necessary to check whether the agreements could be deemed as standard form, small business contracts. The inability to enforce terms applying to suppliers of the franchise system could impact on the franchise network as a whole, not just the franchisor.

MST Lawyers has over 25 years’ experience in franchising, representing clients throughout Australia and internationally in a variety of industries. MST Lawyers can assist you in reviewing and advising you on the franchise documentation provided to you by a franchisor in anticipation of these changes to unfair contract terms legislation.

Contact Raynia on:

P: 03 8540 0242