The Australian Competition and Consumer Commission is warning franchisors about potentially unfair contract terms under a new law offering greater protections to small businesses from 12 November 2016.
Speaking to the legal symposium at the National Franchise Convention in Canberra, ACCC Deputy Chair Dr Michael Schaper outlined the ACCC’s findings following a review that identified a number of problematic terms that appear to be widespread in the franchising industry.
“Of particular concern are terms that give the franchisor unconstrained power to unilaterally vary agreements or operations manuals, broad restraint of trade clauses, excessive liquidated damages, and unreasonable termination clauses,” Dr Schaper said.
“The ACCC urges franchisors to reconsider whether such terms are necessary and to ensure that the contractual relationship is not unbalanced as a result of any such terms.”
The new law will apply to a standard form contract entered into or renewed on or after 12 November 2016. If a contract is varied on or after 12 November 2016, the law will apply to the varied terms. Contracts covered include those between businesses where one of the businesses employs less than 20 people and the contract is worth up to $300,000 in a single year or $1 million if the contract runs for more than a year.
Some of the issues the ACCC has identified may be of concern are:
- Franchisors unilaterally varying documents such as operations manuals. While the operations manual is often a separate document to the franchise agreement, it generally forms part of that agreement. The ACCC considers that terms that allow one party to unilaterally vary aspects of the operations manual, especially in an unrestrained manner, may be likely to be unfair.
- Franchisors should also ensure that the amount of liquidated damages reflects a franchisor’s genuine estimate of costs and should review their restraint of trade clauses to ensure they are only as broad as reasonably necessary to protect their legitimate interest.
- Any termination clauses must ensure that they not only comply with the Franchising Code, but must not also be unreasonably broad and oppressive.
- The fairness of restraint of trade clauses will be judged based on the length of the restraint, the geographic area the restraint applies to and the breadth of conduct the franchisee cannot engage in.
“Franchisors should be taking action now to ensure that their contracts do not contain unfair contract terms or risk having a court strike the term out of the contract,” Dr Schaper said.