Australia recently enacted legislation that will extend an existing regime restricting “unfair contract terms” in consumer contracts to standard form small business contracts, which will include most franchise agreements and ancillary agreements. This change will require franchisors to carefully review and revise provisions within their standard agreements, as such provisions may be void and unenforceable in agreements that are entered into, amended, extended, or renewed on or after November 12, 2016.

The law will apply to contracts between small businesses that use one party’s standard form of contract. The Australian Competition and Consumer Commission, which will enforce the law, has indicated that it will target the franchising sector, among others, in its compliance activities, noting that, in its view, the balance of power in the relationship between franchisors and franchisees may become more equitable as a result.

The legislation

Under the legislation, a contract will be deemed a small business contract if at least one party employs fewer than 20 persons (where each full-time employee, part-time employee and casual employee employed on a regular and systematic basis constitutes one person) and  the upfront price of the contract is equal to or less than (a) AU$300,000 (currently, US$212,500) for a contract with a term of one year or less or (b) AU$1 million (currently, US$708,550) for contracts with a term of more than one year. The “upfront price” includes any consideration provided at or before the time the contract is entered into, such as a franchise fee or an upfront payment for supplies or inventory. Any amount that is contingent on the occurrence or non-occurrence of a particular event, such as interest or royalties, will not count towards the upfront fee.

A small business contract will be presumed to be standard form unless a party can prove otherwise. A court may use its discretion to determine whether a contract is a standard form, but must consider the bargaining power of the parties, whether the contract was prepared in advance of discussions between the parties, whether the parties were given an opportunity to negotiate the terms of the contract, and whether the contract takes into account the specific characteristic of another party or the particular transaction. Given these factors, it is likely that most franchise agreements will qualify as standard forms, but some master franchise agreements (which are more often highly negotiated) may fall outside the scope of the law.

If a contract falls within the scope of the law, a provision will be considered to be an “unfair contract term” if it satisfies the following three conditions:

  • it will cause a significant imbalance in the parties’ rights and obligations under the contract
  • it will cause detriment (whether financial or otherwise) to a party if applied or relied upon and
  • it is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by them.

In determining whether a provision is “unfair,” the extent to which the term is presented clearly, legibly, and in reasonably plain language and the context of the provision in the contract as a whole must be considered. If a provision is determined to be "unfair," the provision will be void and unenforceable, but the contract will continue to bind the parties.

Examples of “unfair” terms

The statute provides 14 examples of terms that may be considered “unfair,” many of which are commonly seen in franchise agreements.  Unfair provisions may include terms enabling one party, but not the other party, to avoid or limit their obligations under the contract, terminate the contract, vary the terms of the contract, vary the services provided under the contract, renew or not renew the contract, unilaterally determine when the contract has been breached, or unilaterally interpret the contract’s meaning. Similarly, terms that limit one party’s vicarious liability or allow one party to assign the agreement to the detriment of another party may be unfair.

Moreover, terms that limit a party’s right to sue the other party or restrict the evidence one party can present or the evidentiary burden one party must satisfy are also suspect. In contrast, terms that define the main subject matter of the contract (such as terms specifying the scope of the franchise grant), set the upfront price payable, or are required or expressly permitted by an applicable law (such as the Franchising Code) will not be considered to be unfair.

What this means for franchisors

As many franchise agreements are take it or leave it agreements with terms that are weighted to protect the franchisor’s interest, it is clear that franchisors have their work cut out for them in the next year.  Among other common terms, franchise agreements often allow franchisors to assign the agreement without a franchisee’s consent, provide the franchisor with significantly more termination rights than the franchisee, and allow the franchisor to unilaterally impose new requirements and policies through revisions to the operations manuals. Under the new law, all of these provisions may need to be revised to make them more balanced between the parties.

While some of these revisions may be easy to implement, others such as limitations on a franchisor’s ability to unilaterally vary the terms of an agreement could have a significant impact on how franchise systems operate in Australia. Though the law won’t impact agreements executed, modified, or renewed prior to November 2016, franchisors should begin the process of reviewing and revising the agreements that they and their master franchisees use in Australia as soon as possible.