The Commonwealth Government is in the process of consulting and finalising legislation to extend the unfair contract terms provisions contained in the Competition and Consumer Act (Cth), Sch 2 Australian Consumer Law (ACL) to small businesses.

If enacted unchanged, those who utilise standard form contracts for transactions with small businesses will need to reassess that practice and the terms of those contracts to ensure compliance with the law or risk the prospect that future litigation may see alteration to standard form contracts potentially with compensation ordered which could affect all agreements entered into which have non-complying clauses.

In addition other standard-form contracts going to the operation of the franchise business itself likely to be caught by the new regime which could include software licenses, equipment rental agreements, finance documents, supply and distribution agreements, telecommunication contracts, terms and conditions of sale; and confidentiality and non-disclosure agreements.

If no changes occur to the draft legislation, franchise systems are likely to be affected both internally in the contractual relationships between franchisor and franchisees and externally with the contractual relationships between suppliers and the franchisor, the franchisees and customers and suppliers and the franchisees. Some systems may need to alter legal agreements presently being used or consider whether they have the appropriate documentation in place to support the continuation of the present contracts under the exemptions available.

WHAT IS AN UNFAIR CONTRACT TERM?

An unfair contract term is a term that:

  • causes a significant imbalance in the parties' rights and obligations under the contract;
  • would cause detriment (financial or otherwise) to a party if it were to be relied on; and
  • is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term.

Some examples of terms that have been considered unfair in the legislation enacted to cover consumers is contained in the attached handout presented by the author to a Griffith University Franchise Management Forum on 3 June 2015. (Click here to access the summary of some court decisions on what is an unfair contract term for a consumer).

Some examples of terms which may be considered unfair in the small businesses context for franchising could include those contained in the attached handout presented by the author to a Franchise Management Forum on 3 June 2015 (Click here to access a table of some potential clauses which may not comply).

Before deeming a term unfair, a court is also required to consider:

  • the extent to which the contract is transparent — that is, if the term is expressed in reasonably plain language, legible and presented clearly and readily to the party affected by it; and
  • the contract as a whole.

An unfair term may be declared void by a court. In most cases, the void term is removed from the contract, and the remainder of the contract continues to operate. There are no fines or penalties for a term being declared unfair, although other relief may be available.

WHO WILL THE EXPANDED UNFAIR CONTRACT TERMS REGIME APPLY TO?

In its present form the legislation will apply to small-business-to-small-business standard-form contracts.

A contract will be deemed a small business contract if, at the time the contract was entered into:

  1. at least one party employs fewer than 20 persons; and
  2. where the value of the contract does not exceed either $100,000, or $250,000 for contracts of more than one year in duration.

In calculating persons employed, each full-time, part-time and casual employee constitutes one person.

Casual employees are not counted unless they are employed on a regular and systematic basis.

A standard-form contract is one which has standardised, non-negotiated terms and are prepared by one party to the contract.

When determining whether a contract is standard-form, a court is required to consider:

  • whether one party has all or most of the bargaining power relating to the transaction;
  • whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
  • whether another party was required either to accept or reject the terms of the contract in the form in which they were presented (“take it or leave it” approach);
  • whether another party was given an effective opportunity to negotiate the terms of the contract; and
  • whether the terms of the contract were tailored to the specific circumstances of the agreement between the parties.

The draft legislation contains a presumption that a contract is a standard-form contract if a party to a proceeding alleges it to be. The party who says it is not must prove it is not standard form contract as defined.

CURRENT STATUS

While the Bill has not yet been finalised, if the legislation is enacted in its present form, it is expected to commence in early 2016.

Franchise systems should keep themselves aware of the status of this legislation.

If it passes as is franchise systems should consider if any business practices or documents need to be altered or supplemented to minimise risk to the operation of the franchise system.

With any business if changes are required to systems or core documentation used by the business, time will be required to both identify and alter the practices and documents, educate those affected by the changes about the changes and the reasons for them, and also to implement and embed the new practices or use of new documents.