From 12 November 2016, the amendments to the Unfair Contract Terms regime in the Australian Consumer Law will commence, protecting small businesses from unfair terms in standard form contracts.
You may be wondering if these changes will affect your franchise agreements. The answer is: potentially.
WILL THE NEW LAW APPLY TO MY FRANCHISE AGREEMENTS?
The new laws will impact your franchise agreement if it is a small business contract that contains an unfair term and is a standard form contract.
What is a “small business contract”?
A small business contract is a contract where:
(a) one party employs fewer than 20 people and the contract itself has an upfront price of no more than $300,000, or
(b) the contract’s duration is for more than 12 months and the upfront price payable under the contract doesn’t exceed $1 million.
Most franchise agreements will be caught as a small business contract.
What is an ‘unfair term’?
A term of a small business contract is unfair if it:
- causes a significant imbalance in the parties’ rights and obligations;
- is not reasonably necessary to protect the legitimate interests of the benefited party; and
- causes detriment (financial or otherwise) to the other party.
The law sets out examples of terms that may be unfair, including terms that:
- enable one party (but not another) to avoid or limit their obligations under the contract;
- enable one party (but not another) to terminate the contract;
- penalise one party (but not another) for breaching or terminating the contract; and
- enable one party (but not another) to vary the terms of the contract.
Terms that are required or expressly permitted by a law of the Commonwealth, or a state or territory are excluded for example where they are permitted under the Franchising Code.
Is your franchise agreement a standard form contract?
There has been some debate about whether franchise agreements will be considered ‘standard form’ contracts. Standard form contracts mean contracts where there is little or no ability to negotiate their terms i.e. they are on a ‘take it or leave it basis’. Typically, franchise agreements are negotiated to some degree. However, at what point does the negotiation stop the contract being a standard form contract?
For the agreement not to be considered 'standard form', negotiations would be expected to extend beyond things that are different from agreement to agreement by nature such as the franchise fees, term of agreement or the territory. As a result, many franchise agreements are likely to be caught as 'standard form' agreements and will be subject to the new laws.
To avoid the application of these new laws, a franchisor will need to prove that the essential terms of the franchise agreement were subject to negotiation. This is uncommon to many established franchise systems.
WHAT ELSE DO I NEED TO KNOW?
If a term is found to be unfair, it will be void and unenforceable. The contract will only continue to bind the parties if it can operate without the unfair term.
The law is not retrospective, which means that it does not apply to contracts entered into before 12 November 2016. It will however apply to contracts renewed on or after this date. If a contract is varied on or after 12 November 2016, the law will apply to the varied terms.
WHAT SHOULD I DO NOW?
Franchise agreements that fall within the definition of a small business contract will need to be reviewed to ensure they are compliant. Any contracts that contain unfair terms could be impacted once they are renewed or varied.
You should seek legal advice as soon as possible to get started on correcting your contracts.
The author wishes to acknowledge Law Clerk Kate Van Der Heyden for her contribution to this article.