The Small Business Unfair Contract Terms regime in the Australian Consumer Law commenced on 12 November 2016.

Any standard form small business contracts entered into, renewed or varied after 12 November 2016 are captured by the regime. For a summary of what constitutes a ‘small business’ and a ‘standard form contract’, see our previous article here.

It is expected that most franchise agreements will be considered by their nature to be ‘standard form’ contracts and thus subject to the new laws.

The ACCC expects this to be the case and has now published a review of the types of unfair contract terms which may be considered to fall foul of the legislation in the franchising industry.

Possible Unfair Terms

Importantly for Franchisors, the review identifies the following problem areas:

  • Unliateral variations of the operations manual
  • Certain rights to claim liquidated damages
  • Restraint of trade provisions, including cascading provisions; and
  • The Franchisor’s termination rights

In particular, the ACCC’s comments regarding variations to the operations manual may create the most cause for concern amongst Franchisors. Many franchise systems include substantive rights and obligations on franchisees in the content of the operations manual. Where a franchise agreement allows the Franchisor an unfettered discretion to alter or amend the operations manual, this has historically given Franchisors the flexibility to vary key aspects of the franchise agreement without needing to amend the franchise agreement itself or seek the approval of franchisees.

Under the new regime, where a Franchisor continues to allow itself unfettered discretion to alter substantive obligations of franchisees, there is a significant risk that such a provision may be found to be unfair and unenforceable.

What to do Next

The guidance provided by the ACCC while helpful, is not an exhaustive list and Franchisors should take steps to fully review their standard franchise agreements for compliance with the Unfair Contract Terms regime in the Australian Consumer Law as soon as possible.

It would also be prudent for Franchisors to review their operations manual to identify any problem areas and seek advice on how best to protect their ability to make changes to the franchise system.

Any amendments made should also be reflected in any separate franchise renewal or variation documentation that a franchise system may utilize.