Standard form contracts are often used by businesses as a convenient way of allowing parties to enter into arrangements quickly, and to provide the business with uniformity of trading terms. It has long been recognised that standard form contracts may allow larger businesses to insert unfair contract terms into arrangements sometimes without the other party knowing or properly appreciating the consequences of such provisions.

These standard form contracts give rise to a risk that larger businesses improperly transfer business risks from themselves to the consumer, by empowering them to vary terms of the contract, terminate the contract at their discretion, or change the price or characteristics of the goods or services being supplied. Under the Australian Competition and Consumer Law (ACL), the government sought to protect consumers from being exploited in this way by allowing consumers to challenge such terms as being unfair.

Currently there are three elements that must be satisfied under the ACL if a contract is to be attacked as being unfair:

  • The contract must be a consumer contract. These are contracts of the supply of goods and services, or a sale or grant of interest in land, to an individual who’s acquisition is wholly or predominately for personal or domestic household use.
  • It must be a standard form contract which is prepared by one party and is not subject to negotiations between the parties.

The terms of the contract must be unfair in that:

  • it will cause a significant imbalance between the contracting parties, or 
  • the term was not necessary to protect the interest of a party it is said to advantage and it would cause detriment to the weaker party if  relied upon.

These laws have been in place for some time and the ACCC has produced a report of incidents that have dealt with it to date which is available on its website.

Extending protection to small businesses

The issue for franchisors is that the protections currently afforded to consumers may be extended  to small business.

In a government discussion paper that recently closed for comment, the government sought responses from the industry in relation to the definition of ‘small business transactions’. It sought  responses to determine a way that would  enable  the  unfair  contract  provisions  to  apply  to them. The paper proposed that a small business could  be defined as a  business that was not a  publicly listed company, or by reference to a transaction below a particular threshold, or by  reference to the annual turnover of the business or by reference to the number of employees   engaged by a business.

It is clear from the above that   franchisees   could easily be covered by one of these extended definitions. If that is the case then the franchisor  utilising a standard form arrangement will need to not only consider the application of the Code  (which as we all know is also under review by the government) but will also have to comply with  this extension of the ACL.

Such changes could result in a franchisor having to review the terms and conditions of its standard  franchise agreement to ensure that they will not be voidable and “unfair”.

The process of implementing the change has only just commenced. Submissions in relation to the  original discussion paper recently closed and the government is now moving to consider those submissions.