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What the 2023 Unfair Contract Term Reforms means for your Franchise

20 February 2024

The phrase, ‘Unfair contract terms’ is not new. Most of us are familiar with the implications of ‘unfair contract terms’ (UCT) when it was introduced in the context of standard form contracts. At the time, it was designed to hold larger companies accountable for contracts that were clearly unfair. For example, where a party to a contract could unilaterally increase the prices (i.e. ACCC v JJ Richards & Sons Pty Ltd [2017]).

In a way, the crack down on UCTs was a helping hand to the ‘Davids’ of Australia who were clicking ‘accept’ on Goliath’s standard term contracts, with no recourse when those terms were completely ridiculously in Goliath’s favour. Thank you ACCC.

On 9 November 2023, reforms were introduced under the Australian Consumer Law (ACL) that made it illegal to rely on unfair contract terms (UCT) in standard form small business and consumer contracts. Not only that, but the reforms also come with a plethora of pecuniary penalties for businesses that do not comply. The new penalties will operate on a per-contravention basis, meaning that each unfair term included in a contract could be subject to a maximum penalty of $2.5 million for individuals and $50 million for corporations who rely or purport to rely on UCTs.

So, we are now talking pretty hefty fines here, and it likely applies to your business’ contracts with consumers and/or franchisees.

Standard Form Contracts

First, what is a ‘standard form contract’?.

I have heard lawyers, during a Friday afternoon beer, discussing legislation (as we do) say “Unfair contract terms legislation does not apply to franchise agreements, because a franchisee has an opportunity to negotiate the contract, and so it is not a standard form contract” …this was the general consensus among lawyers.

A standard form contract (‘SFC’) was generally accepted to be a contract that operated in a “set it and forget it” nature; a ‘like it or lump it’ type agreement from the party offering their goods or services through an SFC. Customers were at the mercy of those who presented them with a contract and the terms it included.

Prior to the reforms, if a court determined a term was unfair, it was simply void and could not be relied on. The ACCC formed the view, however, the risk of having a clause voided was not strict enough to persuade businesses to avoid using unfair contract terms, so monetary penalties are now introduced.

Unfair Terms in Franchise Agreements

Now, in a key findings report released in December 2023 the ACCC has expressly stated they are of the opinion that “many franchise agreements are likely be standard form contracts” (Unfair contract terms in franchise agreements. (accc.gov.au)). The onus is on franchisors to prove that their franchise agreements are not SFCs. If a Franchisor can successfully argue their franchise agreement is not a standard form contract, they will not be liable for any penalties if an unfair term is included in the Franchise Agreement… but what a risk!! Remember we are talking $50 million dollar fines here.

IP Partnership Lawyers are commercial and pragmatic lawyers, but we are also risk adverse and we will certainly be advising clients to not dismiss the risk of their franchise agreements being deemed a standard form contract by the ACCC just because a franchisee can negotiate the terms in a limited capacity.

In fact, the ACCC’s abovementioned report expressly states that just because a Franchisee has an opportunity to negotiate terms in a limited capacity (or in a non-meaningful way) does not mean the franchise agreement is not a standard form contract - those hefty fines above may apply.

Sheesh. The reason this is quite alarming for franchise lawyers and franchisors, is most franchise agreements will have clauses in it to protect the interests of the Franchisor, that could reasonably be considered to be unfair. The ACCC, in fact, stated that in the 10 Franchise Agreements they assessed in their compliance checks in 2019 (across numerous industries), all 10 of them contained what the ACCC considered to be unfair contract terms.

At this point, if you are a Franchisor, you might be sending a quick email to your solicitors saying, “I heard about these $2.5mil / $50mil fines… how are our Franchise Agreements in terms of the unfair contract terms reforms?”.  As you should be.

Below is a quick summary of the types of clauses the ACCC considered may be unfair contract terms that are often present in franchise agreements:

Unilateral Variation Clauses

Terms that allow the Franchisor to vary the franchise agreement without the consent of the other party may be considered, by the ACCC, to be an unfair contract term. Interestingly, the ACCC formed the view a franchise agreement which permitted a Franchisor to vary the terms of their operations manual may also be an unfair contract term. Naturally, a franchise system is constantly evolving and improving, so you will need to speak with your solicitor to get advice as to how you can maintain the right to improve your system without falling afoul of the UCT regime.

Withholding Payment Clauses

The ACCC considers all clauses that a franchisor can withhold payments owed to franchisees to be unfair if the franchisee does not have the right to prohibit the withholding of payments.

Audit Power Clauses

Auditing clauses are normal in most franchise agreements as it is important for a franchisor to have the ability to monitor whether a franchisee is successful. However, certain terms in an auditing clause can be problematic and unfair. For example, some auditing clauses require the franchisee to cover the expenses associated with being audited. The ACCC considers these clauses unfair if there is no requirement for the franchisor to keep the expenses reasonable.    

Restraint of Trade Clauses

Restraint of trade clauses are often necessary to protect a franchisor’s interests. While these clauses are not necessarily unfair, the ACCC may regard them as such if they are overly broad or if they do not protect the Franchisor’s legitimate interests. The ACCC has also warned against cascading clauses that are excessive. If a term is relied on that goes beyond a franchisor’s legitimate interest, it will be deemed a UCT.     

Termination Clauses

Termination clauses are vital for franchise agreements and can provide the protocol for either party to exit the agreement. Sometimes either party will be permitted to terminate the agreement before its expiration for a breach of terms by the other party. However, termination clauses can be considered unfair if they allow one party to terminate the contract without a breach committed by the other.  

What can you do to protect your business?

The ACCC has made it clear that they will be cracking down on unfair contract terms. For Franchisors, the best way to avoid the new penalties is to speak to your solicitors and if you do not have solicitors please feel free to reach out to us (www.ippartnership.com.au) to ensure you are not using terms that are at risk of being considered unfair.

Sam Rees