Changes to the unfair con­tract terms régime are in effect, and enter­ing into any fran­chise agree­ment con­tain­ing an unfair con­tact term or rely­ing on an unfair con­tract term in a fran­chise agree­ment could come with sig­nif­i­cant penal­ties for franchisors.

Both fran­chisors and fran­chisees should review their fran­chise agree­ments to ensure they do not con­tain any unfair con­tract terms.

What is the cur­rent unfair con­tract terms régime?

As of 9 Novem­ber 2023, changes to pro­vi­sions of the Com­pe­ti­tion and Con­sumer Act 2010 (Cth) includ­ing the Aus­tralian Con­sumer Law came into effect intro­duc­ing penal­ties for propos­ing, using, or rely­ing on unfair con­tract terms in stan­dard form con­tracts entered into with con­sumers and small businesses.

The changes apply to stan­dard form con­tracts made, var­ied, or renewed on or after 9 Novem­ber 2023. This poten­tial­ly includes a renew­al pur­suant to a hold­ing over clause. 

It is like­ly that a fran­chise agree­ment will be a stan­dard form con­tract which is sub­ject to the unfair con­tract terms régime.

Poten­tial unfair con­tract terms 

An unfair con­tract term is one which:

• caus­es sig­nif­i­cant imbal­ance in rights and oblig­a­tions of the parties;
• is not rea­son­ably nec­es­sary to pro­tect the legit­i­mate busi­ness inter­ests of the par­ty who gets an advan­tage from the term; and
• would cause detri­ment (finan­cial or oth­er­wise) to the oth­er par­ty if enforced.

We con­sid­er five com­mon claus­es in fran­chise agree­ments that could be an unfair con­tract term and poten­tial ways to make them fair.

1. Uni­lat­er­al vari­a­tion clause

These are terms that per­mit the fran­chisor to uni­lat­er­al­ly vary the terms of the agree­ment. These kinds of claus­es are not auto­mat­i­cal­ly unfair but could cause an imbal­ance in the par­ties’ rights and obligations.

For exam­ple, a term that per­mits the fran­chisor to change its fees at any time with­out notice to the fran­chisee could be unfair. 

This also extends to terms that per­mit the fran­chisor to uni­lat­er­al­ly vary oper­a­tions man­u­als which dic­tate the pro­ce­dures and poli­cies a fran­chisee must com­ply with, espe­cial­ly if non-com­pli­ance with the oper­a­tions man­u­al is a breach of the fran­chise agreement. 

To make these terms more like­ly to be con­sid­ered fair, the terms should: 

• spec­i­fy the cir­cum­stances as to when and how the fran­chisor can adjust their fees;
• pro­vide rea­son­able notice of the pro­posed change so the fran­chisee has time to com­ply or nego­ti­ate; and
• for changes to oper­a­tions man­u­als, pro­vide rea­son­able writ­ten notice of the change and a rea­son­able oppor­tu­ni­ty for the fran­chisee to com­ply, which should be more than sev­en days.

2. With­hold­ing or set­ting-off payments

These are terms that per­mit fran­chisors to with­hold or set-off pay­ments with­out giv­ing the fran­chisee cor­re­spond­ing rights. This can cause cash flow issues for small busi­ness­es and flow on finan­cial impacts for fran­chisees, espe­cial­ly when there is a dis­pute about the amount payable. 

Fran­chisors should con­sid­er if the term is rea­son­ably nec­es­sary to pro­tect their legit­i­mate inter­ests, and if some lim­i­ta­tions should be put in place to pre­serve the bal­ance between the parties. 

A with­hold­ing or set­ting-off pay­ments term should include the following:

• rea­son­able notice to be pro­vid­ed of the inten­tion to with­hold or set-off payments;
• clear­ly set out cir­cum­stances where with­hold­ing or set­ting-off pay­ments is allowed; and
• the method the fran­chisee could use to dis­pute or review a deci­sion to with­hold or set-off payments.

3. Audit pow­er clauses

These are terms that per­mit the fran­chisor to audit the franchisee’s business. 

These are com­mon and are impor­tant for finan­cial trans­paren­cy between fran­chisor and fran­chisee. How­ev­er, audit pow­er terms are often draft­ed to include broad dis­cre­tion for the fran­chisor to decide when to con­duct an audit with­out giv­ing rea­son­able pri­or notice. In some of these claus­es, if a dis­crep­an­cy is iden­ti­fied the fran­chisee will be required to reim­burse the fran­chisor the amount of the under­pay­ment, and per­haps even the costs of the audit. 

These approach­es are not con­sid­ered inher­ent­ly unfair, how­ev­er would be more like­ly to be unfair if there were a require­ment to pay inter­est on an under­pay­ment at a high­er default inter­est rate than nor­mal, and to cov­er all fees and expens­es relat­ed to the audit with­out any limitation. 

Claus­es allow­ing the fran­chisor to con­duct an audit of the fran­chisee should:

• not go beyond what is rea­son­ably nec­es­sary to pro­tect the franchisor’s legit­i­mate inter­ests; and
• only require the fran­chisee to pay the pro­por­tion­ate and rea­son­able costs of the audit.

4. Restraint of trade clauses

These are terms that seek to lim­it how, when and where a par­ty can sup­ply goods or ser­vices after a fran­chise agree­ment ends.

These kinds of claus­es are not inher­ent­ly unfair, and often have the pur­pose of pre­vent­ing a fran­chisee from oper­at­ing a sim­i­lar busi­ness in a cer­tain area, for a cer­tain time, with cur­rent or for­mer cus­tomers, and solic­it­ing employ­ees to leave the brand. 

Fea­tures that may make restraint of trade claus­es unfair include the length of time, the area, def­i­n­i­tions of ​‘restrict­ed con­duct’, and the use of ​‘cas­cad­ing’ claus­es which reduce trans­paren­cy for the franchisee. 

To avoid unfair­ness when includ­ing this type of clause, the fran­chisor should con­sid­er what is rea­son­ably nec­es­sary to pro­tect their inter­ests in regard to: 

• defin­ing the restrict­ed con­duct, restraint peri­od and restraint area; and
• ensur­ing the claus­es are con­sis­tent with any require­ments of the Fran­chis­ing Code of Conduct.

5. Ter­mi­na­tion clauses

Unfair ter­mi­na­tion claus­es are those that give one par­ty, usu­al­ly the fran­chisor, exten­sive rights to ter­mi­nate the agree­ment with­out cor­re­spond­ing rights for the franchisee.

The con­cern with ter­mi­na­tion claus­es is when the fran­chisor is allowed to ter­mi­nate the con­tract based on a much wider range of cir­cum­stances than the fran­chisee, and where the fran­chisor is allowed to ter­mi­nate for a breach of any term of a fran­chise agree­ment, regard­less of whether it was a mate­r­i­al or minor breach. 

To keep a ter­mi­na­tion clause fair, it is rec­om­mend­ed that the clause:

• does not go beyond what is rea­son­ably nec­es­sary to pro­tect the fran­chisor’s legit­i­mate interest;
• is an appro­pri­ate rem­e­dy for par­tic­u­lar but not all breach­es of the agreement;
• has bal­anced ter­mi­na­tion rights between fran­chisor and fran­chisee; and
• allows fran­chisees a rea­son­able oppor­tu­ni­ty to rem­e­dy alleged breaches.

Con­se­quences of unfair con­tract terms 

If a term is found to be unfair, it is void so a par­ty can no longer rely on that term.

A court can then:

• void, vary or refuse to enforce the whole or part of a con­tract to pre­vent loss or dam­age caused by the unfair con­tract terms;
• pre­vent a term that is the same or sub­stan­tial­ly sim­i­lar from being used in any future stan­dard form con­tract; and
• make an order to restrain a par­ty from apply­ing or rely­ing upon an unfair con­tract term.

For each unfair con­tract term in a fran­chise agree­ment, the penal­ty for a cor­po­ra­tion is the greater of $50,000,000, three times of the ben­e­fit obtained from the con­duct or 30% of the com­pa­ny’s adjust­ed turnover dur­ing the breach turnover peri­od. For an indi­vid­ual, the penal­ty is $2,500,000.

Each unfair con­tract term in an agree­ment is a sep­a­rate breach, so penal­ties can be cumulative. 

Does your agree­ment have any unfair con­tract terms?

Whether you are a fran­chisee or a fran­chisor, it is impor­tant to review your cur­rent fran­chise agree­ment to see if it con­tains any unfair con­tract terms. 

Our expe­ri­enced team can review your fran­chise agree­ment to ensure they com­ply with the unfair con­tract terms leg­is­la­tion or nego­ti­ate the terms of your fran­chise agree­ment to strike the right bal­ance between fran­chisor and fran­chisee. Please con­tact us if you are con­cerned about the terms of your fran­chise agreement.