Are franchisees affected by unfair contract legislation? There’s a new law coming into play and it could give you greater protection in your franchise agreement.
Corinne Attard, partner, and Daniel Jepson, solicitor, of Holman Webb Lawyers explain.
From 16 November 2016, the new unfair contracts legislation will apply to contracts entered into by a small business. To date only individual consumers have been protected from unfair contracts under these laws. As small business operators franchisees may soon be able to make use these protections in addition to those under the Franchising Code of Conduct.
Currently the unfair contract laws which are contained in the Australian Consumer Law apply only to consumer contracts that are in a standard form. A consumer contract is one for the sale of goods, services or land to an individual for predominantly personal, domestic or household use. A standard form contract is not defined but if someone alleges a particular contract is standard form, then it is up to the other person to prove that it does not.
What is changing?
The new laws will now apply to both consumer contracts and small business contracts that are in standard form and entered into on or after 12 November 2016 or are varied after that date.
A ‘small business contract’ is one that:
- supplies goods or services, or grants an interest in land (for example a lease); and
- at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons (i.e. a small business); and
- the upfront price payable under the contract does not exceed $300,000 ($1 million for a contract with has a duration of more than 12 months).
But there are a few things to be aware of.
Firstly, the number of employees includes casuals who work on a regular or systematic basis, and, the ‘upfront price’ is effectively any amount payable under the contract that is certain when the contract is entered into.
For example, the upfront fees and any fixed annual fees (such as rent) would count, but not a payment based on a percentage of turnover such as a royalty.
Will franchise agreements be covered?
A franchise agreement will meet the definition of a small business contract unless the franchisee has more 20 employees or the total of the upfront price franchise fees exceeds $1m (assuming it is longer than 12 months). The majority of franchise agreements will meet this definition.
The key question is therefore whether the franchise agreement is considered a standard form contract. To determine if a contract is in a standard form, there are a few things to consider, including:
- who holds the bargaining power in the transaction;
- whether the contract was prepared by one party before any discussion relating to the transaction occurred;
- whether one party was presented with the contract and effectively required to ‘take it or leave it’; and
- whether the terms of the contract have been tailored for the particular transaction.
These circumstances might well describe how many franchise agreements are formed. Most franchisors have standard agreements that they submit to proposed franchisees, who enter often into them with little or no negotiation even if given the opportunity by the disclosure protections of the Franchising Code.
In those situations, the franchisors will likely be considered to hold all the bargaining power and the contract is unlikely to be customised for the particular franchise. The Australian Competition and Consumer Commission certainly thinks that franchise agreements will be considered standard form contracts, as they are used in examples of how the new laws will operate.
Franchisors will presumably argue that if a franchisee elects to accept a franchise agreement without negotiation it should not automatically mean it is standard form. However it will be a matter for a court to decide.
What other contracts might be included?
The new legislation will apply to many contracts that are part of day to day operation of a franchise and business. Any supply contract that includes terms and conditions that are not negotiated (for example, printed on the back of an invoice) could potentially be subject to the new laws.
This could include contracts as broad as leases, licences to occupy and consultancy agreements. If so, they will be subject to having any unfair terms made inoperable (more on this below).
When is a term unfair?
What will be considered unfair will depend on the circumstances of each case. The Australian Consumer Law sets out three matters that must be taken into account when deciding if a term is unfair:
- whether the term would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
- whether the term is reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term;
- whether the term would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
Based on the examples in the Australian Consumer Law and from the ACCC, some common clauses in franchise agreements that may be at risk of being considered unfair include:
- a term that allows a franchisor to terminate the agreement for no cause without reciprocal rights for the franchisee;
- a term that provides for the franchisee to pay a penalty or liquidated damages that don’t fairly reflect the loss caused;
- a right to change the agreement without the consent of the other party;
- clauses that limit the liability of a party for its actions.
What happens if a term is unfair?
The Courts have broad powers to deal with terms that are declared unfair. If a court finds that a particular term is unfair, that clause only will be void – this means the contract stays in place without that term in it. Further, the Court can grant an injunction, payment of money or in fact any order it thinks appropriate in the circumstances.
While anyone can seek to challenge a contract term under the new laws, we anticipate that the ACCC will be active in making sure the new laws are complied with. Indeed, the ACCC has already stated that it will conduct compliance activities in the franchising sector.
What should I do?
For intending franchisees, the most important thing to do when you enter into a franchise agreement is to get legal advice. As well as looking at the commercial terms of the agreement (the amount of the fees etc) ask your lawyer if any of the terms could be considered unfair. If so ask for their deletion.
It is not advisable to just take the view that if they are unfair they are void anyway as you will need to go to court to prove that. Much better to have the clause removed at the outset.
Both franchisees and franchisors will be coming to grips with these new laws over the next year and working out what clauses should stay in and what comes out.
It is a prime opportunity for franchisees to negotiate a more evenly balanced franchise agreement. This in turn we can hope will reduce future disputes rather than increase them.