5 things franchisors need to know about the B2B unfair contract terms

Inside Franchise Business: unfair contract regulation can affect franchisors and franchiseesWith the new unfair contract term provisions in the Australian Consumer Law in full swing, here’s a snapshot of five things you need to know to avoid getting caught out.

1. It applies to standard form contracts

The unfair contract term provisions apply to standard form contracts entered into or renewed on or after 12 November 2016. A standard form contract is one that’s in a template prepared by one party, and usually offered on a ‘take it or leave it’ basis. This means that franchise agreements are most likely to be covered by the legislation.

If your franchise agreement or other contract is open to negotiation, then it is more likely to fall outside of the unfair contract term provisions.

2. It applies to small businesses, including franchises

At least one of the parties to the contract must be a small business (employing fewer than 20 employees, including casuals).

The unfair contract term provisions only apply to contracts where:

  • If the term of the contract is for one year or less – the upfront price payable under the contract is no more than $300,000
  • If the term of the contract is for more than one year – the upfront price payable under the contract is no more than $1million
  • In calculating the ‘upfront price’, any initial fees as well as contingent payments (like royalties) can be taken into account as long as they are able to be calculated at the time the franchise agreement is entered into. Royalties that are calculated as percentage of gross income may therefore not be included in the upfront price.

3. When is a term in a franchise agreement unfair?

While common sense can usually be applied to whether a term is unfair, generally it would include a term that:

  • would cause a significant imbalance in the franchisee’s rights and obligations arising under the contract
  • is not reasonably necessary to protect the legitimate interests of the franchisor
  • would cause financial or other detriment (e.g. delay) to the franchisee if it were to be applied or relied on.

4. What happens if a term in a franchise agreement is unfair?

A court or tribunal may declare a term to be unfair. If it does, that particular term will be void, so the franchisor cannot enforce it. This does not of course affect the remainder of the franchise agreement which will be valid so long as it can operate without the unfair condition.

A court can also make other orders, including that money be refunded or that certain services be provided to the affected party.

5. What should you do?

There are a few things you can do to make sure you don’t get caught out by the unfair contract term provisions:

  • Review your template franchise agreement and amend or delete terms that may be unfair. The ACCC has said that unfair contract terms in franchise agreements might include clauses allowing unilateral variation, broad restraints of trade, excessive liquidated damages or unreasonable termination clauses.
  • Be open to negotiations with the franchisee. This doesn’t mean that you must agree to any and all requests, but if not, provide clear explanations as to why.
  • If the contract has already been entered into and you get a complaint about an unfair term, try and resolve it directly with the franchisee, perhaps by agreeing in writing not to rely on the unfair term.

If in doubt, speak to a lawyer with franchising expertise.