Franchise Systems Big and Small Warned to Comply with Unfair Contract Terms Regime
On 15 December 2023 the Australian Competition & Consumer Commission (‘ACCC’) released its compliance report after reviewing the franchise documents of 10 franchisors, including new franchisors, and franchise systems with less than 40 franchisees.
The audit focused on franchisor compliance with the Franchising Code of Conduct (‘the Code’) and changes to the unfair contract terms (‘UCT’) regime in the Competition and Consumer Act 2010 (Cth) (‘CCA’) which took effect from 9 November 2023.
Changes to the UCT regime include the:
- breach of the regime by the mere existence of a UCT in the contract;
- introduction of significant financial penalties, up to $50 million per contravention;
- expansion of the definition of ‘small business’ – more franchise agreements will be captured under this new definition and must comply with the UCT regime.
You can read more about the changes in our previous article.
Although there were minimal issues with Code compliance, the ACCC was alarmed by terms that the franchise agreements that were reviewed.
The ACCC identified 5 key UCTs in franchise agreements:
- unilateral variation of terms, including changes to the operations manual and approved suppliers/goods
- withholding and setting-off payments – where money is withheld in any situation and without notice
- the power to audit financial documents of franchisees – where the interest payable on underpayment is excessive, and the franchisee must indemnify the franchisor for all audit-related expenses without limitations on costs
- restraint of trade – cascading clauses are drafted broadly and create uncertainty as to the restraints that are applicable
- termination clauses – where the breach is immaterial, or there was no breach by the franchisee
Tips for franchisors
To ensure that a term is not a UCT, franchisors should consider:
- whether the term is reasonably necessary to protect your legitimate interests. The provision should not be broader than this;
- providing reasonable written notice of any changes;
- allowing reasonable time for any changes to be implemented by franchisees;
- the significance of the change and cost of implementation in determining what constitutes ‘reasonable time’;
- setting limitations or specifying circumstances when a power can be exercised;
- drafting your documents in plain language.
How MST can help
Compliance with the UCT regime is an enforcement priority for the ACCC in FY2023-2024. The ACCC expects all franchise systems to comply, even small franchise systems with few franchisees.