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Impact of Unfair Contracts Legislation to be felt in Franchising

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The Trade Practices Amendment (Australian Consumer Law) Bill 2009: Unfair and prohibited contract terms  (“Unfair Contacts Bill”) will be introduced into Federal Parliament in June 2009 and if passed, will mean that many commonly used terms in standard form contracts, will become void in agreements including franchise agreements, entered into or renewed after 1 January 2010.  The Unfair Contracts Bill is likely to require franchisors to amend their franchise agreements and reconsider the way they negotiate and grant franchises.

The Unfair Contracts Bill provides that an unfair term in standard form contract is void.  Whilst standard form contract is not specifically defined, section 7 sets out matters which a court must take into account when determining whether or not a contract is a standard form contract.  These include the following:

  1. whether one of the parties had all or most of the bargaining power;
  2. whether the contract was prepared by one party before any discussion occurred between the parties;
  3. whether a party was required to accept the contract in the form in which it was presented; and
  4. whether a party was given an effective opportunity to negotiate the terms of the contract.

Some or all of these elements exist in the franchise context.  Standard form contracts are the essence of franchising and are often marketed as being an indicator of the strength and credibility of a franchise system.

Once one party alleges that a contract is a standard form contract, the onus shifts to the other party to prove otherwise, making this legislation a very powerful weapon for prospective franchisees or those considering whether or not to renew their franchise.

The FCA has made a submission to the Federal Government that franchise agreements should be exempt from this legislation.  If the Unfair Contracts Bill is passed by the government and franchise agreements are not exempt, franchisors will need to seek advice in respect of their franchise agreements and may need to make amendments to the contracts and their processes to avoid contravening this legislation.

Author: Louise Wolf