Impact of Unfair Contracts Legislation felt in Franchising

The Trade Practices Amendment (Australian Consumer Law) Bill 2009: Unfair and prohibited contract terms (“Unfair Contacts Bill”) states that an unfair term in a standard form contract is void.  Unfair Contracts Bill defines standard form contract so broadly, that franchise agreements are likely to be caught within the ambit of this legislation.

Section 4 of the draft Bill provides several types of terms that may be unfair.  These include:

1. a term that permits one party (but not the other party) to avoid or limit performance of the contract.  For example, clauses that made the franchisor’s duties subject to compliance by the franchisee;
2. a term that permits one party, (but not another party) to terminate the contract.  Most franchise agreements do not have the ability for a franchisee to terminate the contract, (other than during the cooling off period).  If they do, it is in much more limited circumstances than those for which a franchisor may terminate a franchise agreement;
3. a term that penalises one party (but not another party) for a breach or termination of the contract.  For example, most franchise agreements penalise one party for falsely representing turnover by requiring that they undergo and pay for an audit of their business.  On the other hand, franchisors are not subject to the same scrutiny and are never subjected to an independent audit or required to pay for it.  Further, some franchise agreements contain liquidated damages clauses which penalise franchisees, but not franchisors;
4. a term that permits one party (but not the another party) to vary the terms of the contract.  For example, the right of a franchisor to vary a territory, but not the franchisee;
5. a term that permits one party (but not the another party) to renew or not renew the contract;
6. a term that permits, or has the effect of permitting, one party (but not the another party) to vary the upfront price (widely defined) payable under the contract without the right of another party to terminate the contract.  For example, many franchise agreements allow a franchisor to vary certain fees on renewal and there is no requirement for the franchisor to provide a copy of the new franchise agreement before the franchisee is required to exercise the option for renewal.  A further example, may be the practice of franchisors to change the price of the fitout (to adjust their profit margin), without an ability for the franchisee to terminate.
7. a term that permits, or has the effect of permitting, one party (but not the another party) to vary the characteristics of the goods or services to be supplied.  Many franchise agreements give the franchisor the ability to change the goods or services that a franchisee is to purchase or supply.  Clauses that are broad enough to permit a change in the characteristics, for example, by adding or deleting a different line of products, they may contravene this section.  The ability of the franchisor to unilaterally change the Operations Manual may also contravene this section.
8. a term that permits, or has the effect of permitting, one party unilaterally to determine whether the contract has been breached or to interpret its meaning.  For example, clauses which allow a franchisor to determine that a franchise agreement has been breached because of an inaccuracy in turnover reporting, even where there is proof that such discrepancy is inadvertent.  A further example, may be the ability of a franchisor to terminate a franchisee on short notice due to past breaches;
9. a term that limits, or has the effect of limiting, one party’s vicarious liability for its agents.  Some franchise agreements limit the franchisor’s liability for the actions of building and fitout contractors;
10. a term that permits, or has the effect of permitting, one party to assign the contract to the detriment of another party without that other party’s consent.  For example, the ability of a franchisor to sell its business without consideration of the effect on the franchisees may be an unfair term.
    Franchisors need to seek legal advice about whether their franchise agreements need to be amended to avoid having many of their terms rendered void.  Franchisees also need to be aware of the legislation and how it may assist in the negotiation process.

Franchisors should seek legal advice about whether their franchise agreement needs to be amended in light of the above. MST can assist franchisors to protect their agreements for the future.

Franchisees need to be aware of the legislation when negotiating franchise agreements. MST can assist renewing or prospective franchisees in their negotiations with their franchisor and ensure that franchisees enter into or renew agreements that comply with the unfair contracts legislation.

Author: Louise Wolf