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Unfair Terms and Franchise Agreements

Krishneel Nath ||
Franchisees may often consider their obligations under the Franchise Agreement as onerous and unequal. This perception, in of itself, does not necessarily affect the validity or enforceability of their obligations under the franchise agreement.

However, under the Australian Consumer Law (“ACL”) a term in a small business contract may be declared void if the term is unfair and the contract is a standard form contract.

Do the unfair term provisions apply to your franchise agreement?

In determining whether the provisions in relation to the unfair terms apply to franchise agreements, the following matters would need to be considered.

Firstly, the unfair contract provisions under the ACL apply to small business contracts. A contract is a small business contract if:

  • the contract is for the supply of goods or services;
  • at the time the contract is entered into, at least one party to the contract is a business that employs less than 20 persons; and,
  • either of the following applies:
    • upfront price payable does not exceed $300,000; or,
    • the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.

Most franchisees and franchise agreements will meet the above criteria.

Secondly, the unfair term provisions apply to only standard form contracts. Franchise agreements usually have very little scope for negotiation and therefore would generally be considered as a standard form contract. In the event of a dispute, a franchise agreement is presumed to be a standard form contract unless another party proves otherwise.

However, and if it becomes necessary to determine whether the franchise agreement is a standard form contract, a court can have regard to a number of matters including but not limited to the following if:

  • one party has all or most of the bargaining power;
  • the contract was prepared by one party before any discussion relating to the transaction occurred; and,
  • another party was, in effect, required to either accept or reject the terms of the contract in the form in which they were presented.

What is considered an ‘unfair term’?

A term is unfair if:

(1) it would cause significant imbalance in the parties’ rights and obligations; and,

(2) it is not reasonably necessary in order to protect the legitimate interests of the party who would be disadvantaged; and,

(3) it would cause detriment to a party if it were to be applied or relied on.

In determining whether a term of a contract is unfair, a court will have a regard to a number of matters including the extent to which the term is transparent and the contract as a whole.

ACL provides the following general examples of unfair terms:

  • a term that permits one party (but not another party) to avoid or limit performance of the contract;
  • a term that permits one party (but not another party) to terminate the contract;
  • a term that permits one party (but not another party) to vary the terms of the contract;
  • a term that permits one party unilaterally to vary the characteristics of the goods and services to be supplied under the contract; and,
  • a term that permits one party unilaterally to determine whether the contract has been breached or to interpret its meaning.

The Australian Competition and Consumer Commission (ACCC) provides the following examples of terms within a franchise agreement that may breach the unfair term provisions and therefore likely to be declared void:

  • a term that provides the franchisor the right to terminate a franchise agreement with no cause, particularly if it also provides for no compensation to the franchisee;
  • a term that provides the franchisor a right to unilaterally change the terms of the franchise agreement; and,
  • terms of the operations manual may also be covered if it is incorporated within the franchise agreement. For example, procedures under the operations manual may require payment of fees by franchisees each time a customer makes a complaint, irrespective of the franchisee’s role or response.

The above examples are not exhaustive but intended to illustrate the types of terms that may be considered unfair under the ACL and therefore declared void.

While most terms of standard contracts are covered, it is important to note that unfair term provisions do not apply to terms that:

  1. set out the price;
  2. define the product and service being supplied; and,
  3. are permitted or required by another law.

Conclusion

Franchisors and franchisees have been required to adjust their strategies to respond to the economic challenges. Unsurprisingly, parties should also be reconsidering their ongoing obligations under the franchise agreement. If you are concerned about your obligations under your franchise agreement or would like advice generally, please do not hesitate to reach out to a member of the Coleman Greig’s Litigation and Dispute Resolution Team, who would be more than happy to assist you today.

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