What you need to know about franchise agreements and unfair contract terms

Sarah Stowe

Does your franchise agreement avoid unfair contract terms? Image: tri-meridian.comFranchisors are increasingly burdened with increasing regulation of the sector, and sadly this year  is no different. Later this year an amendment to the Australian Consumer Law (ACL) kicks in which may have an impact on franchisors, depending on how they recruit their franchisees.

Under new amendments to the ACL coming into effect from 12 November 2016, any term in a “small business contract” will be void if the term is “unfair” and in a “standard form contract”.

Small business contract

A small business contract applies to situations in which someone employs fewer than 20 people, and the contract has an upfront price of no more than $300,000. Similarly, if the contract’s duration is for more than 12 months and the upfront price payable under the contract is less than $1m it is considered a small business contract.

As most franchisees employ fewer than 20 people, many franchise agreements will be deemed small business contracts.

Unfair terms in a small business contract

What is an ‘unfair’ term in a contract?  That is a very good question, as the Courts have not yet made clear precisely what is and what is not unfair.  It may be impossible to define clearly. Fairness is often in the eye of the beholder and the insertion of such a vague term in the legislation does not assist franchisors (or their advisors) when they are reviewing their franchise agreement in light of this new legislation.

The Australian Competition and Consumer Commission has informally given some guidance in relation to how this may apply to the franchise industry and some examples are likely to include the following from their point of view:

  • clauses that allow franchisors to terminate the franchise agreement without cause
  • clauses that allow franchisors to vary the agreement unilaterally
  • clauses that require franchisees to provide broad indemnities for franchisors
  • clauses that restrict the ability of franchisees to take action against franchisors

Standard form contracts

The legislation only applies to so-called standard form contracts.  Standard form contracts mean those ‘take it or leave it’ style contracts where there is little or no ability to negotiate their terms.  Mobile phone and internet contracts would be a good example.

Does this ‘take it or leave it’ approach apply in the franchise industry?

In our experience it is often the case that franchisees ask for – and obtain – some amendments to franchise documentation before finalisation. It does not happen in every case but it does happen, perhaps more often than many outsiders are led to believe.

If any negotiation does occur in relation to the terms of a franchise agreement, the contract would be exempt from the new legislation as the it would no longer be standard form

From our experience we believe that it is very rare for franchise agreements to be issued with absolutely no opportunity to seek amendment to the documentation.

We would strongly recommend that franchisors allow franchisees to negotiate at least some terms in the franchise agreement – and keep a record of those negotiations and any concessions made.  It appears that even making relatively minor amendments to the franchise documentation will allow a franchisor to avoid the application of the legislation.

What should franchisors do?

Certainly we would recommend that you organise a review of your franchise agreement  by November 2016 to ensure the most obvious examples raised by the ACCC are addressed – and potentially removed – from your franchise template by your legal advisors.

The next thing we would recommend is that you allow the franchisee to review the franchise agreement and at least occasionally consider granting one or two concessions in the documentation – and record those concessions in writing. 

Even trivial concessions should allow a franchisor to prove that there is the ability for any franchisee to negotiate the agreement and therefore avoid the application of the legislation.

We always recommend franchisors consider seriously any requests for amendments, and often one or two amendments find their way into the final documentation. This may involve a clarification of exclusivity, a minor change to renewal or training costs, or some other concession. 

Approaching amendment requests in this way will now be useful to establish that the franchise documentation is not ‘take or leave it’ but is capable of negotiation. 

Regardless of whether a particular franchisee has or has not requested amendments, if in other cases you have granted concessions, this should show that the document can be negotiated and amended.

For those franchisors who have had a ‘take it or leave it’ approach to franchise documentation in the past, we suggest that you reconsider this approach in light of the new legislation.

Taking professional legal advice is crucial to ensure you avoid unnecessary risks in this area. However in most cases it would be highly unlikely that you would need a major re-draft or serious amendments to your existing documentation.

Lawyers who specialise in drafting and amending franchise agreements would be best positioned to assist you in what should be a fairly straightforward and cost effective review.