Franchising Update – ACCC releases industry-specific report for unfair contracts legislation

November, 2016

By Cassandra Taylor, Lawyer and Warren Scott, Partner

From 12 November 2016, the unfair contracts law contained in the Australian Consumer Law and Australian Securities and Investments Commission Act 2001 (Cth) was extended to apply to business-to-business standard form contracts to protect small businesses.

Until the law is tested, its full scope will not be known.  However, the ACCC has released a report entitled “Unfair terms in small business contracts: A review of selected industries” to give certain industries an idea of what provisions might be caught by the new legislation.

The franchising industry is one of seven industries targeted by the ACCC in the report.  This is because of the prevalence in the franchising sector of what the ACCC considers to be standard form contracts.  That is, the ACCC believes that franchise agreements are almost always granted on a take it or leave it basis.  In addition to this, there is often a significant imbalance of power between franchisors and franchisees.

This article aims to highlight the terms that were flagged by the ACCC as common terms of concern contained in a standard franchise agreement, and what businesses can do to reduce potentially problematic terms.

Right to unilaterally vary operations manual

What is the ACCC’s concern about this term?

The ACCC’s view is that allowing the franchisor to have the unilateral right to make changes to the operations manual can cause a significant imbalance to the parties’ rights and obligations and can result in considerable detriment to the franchisee.

Further, franchisors may be of the view that terms that require consultation with the franchisee or that adequate notice of any change is provided before amending the operations manual may avoid action under the new law.  However, the ACCC’s view is that when these provisions are considered alone, they are unlikely to be sufficient to prevent a term being unfair.

What changes can franchisors make to reduce the risk?

Liquidated damages

What is the ACCC’s concern about this term?

Some liquidated damages clauses may be considered unfair if they penalise the franchisee for a breach, instead of reasonably compensating the franchisor.

What changes can franchisors make to reduce the risk?

Restraint of trade

What is the ACCC’s concern about this term?

The ACCC raised concern about cascading restraint of trade clauses, particularly because the largest values for the restraint period and area are often extremely broad.

What changes can franchisors make to reduce the risk?

Termination

What is the ACCC’s concern about this term?

Franchisees are often required to make significant investment into establishing and operating a franchise, which may result in considerable financial detriment where franchise agreements are terminated.  Accordingly, the ACCC has stated that terms that grant the franchisor an unreasonable power to end a franchise agreement are likely to be considered unfair.

What changes can franchisors make to reduce the risk?

Contact Mills Oakley


Warren Scott | Partner
T: +61 3 9605 0984
E: wscott@millsoakley.com.au
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