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

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By Cassandra Taylor, Senior Associate

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?

  • Include a term that only allows reasonably necessary changes to the operations manual. This is instead of allowing the franchisor to amend the operations manual at any time.
  • Place limits on amendments of the operations manual. This way, the franchisee is aware of any potential amounts or changes that may be required when they enter the franchise arrangement

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?

  • Ensure that the business’ losses are fairly reflected in the event of default by the franchisee. For example, if a franchisee fails to attend compulsory training or a meeting, the compensation amount to be paid by the franchisee needs to be a genuine pre-estimate of the loss the franchisor would suffer as a result of the franchisee’s failure to attend.

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?

  • Ensure restraint of trade clauses are only as broad as reasonably necessary. Consider having more targeted restraint provisions.


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?

  • Remove any concerning termination clauses. For example, a clause that allows a franchisor to terminate because of a franchisee’s breach, despite the severity of the breach or whether it has been remedied in a reasonable time.
For further information, please do not hesitate to contact us.

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