The Australian Consumer Law (ACL) contains protection for consumers and small businesses from unfair terms that may be included in standard form consumer contracts. This is known as the unfair contract terms (UCT) regime. A standard form contract is one which adopts a “one size fits all” approach and is presented to a party on a “take-it-or-leave-it” basis, with limited opportunity for the other party to genuinely negotiate terms. The UCT system applies to standard form contracts entered into or renewed after 12 November 2016 that are for the supply of goods or services, or grant of an interest in land, where at least 1 party is a small business (being one that employs less than 20 people), and the upfront price payable does not exceed $300,000 or $1 million if the contract is for more than 1 year. This definition captures most franchise agreements.
There are certain terms that are exempt from the UCT regime, including terms that set the price, define what is being supplied, or terms that are required or permitted by another law. The UCT also does not apply to contracts relating to certain goods or services, including most insurance contracts (except those relating to private health insurance), constitutions and contracts for the shipping of goods.
Whether a term in a standard form contract is potentially unfair and therefore unenforceable must be considered in the context of the entire contract as a whole. The ACL sets out examples of terms that may be unfair, which include unilateral entitlements for termination or variation of the contract, and terms that enables only one party to avoid or limit its contractual obligations, or penalises only one party but not the other.
Only a Court can make a final determination as to whether a term is unfair, but factors which may be taken into account in considering this include:
- If the term causes a significant imbalance between the rights and obligations of the parties;
- Whether the term is reasonably necessary to protect the legitimate interests of the business;
- Whether the term would cause detriment of some kind if the business attempted to enforce it; and
- If the term is transparent.
If a Court determines that a term is unfair under the UCT regime, it will be void – i.e. not binding on the parties. The remainder of the contract will continue to apply to the extent that it can operate without the unfair term.
Enforceable undertakings by Back in Motion Physiotherapy Pty Ltd
The ACCC is the government regulator responsible for overseeing and enforcing the ACL and UCT regime. It has recently accepted a court-enforceable undertaking from Back in Motion Physiotherapy Pty Ltd (BIM Physiotherapy) to remove certain potentially unfair terms from its franchise agreements.
BIM Physiotherapy is one of the largest businesses in the physiotherapy and ancillary services market, and is a franchisor with a network of over 500 franchisees in Australia and New Zealand. Since at least 2004, BIM Physiotherapy has used a standard form franchise agreement, and most of these contained a restraint of trade clause preventing franchisees from being involved in any competing practice within a 10km radius of any BIM Physiotherapy franchise for a period of 12 months, if they left the franchise network. The restraint of trade clause was drafted in a “cascading” manner, with restraints ranging from 10km from any BIM Physiotherapy site in Australia for 12 months to 3km from a franchisee’s former site for a period of 3 months. There were 21 possible permutations of the restraint (their operation depended upon a Court making a determination that certain aspects of the definitions used were unenforceable).
Given the size of the BIM Physiotherapy franchise network, the restraint effectively meant that most former franchisees could not operate in many parts of metropolitan Australia. The ACCC was concerned that the “cascading” manner of drafting caused uncertainty as to the extent franchisees were restricted from offering Physiotherapy services once they left the network, and could cause detriment to franchisees seeking to exit the BIM Physiotherapy franchise network, such that the restraint amounted to an unfair contract term.
The franchise agreement also included a get-out mechanism for franchisees seeking to escape the operation of the restraint clause, however under this get-out clause, BIM Physiotherapy was entitled to charge a fee that was four times the franchisee’s annual royalty fee in exchange for agreeing not to enforce the restraint. The ACCC was concerned that this also amounted to an unfair term.
The ACCC was concerned that both provisions caused a significant imbalance between the rights and obligations of the parties, were not reasonably necessary to protect BIM Physiotherapy’s legitimate interests, and would cause detriment to franchisees if enforced.
BIM Physiotherapy admitted that these two provisions of its standard form agreement may be unfair under the UCT regime, and has provided the ACCC with undertakings that it will not enforce them against current franchisees who leave in the future, or franchisees who have departed in the previous 12 months. It has agreed to remove them from its franchise agreement moving forwards. However, the ACCC has allowed a provision preventing former franchisees from actively soliciting known BIM Physiotherapy clients for a period of 9 months to operate, presumably on the basis that this is reasonably necessary to protect the legitimate interests of BIM Physiotherapy and its franchise network. The undertakings supplied by BIM Physiotherapy are enforceable for a period of 3 years.
Lessons for franchisors
The ACCC investigation and enforceable undertakings supplied by the franchisor in relation to its restraint clause in particular is of interest to franchisors, as restraints in franchise agreements are common, and the “cascading” manner of drafting is a common legal tool employed in such clauses to ensure that they remain at least partially enforceable in the event a Court determines them to be too wide in part to be enforceable.
The undertakings supplied by BIM Physiotherapy suggest that the drafting of the restraint cascading clause may have been less than ideal. It will be interesting to see if the ACCC takes issue with other restraints drafted in the commonplace “cascading” manner moving forwards, both in the context of franchise agreements specifically and in other standard form agreements more generally. Certainly, restraint clauses are something that is on the ACCC’s radar as being provisions that are potentially unfair terms.
This case is a good reminder to franchisors that their franchise agreements should be regularly reviewed for UCT compliance and to ensure that all clauses are sufficiently clear, transparent, certain and easily understood by franchisees. Franchisors will need to consider whether direct reference to the location of other franchisees within a restraint clause is appropriate going forward.
HWL Ebsworth’s Franchising and Retail team have extensive experience with franchise agreements and are well placed to assist with such reviews. Please contact a member of our team if we can be of any assistance.
This article was written by Luke Dale, Partner and Niomi Abeywardena, Special Counsel.