Case Update – Fuji & Unfair Contract Terms

On 12 August 2022, the Federal Court of Australia found that 38 different contracts entered into by Fujifilm Business Innovation Australia Pty Ltd and Fujifilm Leasing Australia Pty Ltd (collectively, Fuji) with potentially thousands of small businesses contained numerous terms which were unfair (Fuji Judgment).

In this article we recap on the unfair contract regime applicable to business to business transactions (B2B UCT Regime), highlight the types of clauses found to be unfair in Fuji’s contracts and discuss whether clauses in your Franchise Agreement should be amended in wake of the Fuji Judgment. It is worth noting at the outset that whether a term is ‘unfair’ is ultimately a matter for the Court, not the ACCC. That said, the ACCC can take action, regardless whether a franchisor is seeking to reply upon a particular term or not.

B2B UCT Regime

To better understand the potential implications of the Fuji Judgment, it is worth recapping the relevant law which captures B2B contracts. Section 23 of the Australian Consumer Law (which is found in Schedule 2 of the Competition and Consumer Act 2010 (Cth) (ACL)) sets out the law relating to unfair contract terms. The B2B UCT Regime applies to terms contained within small business contracts that are entered into, renewed or varied on or after 12 November 2016.

A term of a small business contract is void if:

1. the term is unfair; and
2. the contract is a standard form contract.

What is a small business contract?

A contract is a small business contract if:

1. the contract is for a supply of goods or services, or a sale or grant of an interest in land;
2. at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons; and
3. either of the following applies:
   1. the upfront price payable under the contract does not exceed $300,000; or
   2. the contract has a term of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.

For the purposes of determining how many employees are employed by a party, it is worth noting that the ACL expressly states that a casual employee is not to be counted unless he or she is employed by the business on a regular and systematic basis.

What is considered to be unfair?

Section 24 of the ACL outlines that a term will be considered to be unfair if:

1. it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
2. it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
3. it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

What is a standard form contract?

When determining whether contract is a standard form contract, the Court may take into account such matters as it thinks relevant, but must take into account the following:

1. whether one of the parties has all or most of the bargaining power relating to the transaction;
2. whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
3. whether another party was, in effect, required either to accept or reject the terms of the contract (other than the terms referred to in section 26(1)) in the form in which they were presented;
4. whether another party was given an effective opportunity to negotiate the terms of the contract that were not the terms referred to in section 26(1);
5. whether the terms of the contract (other than the terms referred to in section 26(1)) take into account the specific characteristics of another party or the particular transaction;
6. any other matter prescribed by the regulations.

It is worth noting that a contract will be presumed to be a standard form contract unless a party to a Court proceeding (usually the respondent) is able to prove otherwise.

In terms of franchising, most typical franchise arrangements would likely be considered to be a “standard form contract”. It is good practice for franchisors to make this assumption when reviewing and drafting their template franchise agreements.

Implications of the Fuji Judgment

Whilst the Fuji Judgment is not about franchise agreements, parallels between the terms identified as being unfair can be drawn to common terms often included in Franchise Agreements. As to whether similar terms would be ‘unfair’ in a franchise context remains a vexed question as there is currently limited authority given the B2B UCT Regime is still relatively new law. The ACCC acknowledges itself that a term could be unfair in one contract but not unfair in another. We should also note that the precise terms in the various Fuji contracts are not set out in the Fuji Judgment so the judgment does poses some difficulty to properly assess. However, we set out below four types of clauses that were found to be unfair in the Fuji Judgment that should be considered when franchisors or their advisors are reviewing template franchise agreement.

Price varying clauses

A number of Fuji’s contracts contained the ability for Fuji to unilaterally and immediately vary all or some of the charges payable by the customer. It appears from the Fuji Judgment that this right was not qualified in any way. It is reasonably common for Franchise Agreements to retain the ability for Franchisors to vary some costs. There may be good reason why such right or flexibility is required, especially where a Franchisor may engage services on behalf of the network and the costs of such services fluctuate from time to time. However careful drafting will be required to justify any term which allows unilateral variation of any costs payable by a franchisee and appropriate qualifications and notice provisions should be incorporated into the relevant term. In this regard, the use of the phrase ‘acting reasonably’ may not be sufficient as there were a number of terms in the Fuji contract with such a phase, yet were found to be ‘unfair’.

Franchise Agreements containing similar price variation clauses should be reviewed carefully to clearly limit the circumstances whereby price fluctuations may be introduced. It may be prudent for Franchisors to build in price caps within the franchise agreement so as to provide better certainty to Franchisees as to the maximum cost they may incur. Similarly, prior to engaging third party services on behalf of the franchise network, Franchisors should ensure that service contracts contain similar notice provisions with respect to price variations so as to allow the Franchisor the ability to reasonably notify the franchise network of price changes.

References to extraneous documents

It is common practice within Franchise Agreements to require franchisees to comply with methods, practices, policies and or procedures outlined within a manual. It is also usual that there is a clause allowing the Franchisor to vary a manual during the term of a franchise agreement. Further, it is also common to state that a franchisee’s failure to comply with a manual is considered to be a breach of the Franchise Agreement. The Fuji judgment indicates that incorporating “additional contractual terms by reference to one or more extraneous documents, which… are difficult for the customer to locate or identify” and whereby one party can “unilaterally vary with no obligation to give notice of the variation” are terms likely considered to be unfair. The Fuji Judgment also indicates that provision of a manual prior to a franchisee entering into an agreement may be important, especially if a request to review a manual has been made and denied by a franchisor.

Franchisor’s must ensure that instances whereby the Franchisor may unilaterally vary a manual is clearly set out in the Franchise Agreement and appropriate qualifications drafted into the relevant term. Terms which simply say the franchisor can vary the manual at any time (which was common place in older franchise agreements) should be avoided. Franchisor’s should also ensure that any variations to the manual are communicated clearly and with reasonable notice to the franchise network. The manual should also be made readily accessible to prospective franchisees and the franchise network at all times. Finally, any manual which allows the variation of fees or the potential introduction of new fees needs to be very carefully considered by legal advisors to determine whether such right would be better contained within the franchise agreement or removed altogether if there is potential to offend the B2B regime.

Disproportionate termination rights

The Fuji Judgment seems to suggest that disproportionate termination rights and disproportionate remedy periods in which a party is required to remedy alleged breaches of a contract made various terms in the Fuji contracts ‘unfair’. It is unclear whether the Fuji Judgment can be authority to impinge common termination clauses within a franchise agreement given the context and overall circumstances which relate to a franchise grant. However it is certainly common for franchise agreements to be silent on termination rights of a franchisee.

The issue of disproportionate termination rights is particularly interesting in a franchise context given that the Franchising Code of Conduct (Code) already significantly curtails a Franchisor’s ability to terminate the Franchise Agreement. Further and despite numerous Federal government inquiries, the Government has not sought to introduce into the Code express requirements for a franchise agreement to contain termination rights for a franchisee, save for cooling off rights at the commencement of a franchise. The introduction of new clause 26B of the Code seems to deliberately stop short of allowing franchisees to terminate franchise agreements in that a franchisee may propose early termination, but does not oblige a Franchisor to agree to such proposal. That said, termination rights for a franchisor are important and therefore if there is a risk that a term allowing for termination is ‘unfair’ because a similar right does not exist for a franchisee, franchisors and their advisors may need to consider whether express termination rights are written into template franchise agreements.

Assignment

The Fuji Judgment indicated that the ability of Fuji to assign the contract without consent but the customer had to seek consent was an ‘unfair’ term. This is interesting in the context of common commercial contracts but we don’t see this applying in a franchise context. In franchising, it is very common to have an assignment term in similar terms which would have been in the Fuji contracts. However, there is often very legitimate reasons in franchise agreements for ‘without notice’ assignment rights in favour of a franchisor, especially in the case of network sales. There is also an element of a ‘personal’ contract in franchising when a franchisor selects a franchisee and it is often appropriate that a franchisor has the right to veto a potential assignment of franchise agreement in circumstances where the new franchisee (assignee) is not a suitable candidate.

Takeaways

Some Franchisors are not always in a position to determine whether the party it is contracting with will satisfy the various tests outlined in the B2B UCT Regime. Accordingly, some franchise agreements may not be subject to the B2B UCT Regime. However most franchise agreements will be subject to the B2B UCT Regime. Franchisors should regularly review their template franchise agreements and remove or amend potentially unfair terms that cannot be justified as being reasonably necessary to protect a legitimate interest of the Franchisor. Law reform in this area is still being pushed strongly and action needs to be taken by franchisors.

The Fuji Judgment demonstrates that a number of “commonplace” terms within Franchise Agreements may be considered to be unfair and may require amendment. The use of the phrase ‘acting reasonably’ which has crept into many franchise agreements may do little to avoid a term being declared void. With the majority of Franchisors gearing up to undertake their annual update of their Disclosure Documents, the Fuji Judgment is a timely reminder to again carefully consider the terms of your template franchise agreements. Certainly, express terms allowing unilateral variation of a franchise agreement or a manual need to be avoided and/or appropriately qualified to ensure a franchisor does retain some flexibility to change to meet the ever changing business environment. Automatic renewal clauses, termination for convenience rights, liquidated damages terms and indemnity terms must be reviewed to avoid poor drafting which may lead to a Court finding such terms void.

Please contact us if you would like us to assist you with a UCT compliance review of your Franchise Agreements.

This article was written by Sean O’Donnell, Partner and Emily Lucas, Associate.