Dealers take note: the ACCC's report on unfair contracts

22 November 2016

On 10 November 2016 the Australian Competition and Consumer Commission (ACCC) released its report of common unfair contract terms identified in a number of selected industries.

While the ACCC’s report does not include consideration of common terms in dealer agreements, it does include a number of contract terms of concern in the franchising sector which includes motor vehicle retailing.

As set out below, the ACCC’s report referred to its concerns as to the following clauses which are commonly found in dealer agreements:

Right to unilaterally vary operations manual

In assessing whether a unilateral variation term is unfair, it will be relevant to consider the nature of the obligations subject to the power to vary, as well as any limitations on the exercise of that power.

The ACCC is of the view that terms that allow one party to unilaterally vary key aspects of the franchise agreement, especially in a largely unrestrained manner, are likely to raise concerns under the unfair contract terms law.

In franchising, it is common for a franchisor to require its franchisees to comply with an operations manual, which sets out core business information as well as detailed policies and procedures. While operations manuals are usually a separate document from the franchise agreement, they often set out substantive rights and obligations of the franchisee during the term of their franchise. Franchise agreements often incorporate the terms of the operations manual into the agreement, and otherwise require the franchisee to comply with the terms of such manuals.

All franchise agreements reviewed contain terms that allow the franchisor to unilaterally vary the operations manual. When the ACCC raised concerns about these terms, franchisors maintained that the ability to unilaterally vary the operations manual is essential to allow the franchisor the flexibility to adapt its system to a changing marketplace.

While the ability to vary the manual in some way may be reasonably necessary to protect a franchisor’s legitimate interests, terms that allow the franchisor to vary the entirety of a manual in an unconstrained manner may raise concerns under the unfair contract terms law, particularly if the manual includes substantive rights and obligations, or there are detrimental consequences for the franchisee if the operations manual is not complied with.

In response to the ACCC’s concern, one franchisor amended a term that allowed it to vary the operations manual at any time to provide that it can only make a variation if it is reasonably required. Such a limitation on the right to amend the operations manual may, in appropriate cases, alleviate the ACCC’s concerns.

Not all franchisor responses were satisfactory. For example, another franchisor amended its contract to provide that it could only unilaterally vary its manual if the change improved the franchise system. In the ACCC’s view, such a term does not adequately limit the franchisor’s otherwise unfettered power to unilaterally vary the contract. Changes made to ‘improve’ the system could still cause a significant imbalance to the parties rights and obligations, not be reasonably necessary to protect the legitimate interests of the franchisor, and may cause detriment to franchisees.

A third franchisor claimed that its power to vary the operations manual was mitigated by a requirement to consult with its franchisee panel before making any changes. However, the panel’s recommendations were not binding on the franchisor, and as such the requirement to consult did not provide a sufficient limitation on the franchisor’s power to vary. The ACCC is of the view that the term could still raise concerns if, despite a requirement to consult, the franchisor can ignore the franchisee panel when varying the manual.

The remaining franchisors argued that unilateral variation clauses are fair where franchisees are given prior notice of any changes to the operations manual. The ACCC acknowledges that the provision of notice and the reasonableness of the notice period (in light of the changes that may be made) will be relevant considerations that go towards assessing whether the variation term is unfair. However, prior notice alone may not always be sufficient to stop a term being unfair. In particular, prior notice is unlikely to be sufficient where the variation power is otherwise largely unconstrained and detrimentally impacts on significant aspects of the franchisee’s business.

The ACCC strongly recommends that franchisors ensure that appropriate limits are placed on any terms which enable them to unilaterally vary franchise agreements and/or operations manuals, or risk action under the unfair contract terms law.”

Relevance to dealers

The ACCC’s report makes it clear that:

  • The ACCC is of the view that terms of a dealer agreement that allow a franchisor to unilaterally vary key aspects of a dealer agreement (such as dealer standards or manuals), especially in a largely unrestrained manner, are likely to raise concerns under the unfair contract terms law; and
  • The ACCC is concerned about terms that grant a franchisor an unreasonable power to terminate a franchise agreement. For example on notice without any breach by a dealer of the terms of the dealer agreement, or where there are breaches by a dealer of the dealer agreement but where there is no regard to the severity of the breaches or whether the franchisee had remedied them.

It should also be noted that the same concerns would apply under the Motor Dealers and Repairers Act of New South Wales which has similar unfair contract provisions to the new Commonwealth Legislation.

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