As you may be aware, from today (9 November 2023), substantial penalties will apply where a company (or person) is found to have breached the Australian Consumer Law (ACL). Of particular relevance to most franchisors is the new laws will prohibit and make it illegal if a ‘small business contract’ contains an ‘unfair term’.
Most franchise agreements are likely to be ‘small business contracts’, especially as the definition of ‘small business contract’ has been expanded significantly.
The new laws will also allow the Court to impose significant penalties if it finds that a contract contains an ‘unfair’ term or a franchisor seeks to rely upon an ‘unfair’ term. Importantly, while existing contracts entered into prior to the new laws commencing will not be subject to the new penalty regime, contracts entered into, contracts renewed, and clauses of contracts that are varied on or after today will be caught by the changes to the regime.
New definition – What is a small business contract?
The new definition of small business contract taking effect from today is a contract that satisfies the following conditions:
- the contract is for the supply of goods or services, or the sale or grant of an interest in land; and
- at least one of the parties to the contract satisfies one (or both) of the following:
- the party makes the contract in the course of carrying on a business and at a time when the party employs fewer than 100 persons;
- the party’s turnover for the last income year that ended before or at the time when the contract is made is less than $10 million.
This is an expansion of the existing definition and makes it far more likely that franchise agreements will be caught by the regime.
What is unfair?
A term will be considered to be unfair if:
- it causes significant imbalance;
- it is not reasonably necessary to protect the legitimate interests of the advantaged party; and
- it would cause financial or other detriment if relied upon.
Examples of terms in franchise agreements that may be considered unfair are one-sided indemnity clauses, automatic renewal clauses, one sided breach clauses (ie only the franchisor can breach the franchisee), and unilateral variation clauses such as clauses that allow the franchisor to amend the manual at any time (with the franchisee required to comply with such amendments without any recourse).
Consequence of having an unfair contract term
It is an offence under the new regime to enter into, renew or vary (whether by addition, deletion or variation to clauses) a franchise agreement which contains an unfair term on and from today!
In such instances, penalties may be imposed up to the greater of:
- $50 million;
- 3 times the benefit of the “ill-gotten gain”; or
- 30% of adjusted turnover for the period of the breach (minimum 12 months),
per contravention.
Individuals involved in the contravention can be exposed to a penalty of up to $2.5 million.
Per contravention means that a franchise agreement could contain multiple terms which are ‘unfair’ and liable to a penalty.
The Court also has greater powers including, for example, the power to injunct a person from making future contracts that rely on the unfair term or from applying or relying on an unfair term in any existing contract.
UCT series
For a more in-depth look, please click here for our article series on the UCT, designed to assist businesses in preparing for new reforms to the UCT regime.
Conclusion
9 November 2023 is here. If franchisors haven’t already reviewed their franchise agreement, we strongly recommend they do so as a priority. It is a lengthy and time consuming process to go through every recital, definition, clause, annexure, schedule and any related documents and the process needs to be well documented. A failure to address unfair contract terms in your franchise agreement and other standard form agreements may expose your franchise system to significant penalties and negative publicity.
HWL Ebsworth has a specialist franchising law team and unfair contract terms team that advises clients in various industries across Australia. Contact a member of these teams for further information.
This article was written by Sean O’Donnell, Partner, Laura Young, Partner and Melissa Ramsden, Special Counsel.
