Franchisors that have not already done so need to closely review their contracts given new legislation that provides small businesses with greater protection against unfair contracts will come into effect in November.
The new law, which aims to protect small businesses such as franchisees from unfair terms in business-to-business standard form contracts with larger businesses like franchisors, will apply from 12 November 2016.
Currently, many small businesses entering into contracts with larger businesses have no option but to accept all the terms of the standard form contract that they are given. Under the new law, the courts will be able to strike out any unfair contract terms.
Standard form contracts provide little or no opportunity for the responding party to negotiate the terms – they are offered on a ‘take it or leave it’ basis.
Contracts covered include those between businesses where one of the businesses employs less than 20 people and the contract is worth up to $300,000 in a single year or $1 million if the contract runs for more than a year.
The law sets out examples of contract terms that may be unfair, including:
- terms that enable one party (but not another) to avoid or limit their obligations under the contract
- terms that enable one party (but not another) to terminate the contract
- terms that penalise one party (but not another) for breaching or terminating the contract
- terms that enable one party (but not another) to vary the terms of the contract.
According to the Australian Competition and Consumer Commission (ACCC), Australian small businesses enter into an average of eight standard contracts per year.
With more than two million small businesses in Australia, the ACCC anticipates the law change will potentially affect millions of standard form contracts. It says almost two thirds of small businesses have claimed to have experienced unfairness in contract terms and conditions they have signed up for, with almost half experiencing some harm as a result.
ACCC Deputy Chair Dr Michael Schaper said franchising is one of the key sectors affected by the pending law change given the prevalence of standard form contracts between franchisors and franchisees.
He said it is the responsibility of franchisors to understand the change, their obligations under the new law, and to review their contracts accordingly.
The ACCC is urging all franchisors to make an effort to understand how they will be affected by the new law and how it applies to their contracts. There has been 12 months’ advance notice of the change of law coming into effect from 12 November 2016, so time is running out for franchisors to work with their legal advisors to review their contracts to avoid and limit any potential risks in this area.
However, there are some differing opinions among franchise and legal consultants on what impact these new unfair contract laws will actually have on the franchise sector.
In its explanation of the pending changes, franchise consulting company DC Strategy says franchise agreements are typically negotiated by franchisees and franchisors meaning they are no longer ‘standard form’.
DC Strategy explains in its article ‘Unfair Contract Terms and Franchise Agreements from November 2016’ (www.dcstrategy.com) that a franchisee or franchisee’s lawyer will often ask, and obtain, a number of amendments to a franchise agreement.
If this occurs, DC Strategy argues that the contract would no longer be ‘standard form’ as the parties have had the opportunity to negotiate the terms, and indeed some terms have been changed as a result.
In our experience there are very few franchise agreements issued where there is absolutely no opportunity to seek amendments to the documentation. This may vary for some franchisors, but our advice to franchisors would be to allow the franchisee to ask for changes, and allow the franchisee some changes where this is easy to do. It appears that even making relatively minor amendments to the franchise documentation will allow a franchisor to avoid the application of the legislation, DC Strategy says.
In a somewhat contrary view, HWL Ebsworth Lawyers believes the new law “has potentially profound implications for the franchising sector in Australia”.
In its article explaining the changes, ‘Unfair contract terms laws to apply to franchise sector’ (www.hwlebsworth.com.au), HWL Ebsworth Lawyers says franchise agreements that are negotiated may still fall under the new legislation.
Some have suggested that franchise agreements may not be caught because they are not ‘standard form’ contracts, as there is often negotiation before franchise agreements are signed. However, the legislation is such that any negotiation will likely have to extend beyond agreeing fees, term or territory. It is likely a franchisor will have to show that the basic terms and conditions of its franchise agreement were the subject of negotiation. Many established franchise systems do not engage in this sort of negotiation. As a result, many franchise agreements are likely to be caught as ‘standard form’ agreements and will be subject to the new law, HWL Ebsworth Lawyers says.
What do you think? If you are a franchisor, what are you doing to take into account this change? If you are a legal professional, what is your opinion?