Unfair Contract Terms: Why Franchisors Should Review Their Franchise Agreements

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BDC Law discuss unfair contract terms for the franchise code of conduct updates

Franchisors should be well aware by now that the amendments to the Unfair Contract Terms regime
have been in effect since 9 November 2023. As previously touched on by us, these changes have
serious implications, especially for Franchisors, because, as identified by the ACCC, it has not been
uncommon for Franchise Agreements to be riddled with unfair contract terms, which would be
caught by the regime.

Refer to our previous publication on the changes to the unfair contract term regime and how they
are now applied here: Unfair Contract Terms Law In Australia – New Era (bdcpartners.com.au)

As a quick recap, the major changes included:

  • An increase in financial penalties – up to $50 million;
  • making unfair contract terms unlawful and subsequently attracting pecuniary penalties, with
    each unfair contract term being a separate contravention; and
  • providing the courts with greater-reaching power to remedy the damage caused by unfair
    contract terms.

Unfair Contract Terms in Franchising

As detailed in the regime, a term is 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 to protect the legitimate interests of the party who would
    be advantaged by the term; and
  3. it would cause detriment (financial or otherwise) to a party if it were to be applied or
    relied on.

Franchise agreements are inherently prone to breaching the Unfair Contract Terms regime due to
several factors:

  • standard form contracts: Unless special conditions are added, franchise agreements are
    typically “take it or leave it” contracts, lacking negotiation room for franchisees. This
    standard form nature raises unfair contract term concerns compared to individually
    negotiated agreements.
  • power imbalance: Franchise agreements often grant significant control to the franchisor,
    potentially leading to clauses that favour the franchisor’s interests at the expense of the
    franchisee. This imbalance can be seen as unfair if the terms are not reasonably necessary to
    protect the franchisor’s legitimate business interests.
  • unilateral control clauses: Clauses allowing the franchisor to unilaterally change key aspects
    of the agreement, such as pricing, fees or marketing strategies, can be deemed unfair if they
    significantly disadvantage the franchisee without fair justification.

Terms in Franchise Agreements Which Could be Unfair Contract Terms

Several types of terms which are not uncommon in franchise agreements may be considered unfair
under the regime. These include:

  1. Automatic renewal terms: Terms that allow for the automatic renewal of the franchise agreement without prior notice and approval by the franchisee, or terms that grant unilateral rights for one party to extend the franchise agreement an unlimited number of times.
  2. Imbalanced termination rights: Granting the franchisor the sole right to immediately terminate the contract for any reason, while the franchisee must meet strict criteria, creating an unfair power imbalance. (These clauses are not as prevalent, as the Code has provided substantial clauses to protect franchisees).
  3. One-sided limitation of liability or indemnity terms:
    This can occur when the franchisor significantly limits their liability for breaches, potentially
    even for intentional or negligent acts, while holding the other parties fully responsible for
    any potential losses.
  4. Unilateral variation terms: These terms allow the franchisor to unilaterally change key aspects of the contract, such as the operations manual, product lists, service levels, or pricing, without consent from the franchisee, leaving the franchisee potentially disadvantaged.
  5. Unfair payment terms: This includes unilateral changes in fees, demanding pre-payment without refunds for unused services/products, withholding or setting off payments, or charging fees without delivering the promised performance.
  6. Terms in relation to auditing the franchisee’s business: Where the terms prescribe rights that go beyond what is reasonably necessary to protect the franchisor’s legitimate interests.
  7. Restraint of trade: This includes terms that unreasonably restrict the other parties at the expiry of the franchise agreement, and which go against the requirements contained in the Franchising
    Code.

Franchisors should avoid costly unfair contract term issues. Protect your business from hefty
penalties, reputational damage and franchisee disputes by ensuring your agreements comply with
the latest unfair contract term regulations. Our franchising team has already assisted many
franchisors to achieve compliance through comprehensive reviews and revisions of their existing
agreements.

Proactive unfair contract term reviews foster a thriving network. Schedule a consultation to learn
how our expertise at BDC Law can safeguard your business and empower you to build a stronger
franchise network.

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