Unfair contract terms regime expected to extend to franchise agreements from 1 July

On Friday 20 March 2015, Prime Minister Tony Abbott and Small Business Minister Bruce Billson announced that the unfair contract terms regime contained in the Australian Consumer Law (which presently protects consumers in relation to standard form consumer contracts) will be extended to protect small businesses that enter into standard form contracts.

A "standard form contract" under the proposed new regime is likely to include franchise agreements. Franchise agreements are generally presented to franchisees in a standard form and are usually presented to a prospective franchisee on a "take it or leave it" basis, with little scope for negotiation. A standard form contract might also include a range of other commercial contracts which are presented by a supplier to a customer in a standard form (e.g. software licence and support agreements).

Under the present regime, a term of a consumer contract is unfair if:

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

Examples of unfair terms under consumer contracts can include a term that gives one party (but not the other) the right to terminate the contract or vary the contract. However such terms will not always necessarily be unfair, it will depend on a consideration of all of the relevant facts (including the transparency of the term and the contract as a whole).

A term of standard form contract which is found by a court to be unfair will be declared void. The contract will however continue to bind the parties if it can operate without the unfair term.

Once the proposed bill is passed, franchisors ought to review their franchise agreements to identify unfair terms which should be amended or removed to ensure clarity and enforceability of the terms of their franchise agreements. Relevant to this review will be ensuring that the franchise agreement is clearly expressed and in plain English. Franchisors presenting prospective franchisees with overly complex, one-sided franchise agreements may find that critical terms of the agreement are unenforceable.

The federal government intends that the changes will commence on 1 July 2015.

The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.

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Frances Wheelahan

Partner. Melbourne
+61 3 9672 3380