Unfair Franchise Agreements

If you enter into a franchise agreement, and later find that certain terms are disadvantageous and unfair, what can you do? 

Franchise agreements are governed by numerous industry codes and government legislation, such as the Franchising Code of Conduct and the Australian Consumer Law (ACL). The Australian Competition and Consumer Commission (ACCC) is the consumer watchdog, who oversees and regulates industry codes. 

Unfair Contract Terms

Under the ACL, there are protections in place against a party relying on unfair terms in standard form contracts. A standard form contract is a contract which is primarily prepared by one party and there is little or no room to negotiate the terms of the agreement. 

The laws regarding unfair contract terms apply if the agreement is a standard form contract where:

• It’s for the supply of goods or services, and 
• At the time the agreement is made, one party is a small business (has less than 20 employees), and 
• The agreement has an upfront price payable of less than $1 million if the contract is for more than 12 months. 

Most franchises and franchise agreements will satisfy this criteria, and as such will be subject to the law on unfair contract terms. 

What Terms are Considered Unfair? 

Section 24 of the ACL outlines when a term is considered unfair:

1. The term would cause significant imbalance in the parties rights and obligations, and 
2. The term is not reasonable necessary to protect the legitimate interests of the party who would benefit from the term, and 
3. If the term was to be relied on, it would cause detriment to the other party. 

In determining whether a term is unfair, the court will look at the transparency of the term. This means how clearly presented the term is or if it is in plain English. 

The law provides some examples of terms that would be considered unfair. For example:

• Terms that allow one party to avoid or limit their obligations.
• Terms that allow one party (but not the other) to terminate the agreement. 

Unfair Contract Terms and Franchise Agreements 

As the law on unfair contract terms will likely apply to franchise agreements, it is important to ensure that the terms in the agreement are not unfair and do not result in an unfair advantage to one party. 

The ACCC has provided some examples of terms within franchise agreements that would likely be considered unfair within the meaning of section 24 of the  ACL. 

Some of these include: 

• Termination clauses that are extremely broad or unreasonable – terms that give the franchisor the ability to terminate the agreement with no specific cause 
• Unfair restraint of trade clauses – specifically those that go beyond protecting the legitimate business interests of the franchisor 
• Clauses that allow the franchisor to right to change the terms of the franchise agreement unilaterally

What Happens if a Term is Unfair?

An example of a case of unfair contract terms in a franchise agreement occurred in September 2020. The ACCC accepted a court-enforceable undertaking by a franchisor, to remove certain terms from its franchise agreement. Clauses in the franchise agreement on restraint of trade, prevented former franchisees from being involved with competing practices that were located within a 10 kilometre radius of a franchise location for up to 12 months. A buy-out clause also existed, which allowed the franchisee to pay 4 times their annual royalty if they wished to be released from the restraint of trade clause.

These clauses were deemed unfair, as they ultimately prevented a former franchisee from operating in many metropolitan areas of Australia, due to the large number of franchise locations that existed. The ACCC contacted the franchisor, who have agreed to not enforce the restraint of trade and buy-out clause, as well as to not include these terms in future franchise agreements. 

Currently, under the ACL and the Franchising Code of Conduct, there is no prohibition on a business including or relying on an unfair contract term. Ultimately, penalties cannot be imposed on companies using unfair terms.

Despite this, a court does have the power to declare specific contract terms to be unfair. This means that the term will be declared void and not binding on the parties. If this is the case, the rest of the contract can continue to operate to the extent that it is capable of doing so without the existence of the unfair term. 

To Sum Up

As the law on unfair contract terms commonly applies to franchise agreements, it is important both as franchisor or franchisee, that you have these agreements properly drafted and reviewed by a legal professional. 

The impact of entering an agreement that contains an unfair term may be detrimental if it is relied upon. 

Feel free to contact one of our franchise lawyers on 1300 337 997, or fill out the contact form if you’d like assistance on this issue.