Australia Extends Unfair Contract Terms Law to Small Businesses (Read Franchises)

09/20/2016 / William G. Thornton

On Nov. 12, 2016 amendments to Australian laws relating to unfair contract terms in contracts with small businesses (including franchises) will take effect and render standard franchise agreement provisions void. The amendments apply to contracts entered into, renewed, or modified after November 12, 2016. Example provisions include limitations on franchisor obligations, penalties for franchisee breaches or termination, and provisions permitting franchisors to modify their operations manual during the term of the franchise. Franchisors in Australia need to reexamine their franchise agreements to make sure any new agreements, renewals or modifications comply with the law.

The amendments will apply to contracts where at least one party to the contract employs fewer than 20 persons (a small business), the value of the contract does not exceed $300,000 AU, or $1,000,000 AU for contracts extending more than 12 months, and the contract is for the supply of goods or services or the sale or grant of an interest in land. For many franchise systems, this would cover every individual franchise agreement. It may also cover agreements with master franchisees if the master’s business is below these thresholds. The amendments are aimed at standard form contracts that are drafted by one party prior to negotiations and are offered on a “take it or leave it” basis. However, they apply to negotiated agreements as well, if the other party meets the test for a small business. Contract terms that are mandated or expressly permitted under Australian law, including the Australian Franchising Code, are excluded from the coverage of the amendments.

As a general rule, contract terms that permit one of the parties to avoid or limit obligations, penalize the other party for breaching or terminating the contract, or enable one party to unilaterally terminate or vary the terms of the contract, will be considered unfair. If a court determines that a term is unfair, that term will be considered void and nonbinding. However, the remainder of the terms of the agreement will remain in full force and effect. The Australian Competition & Consumer Commission has issued examples of unfair contracts as applied in a franchise relationship in their publication “Determining Whether a Contract Term is Unfair.” Examples include the right of a franchisor to terminate the franchise agreement at any time without cause or compensation; unilateral modification of the operations manual for a franchise, if compliance with the operations manual is mandated in the franchise agreement; penalties payable by the franchisee to the franchisor for noncompliance with the franchise agreement; or agreement terms that otherwise limit or negate obligations of the franchisor not required to protect the franchisor’s legitimate business interests. Further examples include minimum performance requirements of a franchisee that may be unilaterally modified by the franchisor or overreaching limitations of liability, liquidated damages, and broad indemnities in favor of the franchisor.

If your franchise system includes the grant of franchises to small businesses in Australia, now is the time to review your franchise agreements, or those of master franchisees which you approve or require, to ensure that the terms and conditions do not violate the unfair contract term amendments and are otherwise necessary to protect your legitimate business requirements. You will also want to be careful not to unnecessarily amend an existing agreement or it too will fall within the new law prior to its scheduled expiration.