The Federal Government’s proposal to extend the unfair contract regime to include small businesses may have an adverse effect on Franchisors entering into new franchise agreements with potential franchisees.
Draft legislation proposes to extend the consumer unfair contract provisions to apply to terms in a standard form contracts that, at the time it is agreed to, at least one party employs fewer than 20 people and where the upfront price payable under the contract does not exceed $100,000 or, if the contract has a duration of more than 12 months, $250,000.
Standard Franchise Agreements that are not negotiated may be caught under the proposed legislation. The Australian Consumer Law (ACL) sets out a number of characteristics of a standard
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To avoid the application of unfair contract provisions, franchisors may need to demonstrate that its basic terms and conditions contained in their franchise agreements were subject to negotiation.
Will clauses in my franchise agreement be considered unfair and void? The draft legislation is intended to allow the court to declare provisions in standard forms contract where one party is a small business a void and unenforceable. In these circumstances, the unenforceable provision is removed form the contract, while the remainder of the contract continues to be in force.
Under the ACL, a term is considered ‘unfair’ if it:
causes a significant imbalance in the parties’ rights and obligations under the contract;
would cause detriment (whether financial or otherwise) to a party if it were to be relied on; and
is not reasonably necessary to protect the legitimate interest of the party who would be advantaged by the term.
Whether a particular provision in a Franchise Agreement is unfair will be determined on a case by case basis. However, any clauses that create a significant imbalance between the Franchisor and Franchisee’s rights and obligations may be at risk of being considered