If you are a franchisee under a franchise agreement offered to you as a ‘take it or leave it’ standard form contract, Part 2-3 of the Australian Consumer Law may help you challenge the enforceability of any franchise unfair contract terms. This is in addition to considering rights you may have against the franchisor for breaches of the Franchising Code of Conduct.
‘Standard form contracts’ in consumer transactions generally
One big feature of modern consumer economies is the ‘standard form contract’. Since WWII more and more business has been done using ‘take it or leave it’ contracts. You either accept the tiny fine print at the bottom of the invoice and buy the goods and services, or not. When shopping online, you cannot purchase goods through an e-commerce store unless you click the ‘accept’ box for the vendor’s terms and conditions. You are absolutely free not to enter into the contract, but you are unable to negotiate its terms.
This may be okay for ordinary goods and services bought for personal or family purposes, provided the terms are not unfair. If you’re renting a car for a day, you don’t really care much about not being able to negotiate for free GPS. You’ll happily sign that triple-duplicate form covered in tiny faint writing which nobody has ever read. Also, you may have a relaxed and comfortable attitude because you know that nowadays the unreadable contract has to comply with all sorts of laws and regulations.
What about ‘standard form contracts’ in a small business, like Franchise Agreements?
If you are entering into quite a big and risky deal, like a franchise agreement, you certainly will be getting out a magnifying glass to read the contract offered by the franchisor. Since the introduction of the Australian Consumer Law in 2010, there has been an extension of legal protections for consumers from dodgy operators by specifying in great detail what you can and can’t do when buying and selling stuff, and stopping businesses from imposing unfair and unbalanced contracts on customers.1 However, when the contract was between businesses the law was much less strict.
Businesspeople, so the logic went, were able to look after themselves and take big risks where appropriate. But the rise and onward march of mega-corporations, particularly the giant franchisor companies, means that more and more small businesspeople are entering into contracts with businesses bigger than some nations.
How can the Australian Consumer Law help a franchisee in a dispute under a franchise agreement?
The recently updated Australian Consumer Law now applies new protections from unfair contract terms to all ‘standard form contracts’ entered into or renewed by small businesses with less than twenty employees, on and from 12 November 2016.2 If the contract is for less than a year and less than $300,000 it qualifies, or if it is less than $1m if more than a year. A lot of franchise contracts fall into this category.
This update to the Australian Consumer Law is discussed in our article on recent court cases under that law. In short, to qualify for protections from ‘unfair contract terms’, the small business will need to show they are contained in a ‘standard form contract’.
So, what is a ‘standard form contract’? Well, it doesn’t have to be in triplicate with tiny print. The Australian Consumer Law lays out that when deciding if a contract is a standard form contract or not, a court should consider-
- Whether the contract was prepared by one party before even negotiating with any other parties.
- Whether the contract takes into account the specifics of the other party or the particular transaction.
- Whether one party has most or all the bargaining power in the transaction.
- Whether one party has no real opportunity to negotiate.
- Whether one party can effectively only take or leave the contract on offer.3
The Million Dollar question – What is an ‘unfair contract term’?
You might think 200% mark-up on prices is unfair, but the law disagrees, so long as you are in a contract which is clear and has a balance of rights and obligations between the parties and doesn’t give one party rights which the other party isn’t given. The Australian Consumer Law gives a long list of examples of unfair contract terms.4 Some of the main examples are-
- Terms allowing only one party to terminate.
- Penalty terms- unreasonable fines for breach imposed on only one party.
- Terms allowing only one party to renew.
- Terms that allow only one party to vary the contract.
- Terms which allow one party to jack up the contract price, or vary the goods and services provided, while not allowing the other party to terminate.
That’s just a bit of the list, but the overall objective of the Australian Consumer Law in this area is whether the contract has a balance between the parties in all its terms, and doesn’t impose burdens on the weaker party which are unjustified by ordinary business needs. And yes, the need to make a profit or not lose money is a legitimate need of the stronger party. This is not Robin Hood, it’s just a better, more finely-woven safety-net for small businesses, to avoid the worst of the monstering which giant businesses can dish out to little fish.
There have been recent cases on the meaning of unfair contract terms which have taken a fine tooth-comb approach to analysing standard form contracts and their effect. They indicate that courts will take these matters seriously, so you should get legal advice if you think the new rules might apply to your situation.
Has the franchisor breached other provisions of the Australian Consumer Law?
Even if the terms of your contract are not unfair within the meaning of Part 2-3 the Australian Consumer Law, you might still have a case against the franchisor or its owners over ‘misleading and deceptive conduct’ or ‘unconscionable conduct’.5
Has the franchisor contravened the Franchising Code of Conduct?
As a franchisee, in this situation you may also wish to consider if you have a case against the franchisor for breaching the Franchising Code of Conduct6 for failure to act in good faith, provide a disclosure document, attend mediation, or provide reasonable written notice of proposed termination for breach.
If you think you’re being bullied by a franchisor you should talk to us for advice and action on your problem, including possibly challenging franchise unfair contract terms.
- Australian Consumer Law contained in Schedule 2 of the Competition and Consumer Act (Cth) 2010;
- Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act (Cth) 2015;
- Sections 23 (1) (b) and 27 of the Australian Consumer Law;
- Section 25 of the Australian Consumer Law;
- Recent cases on franchisor unconscionable conduct under the Australian Consumer Law include: Virk Pty Ltd (in liq) v YUM! Restaurants Australia Pty Ltd  FCAFC 190, Mr Rental Australia Pty Ltd v IRD Services Pty Ltd  NSWSC 700, Video Ezy International Pty Ltd v Sedema Pty Ltd  NSWSC 143;
- Franchising Code of Conduct introduced by the Competition and Consumer (Industry Codes—Franchising) Regulation 2014.