Unfair Contract Terms – Small Business & Franchise Agreements

Under the Australian Consumer Laws (the “ACL”) there are laws prohibiting unfair contract terms in consumer contracts.  From November 2016, the unfair contract regime will now extend to small business contracts.

A “small business contract” is where the contract has the following features:

  1. The amount payable under the contract is less than upfront $300,000 or $1,000,000 if the contract period is more than one year;
  2. A small business for the purposes of the regime is a business that employs fewer than 20 people at the time the contract is entered into (including casual staff employed on a regular or systemic basis).

Under the ACL a Court may find that a term in a contract is unfair and therefore unenforceable (called “void”).  Upon finding that a clause is “void” the Court can make a range of orders, including:

  1. Declaring all or part of a contract to be void;
  2. Varying a contract;
  3. Refusing to enforce some or all of the terms of a contract or arrangement;
  4. Directing a party to refund money or return property to the small business affected; or
  5. Directing a party to provide services to the small business affected at the party’s expense.

The reforms to unfair contract terms are relevant to various sectors where small medium enterprises operate.  This is particularly the case where standard form contracts are used and the recipient party is a small business with little opportunity to negotiate the agreement.

The franchise sector will be exposed to the risk of “unfair contracts” as most franchisees employ less than 20 persons and the contract value (even over the longer term) is unlikely to exceed $1,000,000.  Further, Franchisors are reluctant to genuinely negotiate amendments to their agreements claiming any change will make the Franchisor’s burden of administering their franchise agreements more difficult.

The typical franchise agreement has common clauses which may infringe the unfair contract terms regime.  Some of the more obvious clauses that may cause trouble include:

  1. Clauses that allow franchisors to terminate the franchise agreement without cause. Interestingly, this right is specially acknowledged under the Franchising Code of Conduct (Clause 28);
  2. Clauses that allow franchisors to vary the agreement unilaterally.  This often occurs at the time of the renewal or transfer of the agreement (to a new franchisee);
  3. Clauses that restrict the ability of franchisees to take action against franchisors. It is often the case that Franchise Agreement does not allow a franchisee the right to terminate a franchise agreement.

Franchisors and indeed any other business operator that deals with small businesses will need to reflect upon their arrangements (to consider whether they are dealing in small business contracts) and the manner they negotiate their contracts (whether as a take or leave it approach or allowing a genuine negotiation).

If you are concerned about the impact of the unfair contract terms upon your business please fell free to contact our lawyers to discuss.

Heath Adams is a Director of Adams & Partners Lawyers, and head of the commercial legal team within the firm. Heath’s primary focus is on servicing clients in the franchise sector including new and emerging franchise systems. He is an accredited specialist in Business Law. Read more about Heath here.

About Heath Adams

Heath Adams is a Director of Adams & Partners Lawyers, and head of the commercial legal team within the firm. Heath’s primary focus is on servicing clients in the franchise sector including new and emerging franchise systems. He is an accredited specialist in Business Law. Read more about Heath here.