Unfair contract terms and your franchise agreement

As of 9 November 2023, changes to the unfair contract terms (UCT) regime have come into effect.

Franchisors should be aware that unfair terms under the previous regime are void, while unfair terms under the new regime will be unlawful and significant penalties may apply (for companies, up to $50 million or even more).

Unfair contract terms explained

A provision in an agreement may be deemed to be an unfair contract term if it:

• causes a significant imbalance in the rights and obligations of the parties;
• is not reasonably necessary to protect the legitimate interests of the party it benefits; and
• causes detriment to one party if the other party seeks to rely on it.

Despite the good faith obligations under the Franchising Code of Conduct, due to the nature of the relationship between a franchisor and franchisee, it is likely that a franchise agreement will contain provisions that are at risk of being considered to be an unfair contract term.

Does the unfair contract terms regime apply to your franchise agreement?

The UCT regime applies to standard form contracts that are either consumer contracts or small business contracts. Standard form contracts are categorised as contracts prepared by the party with the most bargaining power, and where the other party has little or no opportunity to negotiate the terms.

Although some franchisees are given an opportunity to negotiate and request amendments, franchise agreements, being pre-prepared, often on a ‘take it or leave it’ basis, and with inherent power imbalances between the franchisor and the franchisee, are likely to be considered standard form contracts.

While there may be exceptions, franchisors should be cautious and take a conservative approach.

How to ensure compliance

You should review your franchise agreement to determine whether any provision could be considered to be an unfair contract term under the new regime.

For example, the following provisions in your franchise agreement, while not an exhaustive list, will likely require consideration:

1. a term that limits one party’s liability but not the other party’s liability;
2. broad indemnities imposed on one party but not the other;
3. a right for one party to vary the fees;
4. a term penalising one party for termination of the agreement (such as unreasonable termination fees); and
5. a term that allows one party to vary the terms of the agreement (this could include variations made to an operations manual).

A broader overview of the new UCT regime with a helpful infographic can be found here.

Consequences of non-compliance

A contract found to contain provisions in breach of the UCT regime can result in significant penalties, including fines of up to $50 million. In addition, a court may make orders whereby the entire contract is deemed void, the terms of the contract are varied, penalties are imposed, damages for losses are awarded, and the inclusion of similar terms in future contracts are prohibited.

Next steps

To ensure that you comply with the requirements of the new UCT regime, we recommend conducting a thorough audit and review of your suite of franchise documents.

At Gadens, we are able to assist you to navigate and implement the necessary changes. Please contact us to review and update your franchise documents to ensure compliance with the UCT regime.

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Authored by:

Joanne Moss, Partner
Andrew Barr, Associate