The ACCC is warning franchisors to urgently review and amend their standard form franchise agreements or be prepared for potential enforcement action after a review of franchising contracts found wide-ranging concerns.
A report, published today, outlines the ACCC’s findings and concerns after it recently completed targeted franchising compliance checks. The report provides guidance for franchisors about complying with the unfair contract terms laws after the Australian Consumer Law (ACL) was amended to introduce penalties from November 2023. The test for whether a contract term is unfair has not changed.
“We are concerned that franchisors are failing to grasp the importance of complying with the unfair contract terms provisions of the ACL. Every franchising agreement we reviewed contained potentially unfair contract terms,” ACCC Deputy Chair Mick Keogh said.
“Franchisors are on notice that we will be watching, and those who fail to address the wide-ranging concerns we outline in our report are at risk of legal action by the ACCC and franchisees.”
The ACCC has long been concerned about the power imbalances between franchisees and franchisors.
“The franchising relationship is often characterised by significant controls on franchisees. We are concerned this power imbalance is exacerbated when franchisors include or rely on unfair contract terms in their franchise agreements,” Mr Keogh said.
“Our review found that many contract terms were likely broader than reasonably necessary to protect the franchisor’s legitimate business interests.”
“This is why we strongly encourage franchisors to use our report to inform a review of all their contract terms, and to seek independent legal advice about their obligations. Franchisors should remove or amend any potentially unfair contract terms immediately, to avoid potential penalties. Franchisors should also not seek to enforce any existing unfair terms,” Mr Keogh said.
The report follows a review of smaller franchisors in a range of industries including repair and maintenance, education and training, arts and recreation, wholesaling, personal services, and food retailing, many of which were new to franchising. The documents assessed were largely compliant with the Franchising Code, and the review did not identify any systemic issues or concerns relating to the code.
However, the review identified concerns about unilateral variation clauses, withholding and set-off payment clauses, audit power clauses, restraint of trade clauses and termination clauses contained in standard contracts with franchisees.
“Our report contains several examples of the kind of unfair contract terms we are concerned about and want franchisors to address,” Mr Keogh said.
“Our warning to the franchising sector is that it is time to ensure that your contracts are fair.”
Tips for franchisors
The following general tips may help franchisors when reviewing their standard form contracts:
- Consider both points of view: Even if you think a term is reasonably necessary to protect your business’s legitimate interests, consider the term, and any detriment it could cause, from the franchisee’s point of view.
- Include counter-balancing terms: Check whether your contract has appropriate counter-balancing terms.
- Avoid broad terms: Ensure terms are only as broad as reasonably necessary to protect your business’s legitimate interests.
- Meet your obligations under the ACL: Don’t include terms that seek to avoid your business’s obligations under the ACL or the Franchising Code, for example, terms that seek to limit your customers’ consumer guarantees rights, or terms that seek to disclaim any representations your business may have made outside of the contract.
- Be clear: Use clear and simple language in your contracts.
- Be transparent: Look for ways to ensure key terms are clearly drawn to the attention of your franchisees during the sign-up process, and any renewal process.
Information for franchisees
- Franchisees who have a problem, or are currently in dispute, with their franchisor can access mediation through the Australian Small Business and Family Enterprise Ombudsman’s office.
- Further information about franchising is available at Franchising.
- Current, former or prospective franchisees concerned about the practices of a franchisor can make a report online to the ACCC.
Notes to editors
The ACCC is responsible for regulating industry codes that are prescribed under the Competition and Consumer Act, including the Franchising Code of Conduct. The Franchising Code is a mandatory national code that regulates the conduct of franchising participants towards each other.
From 9 November 2023, businesses, including franchisors, are prohibited from proposing, using and relying on unfair contract terms in standard form contracts with consumers and small businesses, including franchisees, and new, substantial penalties apply for such unfair contract terms. Before 9 November, if a court or tribunal found that a standard form small business contract contained a term that was ‘unfair’, the term would be void – meaning it would not be binding on the parties.
More information about unfair contract terms, is available at the ACCC’s Contracts webpage.
The maximum financial penalties for businesses under the new unfair contract terms law are the greatest of:
- $50,000,000;
- three times the value of the "reasonably attributable" benefit obtained from the conduct, if the court can determine this; or
- if a court cannot determine the benefit, 30 per cent of adjusted turnover during the breach period.
The maximum penalty for an individual is $2.5 million.
The changes will apply to:
- Standard form contracts made or renewed on or after 9 November 2023.
- A term of a contract that is varied or added on or after 9 November 2023.
However, where a term of a contract is varied or added, on or after 9 November 2023, the changes relevant to deciding whether a contract is a standard form contract apply to the whole contract.
Background
In November 2016, the ACCC published its review of 46 standard form contracts across seven industries, including franchising, outlining common contact terms of concern ahead of the introduction of legislation allowing courts to rule that certain contract terms are unfair.
In August 2018, the ACCC accepted a court-enforceable undertaking by Husqvarna Australia Pty Ltd to, among other things, not enforce any of the identified unfair terms in its old agreement and to offer new dealers a new agreement that complied with the Franchising Code and did not contain unfair terms.
In September 2020, the ACCC accepted a court-enforceable undertaking by Back In Motion Physiotherapy Pty Ltd to remove certain terms from its franchisees agreements which it admitted may have been unfair.
In August 2022, the Federal Court declared, after ACCC court action, that 38 contract terms used in contracts entered into by Fujifilm Business Innovation Australia or Fujifilm Leasing Australia with many thousands of small businesses are unfair.
In September 2023, the ACCC encouraged businesses, including franchisors, to review their standard form contracts and remove or amend any unfair contract terms, ahead of the commencement of new penalties for unfair contract terms from 9 November 2023.