Unfair contracts laws poised to affect more franchises

Unfair contracts legislation to be applied to business to business contracts will have a greater impact on the franchise sector if suggested investment thresholds are adopted in the final legislation.

 A report by the Senate Economics Legislation Committee has suggested that investment thresholds for business to business (B2B) contracts be raised to include a wider scope of B2B contracts than previously considered under the draft legislation.

 The legislation was referred to the committee in early August and given less than a month to report to government, including a brief public consultation period.

Under the initial draft legislation, small businesses that enter into contracts worth an upfront investment of up to $100,000, or an upfront investment of up to $250,000 where the contract lasts longer than 12 months would be affected, potentially resulting in unfair terms of contracts being rendered unenforcable, or in extreme cases, a whole contract rendered void.

 The Senate committee heard evidence that these contract thresholds should be increased from $100,000 to $300,000 for upfront contract payments, and from $250,000 to $1 million for contracts lasting more than 12 months.

 If adopted in the final legislation, this will mean that almost all franchises will be impacted in future, whereas previously the threshold amounts would have primarily impacted service franchises, which have much lower investment levels than retail franchises.

 The new law defines a small business as employing fewer than 20 people, which means that it will also apply to small and developing franchisors who enter into agreements with larger organisations (such as suppliers).

Although the small business minister has the discretion to exempt industries subject to mandatory industry codes of conduct from the effects of the legislation (such as the franchise sector in regards to the Franchising Code of Conduct), no exemption has yet been offered despite the sector still adjusting to the new vode which commenced on January 1 this year.

 Unless an exemption for the franchise sector is offered by the minister, it is possible that small businesses considering the future use of franchising as a growth strategy may instead chose alternative growth models that involve greater certainty and less litigation risk.

 The unfair contracts legislation will apply to contracts entered into, renewed or amended after its implementation date, which will commence at least six months after the legislation is approved by the Governor-General. 

 A full copy of the committee’s report can be downloaded here.

Jason Gehrke is the director of the Franchise Advisory Centreand has been involved in franchising for more than 20 years at franchisee, franchisor and advisor level.

 He advises both potential and existing franchisors and franchisees, and conducts franchise education programs throughout Australia, and publishes Franchise News & Events, a fortnightly email news bulletin on franchising issues and trends.