Franchisors call for exemption from new unfair contract laws

May 22, 2009

The franchising industry is seeking exemption from the Government’s proposed legislation on unfair contracts, saying the application of the new laws to SMEs is ambiguous and will create confusion.

The legislation is primarily designed to protect consumers from unfair contract terms, such as unfair exit fees, penalty fees and clauses that permit one party to unilaterally change or cancel a contract. These are typically found in “standard form” contracts.

But despite the intention to protect consumers using standard form contracts, the legislation, which is set to be introduced into Parliament next month and is proposed to start in January 2010, will actually affect all contracts, including those used in business-to-business transactions.

Richard Westmoreland, partner at law firm HWL Ebsworth, says that franchisors often rely on contract terms that stipulate a franchisor can change the business model if and when they decide.

But Westmoreland suggests that under the new unfair contract legislation, these typical contract terms could be deemed “unfair”.

“Franchisors need to be flexible. You often need to change the business system, so you will have provisions in the contract that say ‘we need to change this system as often as we need to.’ You need that to protect the flexibility of the system.”

“The problem is that these clauses could be regarded as being unfair. It creates a difficulty for the franchise industry in that to preserve the flexibility, good franchisors need to have these sorts of controls there.”

Steve Wright, executive director of the Franchise Council of Australia, says that contracts used in franchising should be exempt from the legislation.

“The intention of the law is to ensure consumers are not disadvantaged by ‘standard form’ sales contracts, and that’s not what a franchise contract is,” Wright says.

“Franchise contracts vary from business to business, but a credit card contract is the same from business to business and has no negotiation about it. In franchising, contracts are different; they are business-to-business and are often negotiable.”

Wright also says that because the legislation does not define clearly enough what “unfair terms” would be, it would create anxiety within the industry.

“The ambiguity is one aspect of it. What that leads to is confusion and uncertainty. What is likely to happen is that there will be a lot more court cases, which I don’t think is good for the sector,” he says.

“It’s just added cost, complexity, likely confusion, and likely to lead to more arguments before courts – and unlikely to benefit.”

But Westmoreland says that the franchising industry is not the only one affected.

“That could mean a range of things in mortgage contracts, credit card documents and so on. If you want to swap banks, you find there’s a hefty transfer fee that may now be considered unfair because it’s a larger fee and therefore you don’t have the ability to shift elsewhere,” he says.

“Airlines will have issues because typically they have provisions in ticket terms saying they can cancel their flights without notice and with no compensation. Arguably that’s an unfair position under the new laws. There will be doubt over things like that.”

Meanwhile, new research has revealed changes to the Franchising Code of Conduct in March 2008 cost franchisors about $9.42 million in legal fees after updating new agreements and legal documents.

The “Franchisor Expansion” study by marketing research firm 10 Thousand Feet showed that 49% of franchisors paid $5000 or less in legal fees, with 7% paying more than $50,000.

But only 6% claimed the changes had threatened their business’s flexibility in negotiating franchise agreements, with 33% claiming the changes to the code had not hurt recruitment processes.

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