ACCC sounds warning to franchisors as small businesses get beefed up contract protections

Small businesses will have greater protections for unfair contract terms when new laws come into effect on November 12, and the Australian Competition and Consumer Commission says franchisors in particular should be thinking about how they structure manuals and documents now.

The change will protect small operators with fewer than 20 staff in situations where a contract is worth $300,000 or less in one year, or up to $1 million for contracts of 12 months or more.

Read more: SMEs given extra banking protections under new contracts law

The new unfair contracts legislation aims to protect businesses from situations where the terms of a contract enable one party but not the other to do things like limit their obligations under the agreement, terminate the contract or vary the terms of the contract without input from the other party.

ACCC deputy chair Michael Schaper told SmartCompany franchise manuals are a key area of concern under the new provisions.

“When you sign a contract, you often also sign on to the operations manual. That can include all sorts of things, like the level of training, level of support you get,” he says.

“The single biggest issue for us is that often the franchisor can change this as they see fit.”

Australia’s franchise sector is now worth $146 billion, compared to $144 billion in 2014, according to research by Griffith University’s Asia-Pacific Centre for Franchise Excellence. In its latest biennial review of the franchise sector, the centre found both revenue and growth in the sector continued to grow against an otherwise stagnant retail environment.

Schaper says that while it will depend on the particular franchise system, the new regulations aim to help franchisees when it comes to the terms of a deal being changed part way through their contracts, as well as stopping a franchisor from unfairly terminating a contract.

“We saw one [case] in which it was “if the manager of the store isn’t available to work’, then you’re then out,” he says.

There was scope in that case for the clause to allow a franchisee time to find a new manager if one became unavailable, rather than having the loss of a key staff member trigger the end of the agreement.

“What happens sometimes is that franchisors cover every contingency, so they write it in such a way that a franchisee doesn’t have a great amount of influence in that,” says Schafer.

“But you can do things that will probably accommodate both ways.”

Any contract terms negotiated on or after November 12 will have the new terms applied, while contracts negotiated before that time and are currently running will have to be in line with the new rules when they are renegotiated at the end of the contract term.

Schaper says now is a good time to review the way manuals and franchise operations information is worded. The commission will not have the final say on whether a contract term is “unfair” – this power will go to a court or tribunal, and if it is decided that a term is in breach of the law it will be void – but the rest of the contract will stand. However, terms that relate to the upfront cost of establishing a franchise are not covered by the new regulations.

In the first instance, a business owner is encouraged to ask the other party to remove the contract clause, before considering contacting a lawyer and the ACCC for assistance.

The ACCC has been watching the detail provided on franchise agreements for some time. Last month the commission took action against Western Australian business Pastacup, arguing the business had not adequately informed potential franchisees that a company director had been involved in two previous Pastacup franchisors that failed.

At the time, Schaper told SmartCompany: “Franchisees require full information, [such as:] ‘What I’m likely to earn, what my term is going to be,’ and who are the people behind it.”