Unfair contracts legislation to be extended to include franchising

Public submissions into the proposed extension of unfair contracts legislation to small business, including franchises, close on August 1. 

The federal government has previously released a consultation paper regarding the extension of unfair contract protections from consumer contracts to include business to business contracts, whereby terms in standard-form contracts which are deemed unfair by a court can be struck out.

While the original consumer unfair contract laws targeted standard form contracts used by telecommunications, insurance and car rental companies, the extension of unfair contracts legislation risks additional fallout on franchisors and lessors.

The franchise sector in particular risks being adversely impacted by this legislation as it deals with a new Franchising Code of Conduct for which a draft was released on April 2.

In general, unfair contract terms are terms that cause a significant imbalance in the parties’ rights and obligations under the contract, and are not necessary to protect the legitimate interests of the party who would be advantaged by using these terms.

An example of an unfair contract term given on the government’s unfair contracts consultation web page is one which allows a bigger buinsess to unilaterally change the price or other key terms during the course of the contract, and which may be considered unfair in certain circumstances.

The government consultation process, which closes this Friday, seeks to determine what scope should apply for small businesses, such as turnover, size of transaction, or some other criteria.

The extension of unfair contract terms legislation to small business was an election commitment of the Coalition when in opposition after the legislation was originally introduced by the former Labor government as a consumer protection.

However, the timing coincides with changes to the Franchising Code of Conduct arising from the 2013 Wein Inquiry, which are expected to be introduced as of 1 January 2015.

This means that the franchise sector could be subject to two different sets of regulatory changes at the same time.

Changes to the Franchising Code are still subject to some final amendments, but will include the introduction of an obligation to act in good faith, financial penalties of up to $51,000 for major breaches, and new powers for the Australian Competition and Consumer Commission (ACCC) to issue infringement notices up to $8500 without having to seek a court order.

Franchisors will be obliged to provide potential franchisees upfront with a risk statement about franchising, to disclose how the proceeds from online sales are dealt with, and to be more transparent with marketing funds, including holding funds in a separate bank account, and disclosing types of expenses to be allocated to the fund, as well as giving franchisees an option to vote for an annual audit.

Franchisors will also be compelled to contribute equally to marketing and other co-operative funds for any company-owned outlets.

Changes to the balance of power in franchise agreements prevent franchisors from attributing their costs in dispute resolution to franchisees, and require dispute resolution to be conducted in the state where the franchisee is based, not where the franchisor is based.

Additionally, capital expenditure requirements most be disclosed in the franchise agreement, justified to franchisees by a statement outlining the rationale, costs and expected benefits or otherwise agreed by a majority of franchisees in the system.

Restraint of trade provisions have also been targeted, potentially allowing ex-franchisees the freedom to continue operating as independents after the end of their franchise agreement if they are willing to renew but are not renewed by their franchisor.

The extension of unfair contracts legislation to franchising in addition to the changes to the Franchising Code risks creating a double-legislated environment for franchising where it is not yet clear how such legislation will co-exist.

A simple solution would be to provide an exemption for franchises and other businesses subject to a mandatory industry code from the unfair contracts legislation. However, this could result in a defeat of the policy intent, or lead to the creation of more industry codes as other business sectors (e.g. retail and commercial property leasing) seek exemption from the unfair contracts legislation.

Either way, the extension of unfair contracts legislation to small business will continue to make for interesting times in the franchise sector.

Submissions into the unfair contracts legislation close this Friday, August 1. Click here for details of how to make a submission.

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