Friday, 30 December 2016

Franchising and Standard Form Contracts



General Background

The Australian Consumer Law (ACL) is a national, state and territory law which commenced on 1 January 2011. The ACL is contained in Schedule 2 to the Competition and Consumer Act 2010 (CCA).

Part 2-3 of the ACL deals with “Unfair Contract Terms”. In short, this part is designed to provide statutory protections for consumers where those consumers are required to enter into a contract with another party and the consumer has little or no opportunity to negotiate the terms of the contract with the other party. Which could be called a "take it or leave it" contract.

These types of contacts can be caught by the “Standard Form Contracts” provisions under Part 2-3 of the ACL.

Under the ACL (apart from certain exceptions), a contract may be deemed a Standard Form Contract if it exhibits one or more of the following characteristics:
  • one of the parties has all or most of the bargaining power relating to the transaction;
  • the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
  • a party was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented;
  • a party was not given an effective opportunity to negotiate the terms of the contract; 
  • the terms of the contract did not take into account the specific characteristics of other party or the particular transaction;
  • the regulations say it is a Standard Form Contract.
Examples of Standard Form Contracts might include:
  • employment contracts;
  • hire/lease agreements; and
  • financial agreements.
These types of contracts will typically have a standard body of terms and conditions, with perhaps only a few blank spaces for adding names, addresses, signatures, dates and other relevant variable data.

A particular business may use Standard Form Contracts because that business replicates the contract numerous times to end consumers. Using a standard form maybe more efficient as it minimises the time and cost of producing multiple contracts which are essentially the same.

For businesses who do use Standard Form Contracts, the ACL provides certain consumer protections against terms in those contracts which may be deemed “unfair”.

A term of a contract is likely to be unfair if it:
  • causes a significant imbalance in the parties' rights and obligations arising under the contract; 
  • is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and 
  • would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on. 
Examples of terms in a Standard Form Contract which may be deemed unfair are those that:
  • allow one party (but not another) to avoid of limit their obligations; 
  • allow one party (but not the other) to terminate the contract; 
  • penalise one party (but not another) for breaching or terminating the contract; 
  • allow one party (but not another) to vary the terms of the contract.
Where the contract is a Standard Form Contract and a particular term is deemed to be unfair by a Court, the offending term will be “void”, although the contract can continue to bind the parties if it is capable of operating without the unfair term.

A Court may also make an order for compensation where a consumer has suffered loss as a result of an unfair term.

Depending on the nature of the contract, the ACCC or ASIC may be able to provide information and guidance for consumers affected by unfair contract terms.

Franchising

On and from 12 November 2016, the existing unfair contracts provisions for consumers under the ACL will be extended to Standard Form Contracts where:
  • at least one of the parties is a small business (employs less than 20 staff); and
  • the “upfront price payable” under the contract is:
    • no more than $300, 000 in a single year; or
    • $1 million if the contract is for more than 1 year.
An upfront price payable includes any payments to be provided for the supply, sale or grant under the contract that are disclosed at or before the time the contract is entered into.

The new law has been introduced to protect small businesses from unfair terms in business-to-business Standard Form Contracts.

If a small business enters into, varies or renews a Standard Form Contract on or after 12 November 2016, and a term in that Standard Form Contract is deemed to be unfair, that term can be struck out as void.

The franchising industry will likely be one of the industries the subject of the ACCC’s initial compliance activities once the new law commences on 12 November 2016.

From a franchisor’s perspective, given many franchisors will use contracts (eg. Franchise Agreements) that could well fall into the Standard Form Contract definition under the legislation, those franchisors should consider a review of their Franchise Agreements to identify potential unfair terms and make any necessary amendments to those documents.

There is some argument that if a franchisee asks for changes to a Franchise Agreement and the franchisor does enter into legitimate negotiations with the franchisee about such changes, that the Franchise Agreement would not then be classed as a Standard Form Contract (as the parties would have had the opportunity to negotiate the terms). It would then follow that the provisions about Standard Form Contracts under the ACL would not apply.

However, as with any legislative changes, until they are actually tested in the Courts it can be difficult to specifically identify whether a particular contract is a Standard Form Contract or whether a particular clause in a Franchise Agreement might be deemed unfair.

In terms of the "unfairness" issue, as a general assumption the types of clauses which might be caught as "unfair" are clauses which:
  • allow franchisors to terminate the Franchise Agreement without cause;
  • allow franchisors to vary the Franchise Agreement unilaterally;
  • penalise franchisees;
  • require franchisees to provide broad indemnities for franchisors; and
  • restrict the ability of franchisees to take action against the franchisor.
We envisage that key aspects in determining whether a particular clause is unfair will include:
  • the extent to which a franchisee was given an opportunity to negotiate the terms and conditions in the Franchise Agreement before it entered into the agreement; and
  • whether the franchisee obtained independent legal advice before it entered into the agreement.
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Disclaimer

The material provided in this document is for general information only and is not to be relied upon as advice. No responsibility is accepted for any loss, damage or injury, financial or otherwise, suffered by any person or organisation acting or relying on this information or anything omitted from it.

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