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14 April 2010 Changes in law and implications for franchising

By Richard Ottley, Partner


In brief - Proposed reforms to strengthen protections for franchisees

Changes proposed to unfair contracts law, unconscionable contracts law and the Franchising Code of Conduct may have the effect of providing additional protections for franchisees.  


Unfair contracts law and the Trade Practices Act

The Trade Practices Act (Australian Consumer Law) Bill regulates unfair terms in standard-form contracts for the supply of goods or services or the sale or grant of an interest in land.  

Since the exposure draft of the Bill was released, one of the main changes to the Bill as introduced into Parliament was the removal of the business-to-business application. That is to say, the Bill will only apply to consumer contracts.

However, there have been amendments proposed that would broaden the definition of consumer contract to include a small business-to-business category, where the upfront price of the goods or services under the contract is $2 million or less. This is particularly significant in the context of franchising, because the vast majority of business-to-business transactions would fall into this category.  

There have also been amendments to provide a safe harbour whereby the Australian Competition and Consumer Commission would be able to authorise model industry contracts and model contract terms.

Examples of unfair contract terms

The Bill gives examples of possible kinds of terms in a consumer contract which may be unfair:

  • A term that permits or has the effect of permitting one party (but not the other) to terminate a contract
  • A term that permits or has the effect of permitting one party (but not the other) to vary the terms of the contract
  • A term that has the effect of permitting one party (but not the other) to renew or not to renew the contract
  • A term that permits or has the effect of permitting one party to vary the upfront price payable under the contract without the right of another party to terminate the contract
  • A term that permits or has the effect of permitting one party to vary unilaterally the characteristics of the goods or services to be supplied under the contract
  • A term that permits or has the effect of permitting one party to assign the contract to the detriment of another party without that party’s consent

Once the Bill is passed into law, it may, depending upon any final amendments made to it, have ramifications for franchisors’ standard-form contracts which may then need to be reviewed in light of the changes. The Bill was introduced to the Senate on 26 October 2009 and is expected to be passed before June 2010.

Franchising Code of Conduct and unconscionable conduct law

On 27 November 2009, the Minister for Small Business, Dr Craig Emerson, announced the establishment of an expert panel on franchising and unconscionable conduct.  

The panel’s report, entitled “Strengthening Statutory Unconscionable Conduct and the Franchising Code of Conduct”, dated February 2010, was formally released by Dr Craig Emerson on 3 March 2010. The report makes findings in relation to both unconscionable conduct and the Franchising Code of Conduct.  

On unconscionable conduct, the panel has found that seeking to define unconscionable conduct by reference to a list of examples was not the way forward, as it was of the opinion that a list of examples would not improve understanding or the implementation of provisions. It considered that interpretative principles (as an aid to the interpretation of provisions) would assist the courts and others in understanding and enforcing provisions.

Additional disclosure requirements

In relation to the Franchising Code of Conduct, key findings include additional disclosure requirements relating to:

  • The circumstances in which a unilateral variation to the franchise agreement may occur
  • The possibility of unforseen capital expenditure by the franchisee (for example, through an amendment to the operations manual)
  • The possibility that the franchise agreement may be amended
  • Costs attribution of dispute resolution
  • Types of information which prospective franchisees cannot discuss with existing or former franchisees

In addition, the panel recommended that a short plain English document be developed, to be provided to prospective franchisees before they are committed to entering into a franchise agreement. This short document would be a ready reference to the nature of the franchise relationship.  

It is intended that any recommendations that require legislative change to current provisions of the Trade Practices Act will be included in a second bill to implement the Australian Consumer Law.

For further information, please contact:

Richard Ottley, Partner  |  Phone: +61 2 9233 5544  |  Email: rbo@swaab.com.au

If you would like to republish this article, it is generally approved, but prior to doing so please contact the Marketing team at marketing@swaab.com.au

This article is not legal advice and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.

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