Changes in law and impli­ca­tions for franchising

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: