Unfair contracts law to impact franchising

The Federal Government's draft unfair contracts legislation could become a powerful weapon for franchisees to challenge franchise agreements. It will affect most franchise agreements and any term in a franchise agreement that is found to be unfair will be void.

In a surprise move, the draft released last week is not limited to consumers, but catches any 'standard form' agreements.

Because franchisors generally produce a franchise agreement in a standard form, this legislation will catch most franchise agreements, as well as terms of many leases, supply terms and terms of finance arrangements.

The Franchise Council of Australia wants franchises to be exempt or for the government to remove uncertainty about the application of the legislation to small business.

The FCA's executive director Steve Wright said “The FCA has clearly stated its case that consumer law should not interfere with existing business-to-business contract law, which is the nature of virtually all franchise agreements."

In the proposed legislation a franchise agreement would be unfair if it produces a significant imbalance in rights and obligations between franchisee and franchisor, and in which the franchisor’s legitimate interests do not need particular protection.

Elisabeth Ritchie at law firm HWL Ebsworth said “The Bill gives examples of provisions that a court may consider unfair. These include provisions allowing one party greater rights than the other to terminate or change a contract.

"Other provisions in many franchise agreements that could be challenged include provisions allowing franchisors absolute discretion to modify territories, impose high transfer fees, enforce restrictive conditions on renewals, or change supply arrangements so that franchisees are required to purchase from suppliers who pay high rebates to franchisors.”

Ritchie said careful drafting of agreements will be required and the onus will be on the franchisor to prove that a term in dispute is fair.

The bill will be introduced to Parliament in June with legislation due to take effect on 1 January 2010.

The article appears courtesy of 5 minute Franchising Newsletter