Franchisors beware - unfair contracts claims still available for disgruntled franchisees?

The franchisee applicants in Houlburn & anor v Shig Pty Ltd [2007] NSWIRComm 104 alleged that the master franchise they had entered into was not a viable business.

S.109 of the Australian Constitution allows a federal law to prevail over a state law to the extent of any inconsistency. One type of inconsistency occurs if a federal law is intended to ‘cover the field’ in a particular area, but a state law purports to deal with the same subject matter. Another type of inconsistency (‘direct inconsistency’) arises if it is impossible for both laws to be obeyed at once. The respondent franchisor argued that since the federal Franchising Code provides remedies for misrepresentation, the federal code covers the field, leaving no room for the franchisee to seek a remedy for misrepresentation under s.106 of the IR Act.

A full bench of the Industrial Court of NSW considered the Franchising Code, and found that the wording of the Code indicates that it was not intended to cover the field. At that point in the case’s development, the full bench held that it was premature to determine whether there is any direct inconsistency between the Franchising Code and the IR Act. Unfortunately, the case settled before final consideration of this issue, but at least leaves open the possibility that the NSW unfair contracts jurisdiction may still be available to franchisees.

However, other issues have arisen since this case commenced its journey through the court. The Independent Contractors Act 2006 (Cth) (IC Act) came into effect on 1 March 2007, creating a new federal unfair contracts regime - allowing the Federal Magistrates Court or the Federal Court to declare certain services contracts unfair or harsh and to award remedies to injured parties. The remedies are not exactly the same as s.106 of the IR Act (or for that matter the comparable Queensland provisions), but they are similar.

The IC Act does not apply to all independent contractors. It applies to ‘services contracts’ – which are contracts for services:

• to which an independent contractor is a party – that is, according to common law principles, the contract is NOT an employment contract
• that relate to the performance of work by the independent contractor, and
• where at least one party to the contract is a constitutional corporation or the Commonwealth, or where the contract relates to the ACT or Northern Territory.

As is the case under the state laws, the Court (in this case the Federal Court or Federal Magistrate’s Court) can void or vary a contract of this type if it is unfair or harsh. For independent contractors which are corporations, the Court only has jurisdiction if a director or director’s family member ‘wholly or mainly’ performs the work to which the contract relates.

We cannot yet know whether the new federal IC Act will be held to apply to franchise agreements. Its application will depend on factors including whether the particular franchise agreement is deemed to be a ‘services contract’ – which will depend, in turn, on whether it is an independent contract and whether it requires work to be performed by the contractor.

If the IC Act does apply, then parties to franchise agreements will not be able to seek remedies under s.106 of the IR Act, or the Queensland Act. However, the definitional boundaries in the federal and state laws are a little different. Accordingly, there are likely to be some significant jurisdictional arguments about whether there is still room for some contracts to be reviewed under state laws. And if there is, then Houlburn v Shig removes the Franchising Code as a possible obstacle for franchisees.

Thomson Playford Cutlers works with franchisors as a strategic partner to improve overall network performance. We manage compliance issues and address the legal considerations that contribute to franchise network efficiency, profitability and expansion.