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Franchisors warned to remove unfair contract terms or risk legal action

The ACCC is warning franchisors to urgently review and amend their standard form franchise agreements or be prepared for potential enforcement action after a review of franchising contracts found wide-ranging concerns.

A report, published today, outlines the ACCC’s findings and concerns after it recently completed targeted franchising compliance checks. The report provides guidance for franchisors about complying with the unfair contract terms laws after the Australian Consumer Law (ACL) was amended to introduce penalties from November 2023. The test for whether a contract term is unfair has not changed.

“We are concerned that franchisors are failing to grasp the importance of complying with the unfair contract terms provisions of the ACL. Every franchising agreement we reviewed contained potentially unfair contract terms,” ACCC Deputy Chair Mick Keogh said.

“Franchisors are on notice that we will be watching, and those who fail to address the wide-ranging concerns we outline in our report are at risk of legal action by the ACCC and franchisees.”

The ACCC has long been concerned about the power imbalances between franchisees and franchisors.

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“The franchising relationship is often characterised by significant controls on franchisees. We are concerned this power imbalance is exacerbated when franchisors include or rely on unfair contract terms in their franchise agreements,” Mr Keogh said.

“Our review found that many contract terms were likely broader than reasonably necessary to protect the franchisor’s legitimate business interests.”

“This is why we strongly encourage franchisors to use our report to inform a review of all their contract terms, and to seek independent legal advice about their obligations. Franchisors should remove or amend any potentially unfair contract terms immediately, to avoid potential penalties. Franchisors should also not seek to enforce any existing unfair terms,” Mr Keogh said.

The report follows a review of smaller franchisors in a range of industries including repair and maintenance, education and training, arts and recreation, wholesaling, personal services, and food retailing, many of which were new to franchising. The documents assessed were largely compliant with the Franchising Code, and the review did not identify any systemic issues or concerns relating to the Code.

However, the review identified concerns about unilateral variation clauses, withholding and set-off payment clauses, audit power clauses, restraint of trade clauses and termination clauses contained in standard contracts with franchisees.

“Our report contains several examples of the kind of unfair contract terms we are concerned about and want franchisors to address,” Mr Keogh said.

“Our warning to the franchising sector is that it is time to ensure that your contracts are fair.”

Tips for Franchisors

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The following general tips may help franchisors when reviewing their standard form contracts:

  • Consider both points of view: Even if you think a term is reasonably necessary to protect your business’s legitimate interests, consider the term, and any detriment it could cause, from the franchisee’s point of view.
  • Include counter-balancing terms: Check whether your contract has appropriate counter-balancing terms.
  • Avoid broad terms: Ensure terms are only as broad as reasonably necessary to protect your business’s legitimate interests.
  • Meet your obligations under the ACL: Don’t include terms that seek to avoid your business’s obligations under the ACL or the Franchising Code, for example, terms that seek to limit your customers’ consumer guarantees rights, or terms that seek to disclaim any representations your business may have made outside of the contract.
  • Be clear: Use clear and simple language in your contracts.
  • Be transparent: Look for ways to ensure key terms are clearly drawn to the attention of your franchisees during the sign-up process, and any renewal process.
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