Following major reforms to the unfair contract terms (UCT) regime in the Australian Consumer Law (ACL) that renders unfair terms illegal and subject to heavy penalties, the Australian Competition and Consumer Commission (ACCC) has put the spotlight on the franchising sector's compliance with the regime.

The ACCC has emphasised concerns with the sector's approach to UCT compliance and urged franchisors to seek advice about their franchising agreements, or risk legal action. The ACCC's warning was accompanied by a report setting out its findings of recent spot check of franchising contracts, and providing guidance on terms raising UCT risks. While focused on the franchising context, this guidance nevertheless has broader application, providing businesses generally with insights into how the ACCC views a range of terms.

"Every franchising agreement we reviewed contained potentially unfair contract terms" ACCC Deputy Chair, Mick Keogh

Key UCT concerns

In a press release and report regarding UCTs in franchise agreements published on 15 December 2023, the ACCC expressed its ongoing concern about the power imbalance between franchisors and franchisees. The ACCC views this relationship as being characterised by significant controls and most franchisees having limited bargaining power in negotiating the terms of a franchise agreement. The ACCC considers that this power imbalance is exacerbated by including or using unfair terms in franchise agreements, and identified that many terms were likely broader than reasonably necessary to protect the franchisor’s legitimate business interests.

The ACCC's report explores a range of terms that raise potential UCT risks for franchisors, including the following.

Unilateral variation rights: Clauses that only allow the franchisor to vary the terms of the franchise agreement – including the operations manual – without the franchisee's knowledge or express consent are likely to be unfair where:

• the franchisor's right to vary key aspects of the agreement is unconstrained; or
• the franchisee does not receive sufficient notice of the change and cannot exit the agreement without financial detriment.

Set-off rights: Clauses that allow franchisors to withhold or set-off payments against outstanding monies payable to franchisees raises unfairness issues if:

• the set-off right is unconstrained, including where the payment is not due or disputed;
• there is no notice requirement imposed on the franchisor; or
• the agreement prohibits the franchisee from exercising corresponding rights.

Audit powers: Clauses that grant the franchisor broad discretion in when and how to audit the franchisee's business can be unfair, particularly where there is an obligation to pay interest on any underpayment identified during the audit or requires the franchisee to pay all (or a significant proportion) of the costs of the audit without requiring those costs to be reasonable.

Restraints of trade: Clauses that limit where and/or when former franchisees can conduct business for an unreasonably prolonged period of time following termination of the agreement will be unfair if they go further than necessary to protect the franchisor's legitimate interests. Cascading restraints of trade have generally been used in franchise agreements to avoid unreasonableness at common law, but these are likely to be unfair due to the lack of transparency as to the scope of the restraint and, often, their broad scope.

Termination clauses: Clauses that afford the franchisor an unrestrained unilateral right to terminate the agreement before expiry will not only contravene the Franchising Code, but are at high risk of being unfair. The ACCC has expressed the view that even an obligation to provide reasonable notice in such circumstances is unlikely to be reasonably necessary to protect a legitimate interest and so will be an unfair contract term.

Guidance for franchisors

When reviewing franchise agreements, the ACCC encouraged franchisors to ensure that:

• terms do not go further than reasonably necessary to protect their legitimate interests;
• they comply with their obligations under both the ACL and the Franchising Code of Conduct; and
• they use clear and transparent language in their franchise agreements to minimise UCT risk.

ACCC to focus on compliance in 2024

Compliance with the UCT regime will be a key priority for the ACCC in 2024, and businesses should expect that the ACCC will actively investigate and take enforcement action against franchisors (and other businesses) whose agreements raise UCT concerns.

Post reforms, non-compliance with the UCT regime carries significant risks. In particular, if a court finds that a standard form contract for consumers or businesses (including franchisees) contains unfair terms, businesses may be subject to penalties of up to the greater of:

• $50,000,000;
• three times the value of the 'reasonably attributable' benefit obtained from the conduct, as determined by a court (if possible); or
• if a court cannot determine this benefit, 30% of the business' adjusted turnover during the contravening period.

Next steps for franchisors & other businesses

In light of the significant consequences associated with using unfair terms, franchisors should review their current franchising agreements for potential UCTs using the guidance in the ACCC's report. Franchisors should amend or remove such terms to avoid being the subject of enforcement action and potentially significant penalties. Businesses who use standard form contracts should similarly heed the ACCC's guidance and review their contracts for compliance.

The ACCC's spot checks of franchising agreements and UCT concerns highlights the need for close scrutiny of all franchise agreements and other standard form contracts to mitigate risks under the UCT regime. Efforts to review agreements in light of the ACCC's guidance should be made promptly at the start of 2024.