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How to spot an unfair contract.

If you are looking to buy a franchise, be it a new or existing business, at some point you will be presented with a contract or franchise agreement. This will form the basis of your rights and obligations as a franchisee and those of the franchisor. It is an important document as it governs the business relationship.

The franchise agreement will have been drafted by a lawyer, and generally speaking it will favour the franchisor in most respects. Your responsibilities may be extensive and will usually form the bulk of the agreement. If there is a section on franchisor obligations, it will probably fit on one page.

Until lately, provided they honoured the franchise code, franchisors had free reign over their contracts, and fairness to the franchisee party was not a major focus, particularly for established and successful franchises. With the introduction of the “unfair contracts” regime, there is now an overarching fairness test.

How does it work?

Changes were made to the Competition and Consumer Act 2010 and the Australian Securities and Investments Commission Act 2001, taking effect from November 2016, that mean unfair terms in standard smallbusiness contracts can be declared void.

Generally speaking, a “standard-form small-business contract” is a contract: • Which supplies goods or services or the

sale or grant of an interest in land • Where at least one of the parties is a

business employing fewer than 20 people • Where the upfront price payable under the contract does not exceed $300,000 if the term is less than one year, or the upfront price does not exceed $1 million if the term is more than one year. These limits rely on fees being ascertainable at the time the contract is signed. In franchise agreements this is not always the case because a percentage of revenue may be used to calculate royalties, so these will not be included in the calculation and most small-business franchises will be within the threshold. An unfair term is a term that:

• causes a significant imbalance in the parties’ rights and obligations under the contract

• would cause detriment to a party if it were to be relied upon by the other is not reasonably necessary to protect the commercial interests of the party that would be advantaged by the term. A court will declare a contract term unfair only if all these three aspects are satisfied. The rest of the contract remains legally binding if it is still workable without the unfair element.

Some of the common terms in franchise agreements with the potential to be considered unfair include:

• Clauses permitting franchisors to make unilateral variations to the agreement without franchisee agreement • Expansive restraint-of-trade provisions on franchisees following the end of the franchise agreement

• Termination rights in favour of

franchisors, though the franchising code

• already limits the circumstances in which franchises may be terminated

• Clauses imposing obligations on franchisees to pay franchisor damages and other penalties, particularly if they are over and above what would be reasonable

• Clauses unduly limiting a franchisee’s right to sell the business and/or imposing significant penalties or payment to franchisor in such circumstances • Clauses in favour of the franchisor regarding ownership of customer records, depending on the context • Clauses imposing rights to impose significant expenditure on a franchisee where it cannot be justified, though the code already offers protection in this area.

Sometimes the type of clause will cause a problem, for instance, a clause requiring the franchisee to do something “as directed by the franchisor”. Also problematic are clauses providing the franchisor with “absolute or unfettered discretion” over particular matters.

Unfair contracts law is not a substitute for reading contracts and knowing what they say before you sign. The enforcement of rights still requires a legal claim with courts or tribunals, and all the usual uncertainty and difficulties with making legal claims apply. Normal mitigation of risk through careful review and robust negotiation of contracts is always encouraged.

Some contracts may be basically unfair to franchise buyers. Here’s what you need to know to avoid such problems.