Despite the introduction of a new Franchising Code of Conduct on January 1 this year, the Australian franchise sector is set to be further impacted by additional regulation with the introduction of unfair contracts legislation to apply to small businesses.
The exposure draft of the new unfair contracts legislation was released on April 28, with a short consultation period of just two weeks with submissions closing on May 12.
Small businesses that enter into contracts worth an upfront investment of up to $100,000, or an upfront investment of up to $250,000 where the contract lasts longer than 12 months will be subject to the new legislation.
The legislation will allow an unfair term in a standard form contract to be declared void; however, the contract will continue to bind the affected parties (as long as the contract is capable of operating without the term).
Consumers have been protected by unfair contracts legislation since 2010, and the new legislation will allow these protections to be extended to small businesses, which are defined as employing less than 20 people (excluding casual employees).
In announcing the new legislation, Small Business Minister Bruce Billson said that the protections “will give businesses access to a level playing field to grow, invest and create jobs”, and was part of a 2013 commitment by the Abbott government to give businesses “a fair go”.
The legislation is expected to impact standard-form contracts such as franchise agreements, tenancy agreements for shops and offices, and finance agreements for small businesses.
The investment thresholds of $100,000 up front or $250,000 for contracts longer than 12 months mean that Australian franchisees of almost all mobile service franchises, as well as many fixed-location service and some retail franchises will potentially be covered.
Suggestions that franchising be made exempt from unfair contracts legislation due to specific regulation of the sector via the Franchising Code of Conduct appear to have gained some traction with the government, but is not specifically enshrined in the legislation.
According to a Fact Sheet published on the Treasury Department’s website, the Business Minister will have the discretion to “exempt the application of the unfair contract term protections for small business where an industry-specific legislation or regulation is deemed enforceable and equivalent”.
It is unknown if the Minister will use this discretionary power to offer an exemption to the franchise sector, or any other sector currently covered by a mandatory industry code of conduct. (If exemptions are offered, it may encourage the development of future mandatory codes in sectors where only voluntary codes currently exist).
The Decision Regulation Impact Statement for the unfair contracts legislation acknowledges the Franchising Code of Conduct’s usefulness in addressing specific issues in contractual relationships between franchisees and franchisors, but notes that it does not provide scope for “a general review of unfair contract terms”.
A “general review” of franchise agreement terms may well have significant underlying consequences for the enforceability of some terms and conditions under franchise agreements.
Of particular concern for franchise agreements may be the common provision that requires franchisees to operate their business in accordance with the policies and procedures laid down in the franchise operations manual, and which franchisors typically reserve the right to change from time-to-time.
Retail lease agreements may also be covered by the new legislation. This could be a silver lining for the franchise sector, with both franchisors and franchisees often holding leases on sites and offered standard form lease agreements witth little or no room for negotiation.
The definition of a small business as employing fewer than 20 people (excluding casual employees) could also be good news to startup and developing franchisors, as they themselves may be covered by the legislation to avoid unfair provisions of agreements that they enter themselves, such as contracts with suppliers.
The public consultation period closes on May 12; however, Treasury officials are expected to hold further targeted consultations after this date. An initial round of submissions and consultations was held mid last year before the legislation was drafted. State and territory governments have also indicated their support for the legislation.
The Australian Competition and Consumer Commission (ACCC) has been allocated an additional $1.4 million to support the implementation of the new legislation, including conducting an information campaign.
It is expected the unfair contracts legislation will apply to contracts entered into, renewed or amended after the implementation date, which is expected to commence in 2016. Read more
A panel of legal and franchising experts will discuss the impact of the unfair contracts legislation on the franchise sector at the upcoming Franchise Management Forum, to be held in Brisbane on June 3.
Jason Gehrke is the director of the Franchise Advisory Centre and has been involved in franchising for more than 20 years at franchisee, franchisor and advisor level.