Does your franchise agreement contain unfair contract terms?

Franchise Agreements are governed by both the Australian Consumer Law (ACL) and a mandatory prescribed industry code called the Franchising Code of Conduct (Code), which is enforced by the Australian Competition and Consumer Commission (ACCC).

The ACCC recently accepted a court enforceable undertaking from physiotherapy franchisor Back in Motion Physiotherapy Pty Ltd to amend the restraint of trade and “buy-out” clauses in its standard form Franchise Agreements, which the ACCC considered were unfair.

Background

Prior to providing their enforceable undertaking, the majority of Back in Motion Physiotherapy’s Franchise Agreements contained a restraint of trade clause that prevented franchisees from working for, or otherwise being involved with, any competing physiotherapy practice located within 10km of any Back in Motion Physiotherapy franchise, for a period of 12 months after leaving the network.

The Franchise Agreements provided that franchisees could leave the network and opt to be released from the restraint if they were willing to pay a “buy-out fee” in an amount that was equal to four-times the annual royalty fees payable under their respective Franchise Agreement.

The concern for the ACCC was Back in Motion Physiotherapy’s very extensive geographical reach, with over 500 franchisees in its network, operating all over Australia and New Zealand. This meant that if franchisees left the network and were unable or unwilling to pay the buy-out fee, they would be prevented from working in many metropolitan areas of Australia for a whole year.

When the ACCC approached Back in Motion Physiotherapy, the franchisor agreed that it had used a standard form Franchise Agreement, which contained the restraint of trade and buy-out clauses, since at least 2004 and admitted that these franchise terms may be unfair.

Unfair contract terms under the Australian Consumer Law

Under the ACL, an ‘unfair contract term’ is one that:

  1. Is set out in a standard form contract;
  2. Would cause significant imbalance between the rights and obligations of the parties to the contract;
  3. Is not reasonably necessary to protect the legitimate interests of the stronger party who would be advantaged by the term; and
  4. If relied on, would cause detriment (whether financial or otherwise) to the weaker party.

The ACCC or individual consumers can apply to have a term of a standard form contract declared unfair. If a term is declared to be unfair, that term will be void, which means that it will not be binding on the parties.

Whilst there are currently no penalties imposed on businesses who include unfair contract terms in their agreements, the ACCC and individual consumers can seek compensation for any loss suffered as a result of the inclusion of a term that has been declared to be unfair.

If you need advice regarding the terms of your existing contracts, the Kalus Kenny Intelex Commercial team is here to help.

This article has been prepared by Natalie Lasek, Partner and Brighid Virtue, Law Graduate.