ACCC Warns Franchisors to Remove Unfair Contract Terms… and that they will be watching

On 15 December the Australian Competition and Consumer Commission (the ACCC) gave an early Christmas present to Australian Franchisors in the form of a warning; remove unfair contract terms from your franchise agreements, or run the risk of hefty penalties. The heads up was packaged in a report titled ‘Unfair Contract Terms in Franchise Agreements’ which published the ACCC’s findings after it completed a review of 10 Franchise Suites which were voluntarily provided to the body. While the report did acknowledge the documentation it reviewed was largely compliant with the Franchising Code, it also found ‘a significant number of clauses that raised UCT (unfair contract terms) concerns for the ACCC’ and that all the agreements it reviewed ‘contained potentially problematic terms’. The report went on to warn franchisors that failed to address the issue and remove or vary potential unfair contract terms could face penalties of $50,000,000 plus, and that the ACCC would continue to undertake compliance checks. But what exactly is an unfair contract term in legal speak? And what kind of typical clauses lurking in franchise agreements could be stamped with the “unfair” label? Most importantly, what’s the gamble of keeping these questionable terms in franchise agreements? This article will unpack these important questions for Australian Franchisors.

What are Unfair Contract Terms (UCTs)?

A term will be considered to be unfair if:

  • it causes significant imbalance;
  • it is not reasonably necessary to protect the legitimate interests of the advantaged party; and
  • it would cause financial or other detriment if relied

Pursuant to the Australian Consumer Law (ACL), businesses must not include UCTs  in their standard form contracts entered into with small businesses. Previously, a term deemed by the Courts to be unfair as appeared in such a contract could be deemed void, and thus unenforceable. As of November 2023, the laws concerning UCT’s have been updated and expanded, so not only can such clauses be deemed void, but also the party which included the clauses in the relevant contract can be penalised, with the maximum  penalties being the greater of $50,000,000, 3 times the value of the benefit (if that can be determined) or 30% of the company’s adjusted turnover during the period of the breach, or the previous 12 months, whichever is longer. Importantly, these penalties can be applied per breach, and thus a franchise agreement that contains numerous unfair contract terms could render the relevant franchisor liable for a very significant sum indeed.

Under the updated UCT laws, the definition of ‘small business’ has also been expanded to now include any contract entered into with a party who employs less than 100 people or turns over less than $10,000,000. The result is the majority of franchise agreements will be deemed small business contracts for the purpose of the ACL.

To break this down, under the new section 23(2A) of the ACL, a person will contravene section 23 of the ACL if:

(a)  the person makes a contract (which would include entering into a franchise agreement);

(b)  the contract is a consumer contract or small business contract (as above, given the expanded definition, most franchise agreements will be small business contracts);

(c)  the contract is a standard form contract;

(d)  a term of the contract is unfair; and

(e)  the person proposed the unfair term.

What are some examples within franchise agreements?

In order for a franchise agreement to be subject to the UCT laws, it must be a standard form contract. The view of the ACCC (with which we concur) is that the vast majority of franchise agreements will indeed be considered standard form contracts. Importantly, the law now provides that a Court must not consider whether a party had the opportunity to negotiate minor changes, whether it had the opportunity to select a term from a range of options or whether a party to another contract was given the opportunity to negotiate its terms in determining if a specific contract is considered standard form. Therefore, even if some negotiations occur and/ or some special conditions are included, a franchise agreement is very likely to be considered standard form given the bulk of its terms will not be amended on a case by case basis for each individual franchisee.

Assuming the UCT laws then apply, what sorts of clauses typically contained in a franchise agreement could be considered unfair? The report identified the prevalent issues it identified, which we describe below:

  1. Unilateral Variation Clauses – these are clauses that enable one party to change a term of the agreement after it is entered into. Importantly, those changes can occur not just by amending the franchise agreement itself, but also by updating the operations manual, or relevant supplier lists and similar. While the ACCC acknowledged that a franchisor may have a legitimate basis for updating an operations manual, for example to ensure ongoing consistency across the franchise network, the report went on to say “we consider that terms which place no constraints or limits on when, how or why the franchisor may unilaterally vary the operations manual are likely to go beyond what is reasonably necessary…”. Clauses enabling the franchisor to update either the franchise agreement and/ or the operations manual should therefore be amended to include suitable notice, consultation, and other limits. Clauses entitling franchisors to vary approved supplier or products lists should also be scrutinised, and amended so such changes can only occur in certain defined circumstances, and with reasonable notice.
  2. Withholding or set-off Clauses – these are clauses that enable franchisors to withhold payments owing to the franchisee when money is owed to the franchisor. Typically, there are no reciprocal clauses in favour of a franchisee. The report suggested that such clauses be modified to require reasonable notice be provided when the franchisor intends to withhold or set-off monies, to set out the circumstances where a set-off or withholding may apply, and to specify the method whereby a franchisee can dispute or seek a review of a proposed set-off or withholding of monies.
  3. Auditing Clauses – most franchise agreements contain a clause entitling a franchisor to audit a franchisee’s business records, and, if the audit discovers any underpayment by the franchisee, to make good that underpayment and pay the costs of the audit. The report recommended such clauses be adjusted such that there is a notice period, and a positive obligation on the franchisor to keep the audit costs reasonable.
  4. Restraint of Trade Clauses – almost every franchise agreement contains a restraint of trade clause, one purpose of which is to prevent the franchisee competing with the franchise network once the franchise relationship is concluded. While restraint clauses serve a legitimate interest, the report considered they could be deemed unfair if they had a broad scope (for example, preventing a franchisee being ‘interested in’ a competing business, had multiple cascading areas and/ or time periods, or were otherwise beyond the realm of what was reasonably necessary to protect the franchisor’s interests (for example, by having a far-reaching definition of competitive business). Restraint clauses as contained in all franchise agreements should be scrutinized in light of the report’s findings.
  5. Termination Clauses – most franchise agreements entitle the franchisor to terminate the agreement in the event a breach is unremedied, even if that breach is minor or trivial. Such clauses, the report found, were likely to be deemed unfair. The report also found that a clause unilaterally entitling the franchisor to terminate the franchise agreement during the term at will was very likely to be deemed a UCT. Termination provisions should be adjusted so that the franchisor will not terminate for a minor or trivial breach (unless that breach is repeated/ is one of many breaches) and any clause entitling the franchisor to unilaterally terminate at will should be deleted.


The above is not an exhaustive list of what may be considered an unfair contract term as contained in a franchise agreement, merely the clauses that were the focus of the report (because these clauses appeared in the documentation reviewed). Other clauses that may be deemed unfair contract terms include entire agreement clauses, unilateral buy-out clauses, and one-sided indemnity clauses.

What happens if they are included?

Including a UCT in a Franchise Agreement leaves a franchisor exposed; not only could the clause in question be deemed void and unenforceable, but  also to significant financial penalties for breach of the UCT laws. There is also some scope for argument that inclusion of a UCT in a franchise agreement represents a breach of the obligation of good faith as contained in the Franchising Code, further exposing the franchisor to potential penalties.

There are no cases determined at the time of publication which consider the UCT laws in the context of franchise agreements, though we will be following the issue closely. Given the ACCC’s stated focus on this area, franchisors should expect the ACCC will undertake investigations and be willing to prosecute potential breaches.

If you need assistance understanding the UCT laws or ensuring none are included in your franchise documentation, we can certainly assist. Please contact us.

Disclaimer: This article contains general information only and does not constitute legal advice. Magnolia Legal disclaims any liability arising from reliance on this article. Our terms of use apply