When the UCT laws were updated in November to include hefty penalties for non-compliance, many franchisors sought to update their franchise agreements, and rightfully so. Breaching these laws can lead to significant penalties and render clauses void. Despite the high stakes, navigating compliance with UCT laws remains murky territory. Adding to the uncertainty is that there haven’t been any clear court decisions on how these laws apply to franchise agreements, leaving franchisors somewhat in the dark. This article delves into the essence of UCT laws, explores their potential impact on franchise agreements, and provides some practical tips for franchisors.
What are UCT Laws?
The Competition and Consumer Act 2010 (Cth) (Australian Consumer Law)(ACL) includes the UCT laws. These laws protect consumers and small businesses from unfair terms in standard form contracts. A term will be considered to be unfair if it:
- causes significant imbalance;
- is not reasonably necessary to protect the legitimate interests of the advantaged party; and
- would cause financial or other detriment if relied upon.
The ACL does not contain a ‘list’ of all clauses that may be deemed UCTs, but does contain examples at section 25. These include, relevantly to franchising:
- a term that permits one party to avoid or limit performance of the contract;
- a term that permits one party to terminate the contract;
- a term that permits one party to vary the terms of the contract; and
- a term that permits one party to unilaterally determine when the contract has been breached or interpret its meaning.
What are the consequences of breaching UCT Laws?
Previously, a term deemed by the Courts to breach UCT laws could be deemed void, and thus unenforceable. As of November 2023, the laws concerning UCTs have been updated and expanded. Now not only can such clauses be deemed void, but also the party which included the clause/s can be penalised.
The maximum penalties are 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. These penalties can apply per breach.
How might they apply to franchise agreements?
The most exhaustive statement of what will be deemed a UCT comes from the Fuji case, which examined a series of standard form contracts and deemed 38 clauses therein to be UCTs. Some of those clauses, for example clauses which incorporate additional contractual terms by reference to one or more extraneous documents (noting most franchise agreement require compliance with operations manuals) and one sided indemnity clauses, are regularly found in franchise agreements, thus they can be assumed to be UCTs in a franchising context as well.
The ACCC has also provided some guidance on this issue, setting out what typical clauses they consider to be UCT. We discussed this further in our prior article here.
Franchisors’ vulnerability, however, largely arises from non-standard clauses, for example clauses they have included in their franchise agreements to reflect their industry, but which aren’t contained in the majority of franchise agreements. Vulnerability also arises where clauses may have different terminology but the same effect as a clause the ACCC or the Courts have identified as likely UCTs, and thus may not obviously be UCTs.
In reviewing franchise agreements of late, we have identified a number of clauses that fall into these categories, which we consider still likely to be deemed UCTs. Examples include:
- a clause entitling the franchisor to unilaterally determine the goodwill value of the business if they elected to exercise an option to purchase;
- a clause entitling the franchisor to refuse to provide goods to the franchisee if they are in breach of the franchise agreement;
- one-sided liability caps in favour of the franchisor; and
- a clause entitling the franchisor to introduce KPIs during the term with which the Franchisee must comply ‘at the Franchisor’s absolute discretion’.
In our view, each of the above clauses meets the statutory criteria of a UCT. This is true even if they are not obvious UCTs, as identified by the ACCC, and are not on the list of UCTs that can be extracted from the Fuji case.
What should franchisors do now?
There will likely come a time when the Courts will tell us what clauses are UCTs in the context of franchising, when an unfortunate franchisor will become the ‘test case’. This will likely arise either through an ACCC initiated proceeding, or an action brought by a franchisee/s seeking to have certain clauses deemed void. Until then, franchisors should make an informed best guess and scrutinise each and every clause of their franchise agreements, not relying on any lists or similar but instead looking at the impact and purpose of each clause, and considering that impact and purpose as against the criteria of a UCT in section 24 of the ACL, and the list of examples in section 25.
Franchisors should keep aware of this issue by signing up to legal alerts and keeping abreast of legal developments (I hear the legends at Magnolia Legal regularly publish legal alerts; their Instagram is available here); otherwise, they become a sitting duck who may indeed become that unfortunate test case.
If you would like to discuss how the UCT laws may apply to your franchise documents, feel free to reach out for a complimentary and obligation-free discussion.