We have written about unfair contract terms in franchise agreements before.
Unfortunately, we still see clauses that could potentially be unfair almost every day.
These are not always obscure provisions buried at the back of an old agreement. They include things such as:
- complete waivers of liability in favour of the franchisor;
- unrestricted rights to change the operations manual;
- rights to change minimum performance criteria whenever the franchisor chooses;
- rights to acquire a franchisee’s fitout, equipment and stock at depreciated value; and
- rights to determine the value of those assets without any independent valuation process.
Often, these clauses have appeared in franchise agreements for years. That does not necessarily mean they are fair—or enforceable.
With the Government now considering extending unfair contract terms protections to all franchisees, it is a good time for franchisors to take another look at their agreements.
What is changing?
The unfair contract terms laws already apply to many franchise agreements.
Since 9 November 2023, it has been unlawful to propose, use or rely on an unfair term in a standard form consumer or small business contract. Significant penalties may apply.
A small business will currently qualify for protection if it:
- employs fewer than 100 people; or
- has an annual turnover of less than $10 million.
Most franchisees will fall within at least one of those thresholds.
In February 2026, the Australian Government commenced consultation on extending the protection to all franchisees covered by the Franchising Code of Conduct, including franchisees that do not satisfy the existing small-business thresholds.
The consultation has closed, and the proposal has not yet become law. However, the direction of travel is clear: franchise agreements are receiving increasing scrutiny, and relying on the size of the franchisee as a reason not to review an agreement is becoming an increasingly risky approach.
The Government has also announced that it intends to give regulators additional infringement notice powers in relation to unfair contract terms. Franchisors should not assume that the issue will only arise if a franchisee has the time and resources to challenge a clause in court.
When is a term unfair?
A term may be unfair if it:
- causes a significant imbalance between the parties’ rights and obligations;
- is not reasonably necessary to protect the legitimate interests of the party who benefits from it; and
- would cause financial or other detriment if it were applied or relied upon.
All three elements must be established.
The agreement is considered as a whole, and the court will also look at whether the term is transparent. This includes whether it is expressed in reasonably plain language, clearly presented and readily available to the franchisee.
Transparency helps, but it is not a complete answer. A clause can be written in beautifully clear language and still be unfair.
Importantly, only a court can finally determine whether a term is unfair. However, franchisors should not treat that as a reason to leave an obviously problematic clause in place and hope that nobody challenges it.
Is a franchise agreement a standard form contract?
Usually, yes.
A contract may still be a standard form contract even if:
- the franchisee was given an opportunity to negotiate;
- the parties made minor amendments;
- the franchisee negotiated commercial details in the schedule; or
- another franchisee previously negotiated different terms.
The question is not simply whether some negotiation occurred. The court may consider matters such as bargaining power, who prepared the agreement, whether it was effectively offered on a “take it or leave it” basis, and whether the franchisee had a genuine opportunity to negotiate its substantive terms.
Franchise agreements are, by their nature, usually based on a common template. Consistency across the network is important, but it does not give franchisors a free pass from the unfair contract terms regime.
What clauses should franchisors be looking at?
Not every clause that favours a franchisor is unfair. A franchise agreement needs to protect the brand, intellectual property and broader network.
The real question is whether the protection goes further than reasonably necessary.
The following are some of the clauses we continue to see regularly.
Complete liability waivers
Some agreements attempt to exclude virtually all liability of the franchisor, including liability arising from its own conduct, representations, negligence or breach.
Apart from raising issues under the unfair contract terms laws, general releases and waivers in favour of a franchisor may also raise separate issues under the Franchising Code and the Australian Consumer Law.
A franchisor may have legitimate reasons to limit certain categories of liability or exclude indirect loss. However, a clause that transfers every conceivable risk to the franchisee—regardless of who caused the loss—is much harder to justify.
A more balanced clause may:
- preserve liability that cannot lawfully be excluded;
- avoid excluding liability arising from the franchisor’s own serious wrongdoing;
- distinguish direct loss from remote or consequential loss;
- use reasonable and proportionate liability caps; and
- apply equivalent principles to both parties where appropriate.
Unrestricted changes to the operations manual
Franchisors need to update their systems. A frozen operations manual would be commercially unworkable.
The problem is not usually the existence of a variation power. It is the lack of any limit on it.
We still see clauses allowing a franchisor to amend the manual at any time, for any reason and without restriction—even where the amendment could impose substantial new costs or materially alter the franchisee’s obligations.
A better provision may allow the franchisor to update the manual while requiring changes to be:
- reasonable;
- connected with the operation or protection of the franchise system;
- consistent with the franchise agreement and applicable law;
- introduced on reasonable notice, except in urgent circumstances; and
- subject to any requirements concerning significant capital expenditure.
The franchisor retains the flexibility it genuinely needs without giving itself an unlimited power to rewrite the commercial deal through the manual.
Changing performance criteria at will
The same issue arises with minimum performance criteria, key performance indicators and similar benchmarks.
A franchisor may reasonably need to update performance standards as the system develops. However, a right to change the criteria whenever it chooses—particularly where failure to comply can lead to default, termination or non-renewal—creates an obvious imbalance.
The risk is greater where:
- the criteria are not objectively measurable;
- there is no connection to the franchisee’s market or circumstances;
- changes can apply retrospectively;
- the franchisee receives no reasonable notice;
- there is no opportunity to remedy underperformance; or
- the franchisor has an absolute discretion to decide whether the criteria have been met.
The agreement should explain how performance criteria may be set or changed and include reasonable limits around that process.
Acquiring assets at depreciated value
We also regularly see clauses giving the franchisor an option, following termination or expiry, to purchase the franchisee’s fitout, equipment or stock at depreciated or written-down value.
Sometimes the franchisor is entitled to determine that value itself.
These provisions can produce a particularly harsh result where the assets retain substantial commercial value but have been heavily depreciated for accounting purposes. They may also allow the franchisor to take control of a trading site at a significant discount after the franchisee has funded the fitout.
There may be a legitimate reason for the franchisor to have a first right to acquire the assets, particularly where this supports business continuity or protects the network.
However, the valuation mechanism should be fair and capable of objective verification. Depending on the circumstances, this could involve:
- market value;
- an agreed valuation methodology;
- valuation by an independent expert;
- a process for resolving valuation disputes;
- appropriate treatment of obsolete or unusable stock; and
- different outcomes depending on why the agreement ended.
A clause is more difficult to defend if the franchisor can acquire valuable assets at a price it determines entirely for itself.
“We need consistency” is not the whole answer
Franchisors sometimes resist amendments on the basis that every franchisee must sign the same agreement.
Network consistency is a legitimate concern. However, consistency does not require unfairness.
In fact, an unfair clause replicated across an entire network may increase the franchisor’s exposure rather than reduce it. Each unfair term proposed in a standard form contract may amount to a separate contravention, and further contraventions may arise if the franchisor later applies or relies on it.
The better approach is to develop a balanced template that can be used consistently.
You do not need to make the agreement toothless
Reviewing an agreement for potentially unfair terms does not mean removing every protection available to the franchisor.
Franchisors remain entitled to protect legitimate interests, including:
- brand standards and reputation;
- intellectual property and confidential information;
- consistency across the network;
- customer relationships;
- compliance with laws and system requirements; and
- the ability to respond to genuine defaults.
The aim is not to create identical rights for the parties in every clause. Franchisors and franchisees perform different roles and will not always have matching obligations.
The aim is to ensure that a clause is no broader than reasonably necessary to protect the franchisor’s legitimate interests and does not impose a disproportionate consequence on the franchisee.
What should franchisors do now?
This is not an area where franchisors should wait for the proposed reforms to become law.
Many franchisees are already protected, and the ACCC warned franchisors back in 2023 that every franchise agreement examined during its targeted review contained potentially unfair terms.
Franchisors should now:
- review the entire franchise agreement—not merely the clauses that were amended for the new Franchising Code;
- identify every unilateral right, discretion, waiver, indemnity, termination power and valuation mechanism;
- ask what legitimate interest each provision protects;
- consider whether the clause goes further than reasonably necessary;
- add reasonable limits, notice requirements and objective criteria where appropriate;
- consider whether a counterbalancing right or procedural safeguard is required;
- ensure important provisions are clear and transparent; and
- review how potentially unfair clauses are being used in practice, including in breach and termination notices.
We have explored unfair contract terms in previous articles, but the issue has not gone away. We continue to see clauses every day that deserve a closer look.
The short version? A clause is not safe simply because it is common, longstanding or included in every agreement in the network.
Magnolia Legal assists franchisors with reviewing and updating franchise agreements for compliance with the Franchising Code and unfair contract terms regime. If your agreement has not had a proper unfair contract terms review—or if it still contains any of the provisions discussed above—now is a good time to take another look.
This article contains general information only and does not constitute legal advice. Advice should be obtained about your particular circumstances.