Is a Franchisor’s Ability to Update the Operations Manual an Unfair Contract Term?

Franchisors across Australia have been updating their Franchise Agreements to remove Unfair Contract Terms (UCTs). Last November, laws changed to include significant financial penalties for including UCTs in standard form contracts. But is a clause in a Franchise Agreement requiring franchisees to comply with the Operations Manual, including any updates, an Unfair Contract Term? The franchising legal community has varied opinions on this important matter.

In our recent article, we explored what an Unfair Contract Term (UCT) is. Essentially, it’s a term in a standard form contract that is unfair. There isn’t a definitive list of UCTs, so we look to decided cases to determine if the ability to update an Operations Manual is a UCT.

What did the Fuji Case find?

The Fuji case provides the most definitive precedent on UCTs. In that case, the court accepted that UCTs were those that (amongst other things):

  • allowed Fuji to unilaterally vary the price charged to customers or change the rights and obligations between Fuji and the customers; and
  • incorporated additional contractual terms by referencing extraneous documents that were difficult for customers to locate or identify. Fuji could also unilaterally vary these documents without notice.

Typically, the relevant clause in a Franchise Agreement concerning compliance with the Operations Manual does not limit what a franchisor can amend or add to the Operations Manual. Applying the Court’s reasoning in Fuji, then, such a clause may indeed be a UCT. This is because, in most cases:

  • franchisors can unilaterally change aspects of the franchise system and the rights and obligations of their franchisees by updating the Operations Manual; and
  • the Operations Manual is an extraneous document. Commonly, franchisees do not receive a copy before signing the Franchise Agreement. At the time of signing the Franchise Agreement, however, franchisees become contractually obliged to comply with the Operations Manual. Accordingly, when signing the Franchise Agreement, they are agreeing to be contractually bound by something they have never seen.

What has the ACCC said?

The ACCC’s position is murkier. In its December 2023 report on UCTs in Franchise Agreements, the ACCC stated:

“There are instances where a franchisor may reasonably require the ability to make changes without seeking the franchisee’s consent, for example, to respond to changes in the law. However, 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 to protect the franchisor’s legitimate interests.”

The ACCC also said:

“We consider franchise agreements that place no limitations on the franchisor’s ability to vary the operations manual are more likely to be unfair. This is especially the case where franchisees do not have a right to exit the agreement (without penalty or financial harm) if they do not agree with, or are unable to implement, the changes to the operations manual.”

Regarding notice of any changes to the operations manual, the ACCC added:

“While a clear implementation timeframe provides more certainty to franchisees, 7 days may not be a reasonable amount of time to implement changes to the franchisee’s operations or to consider what options are available to them if they consider the changes will have an adverse impact on their business. This is especially the case if the changes are significant/onerous or if the franchisee is required to bear the full costs of implementing the change.”

Based on the ACCC’s view, then, it is apparent the precise legal reasoning in Fuji will not necessarily automatically apply to Franchise Agreements, which operate in a different context. Given consistency is a fundamental aspect of most franchise systems, there needs to be some ability of the franchisor to update the Operations Manual, though that needs to happen with proper notice, only when reasonable and, potentially, in such a manner as to enable franchisees to not agree with the change.

What approach are franchising lawyers taking to the issue?

At Magnolia Legal, we review many Franchise Agreements and see many different approaches to this issue, such as:

  • allowing the Operations Manual to be updated if the franchisor considers the change reasonable; 
  • including definitions of ‘material’ and ‘non-material’ changes, with a consultation process before implementing material changes, while allowing non-material changes to be made at will by the franchisor; 
  • providing a consultation period before implementing any changes to the Operations Manual;
  • applying a test of sorts or specified criteria which the franchisor must apply before any changes are made to the Operations Manual; and/ or
  • making changes binding if required by law or agreed by a majority of franchisees.

Despite the ACCC’s statements, we have not seen a single Franchise Agreement that allows franchisees to terminate the agreement if they are dissatisfied with or object to a proposed change. 

What is Magnolia Legal’s view?

How UCT laws apply to franchise agreements is a legal grey area. We favour a practical approach that includes the provision of reasonable notice (which period may vary dependent on the nature of the update). Considering the Court’s reasoning in Fuji, the ACCC’s statements, and practical matters relevant to franchise operations, we suggest:

  • clarifying changes that can be made without consultation, such as those required by law or due to necessary circumstances (e.g., if an approved supplier is no longer operating); 
  • for changes requiring consultation, providing reasonable notice (at least 14 days) based on the impact and associated costs of the relevant change;
  • including a provision binding on franchisors to ensure any proposed changes are not substantially disadvantageous to franchisees or any of them before they are introduced; and
  • allowing franchisees to seek consultation during the applicable notice period. If dissatisfied, the franchisee/s then can issue an Early Termination Request pursuant to the Franchising Code, which the franchisor will consider in good faith.

We also encourage our franchisor clients to offer incoming franchisees to inspect the Operations Manual before the Franchise Agreement is signed.

In our view, this approach strikes a balance between the franchise parties rights, while still allowing for necessary and/ or beneficial changes to be made to franchise networks. 

If you are a franchisor concerned that a clause in your Franchise Agreement could be deemed a UCT, including any clauses related to the Operations Manual, please get in touch for an obligation free discussion.


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