On 22 August 2008, the Federal Magistrates Court released its
judgment in Keldote Pty Ltd v Riteway Transport; a case
which should be considered by all franchise businesses using
The applicants were 3 drivers contracted to provide linehaul
trucking services between Riteway's Melbourne and Sydney
depots. In February 2007, Riteway wrote to each of the drivers
requiring them to either upgrade their trailer configurations from
single trailer units to 'b double' trailers (2 trailers
pulled by a single prime mover), or cease providing the
The drivers where to be paid increased fees for their services
using the new trailers, but the increase was less than the
additional costs associated with acquiring and maintaining the new
equipment necessary to perform the contract.
The Independent Contractors Act 2006 (Cth) allows the Court
set aside the whole or part of a contract, or
vary the terms of the contract,
entered into with an independent contractor where the Court is
of the opinion that the terms of the contract are 'unfair'
Each contract between Riteway and the drivers contained a clause
which required the drivers to replace their vehicles every 5 years
(unless otherwise approved by Riteway) and allowed Riteway to
approve the type and classification of vehicles being used for the
service, subject to the requirements of Riteway "from time to
time". The drivers claimed (among other things) that this
contractual ability to require them to replace their vehicles
without a commensurate compensation for the additional expense was
The judgment elicits the factors that the Court will consider
when making any future decisions under the Independent Contractors
Act. These include the following points.
The 'unfairness' or 'harshness' of the contract
is to be determined at the time when the parties originally entered
Whether or not a contract is unfair or harsh is a matter to be
decided upon examination of the facts of each particular case.
Unfairness or harshness may arise either from the terms of the
contract itself or from the surrounding circumstances.
The test involves a common sense approach to balancing the
respective advantage and disadvantage between the parties.
Where a contract is found to be unfair or harsh, the Court has
a discretion as to whether the contract should be avoided or
Whilst the discretion allowed to the Court is extensive, it
should not interfere with a bargain freely made by a person who:
is not being exploited; or
was not in a situation of disadvantage, that is, the parties
had relatively equal bargaining strength and there was no undue
influence, pressure or unfair tactics used during
Whilst the drivers challenged a number of aspects of their
contracts with Riteway, many of these arguments related to factors
occurring after the time that the contracts were entered into and
therefore could not be considered by the Court. However, the
drivers were successful in establishing that the provisions
requiring them to replace their vehicles at Riteway's direction
The Court ruled that Riteway's requirements "from time
to time" could be manipulated so as to disadvantage the
drivers, unless the drivers had the ability to protect themselves
from the potential financial burden of acquiring more expensive
Accordingly, the Court exercised its discretion to vary the
terms of the contract so that any replacement vehicle had to have
"specifications reasonably equivalent to the vehicle to be
Franchisors should consider whether the Independent Contractors
Act applies to their franchise systems. If it does, clauses in the
franchise agreement which may be considered 'unfair' or
'harsh' such as clauses requiring replacement of a vehicle
"from time to time" should be revisited in light of this
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
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