How the Australian consumer law affects franchising

If you are purchasing a franchise, having a working knowledge of the  Franchising Code of Conduct (the Code) will assist you in negotiating and bargaining with the franchisor. This knowledge can enable you to make informed decisions and protect your business interests. However, many people overlook the significant impact that the Australian Consumer Law (ACL) can have on franchises and businesses generally. This article will explore how the provisions of the ACL apply to franchises and how they can help franchisees and franchisors navigate their obligations and rights. 

Does the ACL Apply to Franchise Contracts?

It may not seem obvious to associate consumer laws with business or franchise contracts. Historically, consumer laws aimed to protect individual consumers, but recent changes to the ACL have broadened the definition of a "consumer contract" to include small business contracts. As a result, many franchise agreements now fall under the ACL, extending essential protections to small and medium businesses. These amendments safeguard franchisees from unfair practices, granting them rights akin to those afforded to individual consumers.

What is a Small Business Contract?

In November 2023, the ACL expanded the class of "small business contracts". To qualify, a contract must meet certain conditions: 

• it must relate to the supply of goods or services or the sale of an interest in land; and
• one party must employ fewer than 100 people or have a turnover of less than $10 million in the previous income year. 

The ACL no longer imposes a minimum contract value requirement.

Given that many franchises meet these criteria, franchisees need to understand the additional protections available under the ACL.  Franchisees entering into franchise agreements benefit from these legal safeguards, while franchisors must ensure their contracts comply with the ACL to avoid breaches and foster fair dealings. This promotes a transparent and balanced relationship between franchisors and franchisees.

What Protection Does the ACL Provide?

Section 24 of the ACL protects against  unfair contract terms in small business contracts. While commercial terms can still benefit one party over another, certain conditions ensure fairness. Under the ACL, a term in the contract will be deemed unfair if:

• the term causes a significant imbalance in the rights and obligations of the parties;
• the term is not reasonably necessary to protect the legitimate interests of the party who receives the advantage of the term; and
• the term will cause a detriment (financial or otherwise) to a party if it is applied or relied on.

These criteria help to ensure that contracts remain fair and balanced. Whether a term is deemed unfair depends on the circumstances, including how the contract was formed and the balance of power between the parties.

How Does this Relate to Franchising?

Franchise relationships often involve a power imbalance, particularly when a franchisee negotiates with a large, established franchisor. This imbalance can be reflected in franchise agreements, where franchisors may impose terms that favour themselves and are difficult for franchisees to negotiate. When reviewing such agreements, courts will consider whether the terms allow the franchisor to

• limit their responsibilities under the contract;
• penalise the other party for breaching or ending the contract;
• unilaterally vary the terms of the contract; and
• unreasonably terminate the contract.

The court's evaluation will consider the entire agreement and weigh any potentially unfair terms against the franchisor's business interests and what they offer in return. For example, suppose the franchisor has the right to alter the agreement unilaterally. In that case, the court will consider whether this right is justified or whether the franchisee receives sufficient benefits or protections in exchange.

Key Takeaways

By understanding the Code and the ACL, franchisees can better navigate franchise agreements and negotiate more balanced terms. At the same time, franchisors can ensure their agreements comply with the ACL. This fosters a fairer, more equitable franchising relationship over time.

Franchisors and franchisees should understand their legal rights and obligations. If you have any further questions or need assistance, our experienced franchising lawyers can help. As part of our LegalVision membership, you will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. .

Frequently Asked Questions

What is the Australian Consumer Law (ACL)?

The Australian Consumer Law (ACL) is a national law that provides protections for consumers and small businesses. It covers unfair contract terms, consumer guarantees, product safety, and misleading or deceptive conduct, among other provisions.

How does the ACL apply to franchising?

The ACL applies to many franchise agreements, particularly those involving small businesses. Recent amendments to the ACL extend its protections to franchise contracts, offering franchisees similar rights to individual consumers, such as protection against unfair contract terms.

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.