Unfair Contract Terms - rules now apply to franchise documents
Franchisors should be aware that changes to the Fair Trading Act 1986 (FTA ) are now in force which mean that all standard form business to business contracts with an annual threshold value under $250,000 (including GST) will be subject to the same unfair contract terms rules that already apply to business to consumer contracts. Set out below is a brief summary of the application of the unfair contract terms rules to franchise documentation. For more detail, please see our top 10 things to think about article here.
what contracts are affected?
Standard form contracts with an annual threshold value is expected to be $250,000 (GST inclusive) or less (small trade contracts).The new rules will apply to all small trade contracts entered into on or after 16 August 2022 as well as any small trade contracts entered into before 16 August 2022 but renewed or varied on or after that date.
what terms are unfair?
Terms considered unfair are those that:
cause a significant imbalance in the parties’ rights and obligations under the contract;
are not reasonably necessary to protect the legitimate interests of the advantaged party; and
the terms would cause detriment to a party if they were applied, relied on, or enforced.
Potentially unfair terms are those that:
allow one party to unilaterally vary the contract;
place risk on a party for events outside their control;
penalise one party (but not the other) for a breach of the contract;
allow termination for non-material breaches;
limit a party’s ability to terminate the contract; and
allow one party to vary the upfront price payable under the contract without giving the other party a termination right.
what about franchise documents?
Franchise agreements will be small trade contracts unless their annual value exceeds $250,000 (including GST) per year. Other agreements with franchisees and prospective franchisees, and related documentation and standard form B2B contracts / terms for sale or purchase of goods or services may also be affected.
what should i do?
Franchisors should check if their franchise agreements, other franchise documentation and any of their standard form contracts are small trade contracts under the FTA. If they are, they should review them for unfair contract terms. Any unfair contract terms should be amended so that they are no longer unfair or removed from the contract.
how can i learn more?
The Commerce Commission has updated its guidance on the unfair contract terms rules as they applied to standard form consumer contracts to reflect the extension of the regime to business to business contracts. The guidance can be accessed here.
For help and advice please contact your usual Jackson Russell Business Law advisor or one of the team listed.
Disclaimer: The information contained in this publication is of a general nature and is not intended as legal advice. It is important that you seek legal advice that is specific to your circumstances.