A report released just before Christmas reveals the ACCC’s concerns and offers guidance to help franchisors ensure that they are compliant with the change in unfair contract terms laws under Australian Consumer Law (ACL) that came into effect from November 2023.

“We are concerned that franchisors are failing to grasp the importance of complying with the unfair contract terms provisions of the ACL,” ACCC Deputy Chair Mick Keogh said. “Every franchising agreement we reviewed contained potentially unfair contract terms.

“Franchisors are on notice that we will be watching, and those who fail to address the wide-ranging concerns we outline in our report are at risk of legal action by the ACCC and franchisees,” Keogh, who’s organisation has been concerned for a long time about the power imbalances between franchisees and franchisors, added. “The franchising relationship is often characterised by significant controls on franchisees. We are concerned this power imbalance is exacerbated when franchisors include or rely on unfair contract terms in their franchise agreements.”

Pointing out that the review found that many contract terms were “likely broader than reasonably necessary to protect the franchisor’s legitimate business interests”, Keogh said that the ACCC strongly encourage franchisors to use information revealed in the report to “inform a review of all their contract terms, and to seek independent legal advice about their obligations”.

“Franchisors should remove or amend any potentially unfair contract terms immediately, to avoid potential penalties,” Keogh averred. “Franchisors should also not seek to enforce any existing unfair terms.”

The report follows a review of smaller franchisors in industries including repair and maintenance, education and training, arts and recreation, wholesaling, personal services, and food retailing. Despite many of the franchisors looked at in that review being new to franchising, most of the documents assessed were largely compliant with the Franchising Code, and the review did not identify any systemic issues or concerns relating to the code.

That review did, however, raise concerns about unilateral variation clauses, withholding and set-off payment clauses, audit power clauses, restraint of trade clauses and termination clauses contained in standard contracts with franchisees.

“Our report contains several examples of the kind of unfair contract terms we are concerned about and want franchisors to address,” Keogh said. “Our warning to the franchising sector is that it is time to ensure that your contracts are fair.”

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The ACCC said contracts are unfair if they cause a significant imbalance in the rights and obligations of the involved parties; are not reasonably necessary to protect the legitimate interests of the party advantaged by the term; and would result in detriment to the other party if implemented or relied upon.

In a newly published report, the ACCC outlined its findings and concerns after it completed targeted franchising compliance checks.

The report provides guidance on complying with the unfair contract terms provisions of the Australian Consumer Law (ACL) after it was amended to introduce penalties beginning in November this year.

ACCC Deputy Chair Mick Keogh said every franchising agreement the consumer watchdog reviewed contained potentially unfair terms.

“This is why we strongly encourage franchisors to use our report to inform a review of all their contract terms, and to seek independent legal advice about their obligations,” Keogh said. “Franchisors should remove or amend any potentially unfair contract terms immediately, to avoid potential penalties. Franchisors should also not seek to enforce any existing unfair terms.”

Keogh said the ACCC will be monitoring franchisors and those who fail to act on the concerns will be at risk of legal action from the government agency and franchisees.

The ACCC said that when reviewing standard form contracts, franchisors should consider both points of view, include counter-balancing terms, avoid broad terms, meet obligations under the ACL and be transparent.

An individual found to have breached the ACL may face a penalty of up to $2.5 million.

The maximum financial penalties for businesses are the greatest of $50 million – three times the value of the “reasonably attributable” benefit obtained from the conduct if can be determined, or 30 per cent of adjusted turnover during the breach period if the court cannot determine the benefit.

This story first appeared on our sister publication Inside Retail

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PESTLE stands for:

• Political
• Economic
• Social
• Technological
• Legal
• Environmental.

In November, a LEGAL help for SMEs finally became law. It’s something that I have written and spoken about for years, so it’s very gratifying to see the final result of all that lobbying by SME advocates and organisations (such as the Australian Small Business and Family Enterprise Ombudsman).

At last, it is illegal to have unfair terms in a contract with a small supplier.

November 9, 2023, marks a significant shift in the Unfair Contract Terms (UCT) regime. The Treasury Laws Amendment (More Competition, Better Prices) Act 2022 introduced some critical changes:

• The definition of a ‘small business’ is widened
• Unfair Contract Terms will be illegal and will be met with stern penalties.

If you are a supplier to a larger business, there’s a chance that the contracts you have signed will now be illegal.  

If you’re running a business and buying from SMEs, you might be caught by these changes yourself. A ‘small business’ is defined as any entity with fewer than 100 employees or an annual turnover under $10 million.

So, what does this mean for your standard form contracts? They’re presumed to be under this umbrella unless proven otherwise.

Previously, if your contract had an unfair term, it was simply unenforceable—no harm, no foul, right? Not anymore. The new legislation introduces hefty fines just for including such terms in contracts. Companies could face penalties up to the greater of:

• $50 million,
• three times the benefit’s value, or
• 30 per cent of the company’s turnover when the contract was in place.

Individuals are not spared either, with potential fines up to $2.5 million.

What is Unfair?

It’s crucial to go through your contracts with a fine-tooth comb. That includes both the contracts with your customers and contracts with your suppliers.

Look for any terms that might be considered unfair. Here’s some pointers:

• Clauses that skew the balance of rights and obligations
• Clauses that are not necessary to protect legitimate interests
• Clauses that give one party some rights or benefits that the other party does not have.

An example, and one that I see often, is where buyer can terminate a contract anytime, for any reason, while the supplier must give notice. This kind of imbalance could now be a costly oversight.

These changes open the door for any SME or individual to take civil action if they’re on the receiving end of a UCT. With the Fair Work Commission potentially getting the authority to make orders regarding UCTs in ‘service contracts’, the world of supplier contracts has changed.

Of course, we must now wait and see what actually unfolds in the Courts as cases are brought before them. Regardless, all businesses must brace themselves for this regulatory change.

It’s about more than just the legals

Ensuring your contracts are fair and balanced isn’t just about legal compliance; it’s a matter of upholding your brand’s integrity. Ethical dealings and fair practices are always in vogue, and the cost of ignoring these new rules goes way beyond the hefty fines. Your reputation is also at risk.

Now, your attention to the “L” in the PESTLE analysis is as important as your entrepreneurial spirit. Consider this article a call to action: live up to your brand, embrace ethics, and ensure your contracts reflect that commitment. November 9, 2023 has already passed, so the time to review and adjust your contracts is now.

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According to ASIC, the contract term gives PayPal business account holders 60 days to notify PayPal of any errors or discrepancies in fees that PayPal has charged them, or else accept those fees as accurate.

The term appears in PayPal’s User Agreement, one of several documents that form the contract between PayPal and its Australian business account holders.

ASIC stated that this term is unfair because it would permit PayPal to retain fees it has overcharged or wrongly charged if the small business does not notify PayPal of the error within 60 days of the fee appearing in its account statement.

“ASIC has commenced this action to protect the interests of small businesses,” ASIC Deputy Chair Sarah Court stated. “We allege this term is unfair because it allows PayPal to escape the consequences of its own errors in overcharging small businesses, and places additional burdens on small businesses to detect and correct charging errors.”

ASIC further stated that the contract term is unfair within the meaning of s12BG of the ASIC Act as the term:

• “causes a significant imbalance in the parties’ rights and obligations under the contract”
• “is not reasonably necessary to protect PayPal’s legitimate interests,” and
• “would cause detriment to PayPal business account holders if the term were relied on.”

Since 1 July 2010, the unfair contract term regime contained in the ASIC Act has applied to standard-form consumer contracts for financial products and services. On 12 November 2016, the unfair contract term regime was expanded to include small business contracts.

Furthermore, on 9 November 2022, the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 was assented to, which will impose civil penalties under the ASIC Act for breaches of the unfair contract term prohibition from 10 November 2023.

In light of PayPal’s alleged unfair contract term, ASIC has sought declarations that the term is void. ASIC is also seeking injunctions and corrective orders.

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The amendment will introduce penalties and other changes relating to unfair contract terms, as well as significant increases in maximum penalties for breaches of certain provisions of the Competition and Consumer Act including the Australian Consumer Law.

These maximum penalties will apply to a range of offences and civil penalty provisions under the Australian Consumer Law including unconscionable conduct, false or misleading representations, and harassment and coercion. They also apply to most civil and criminal offences under competition law, including cartel offences, the news media and digital platforms mandatory bargaining code provisions, the international liner cargo shipping provisions, and the prohibited conduct in the energy market provisions.

Maximum penalties for companies that breach those provisions have increased to the greater of $50 million or three times the value derived from the relevant breach, or, if the value derived from the breach cannot be determined, 30 per cent of the company’s turnover during the period it engaged in the conduct. For individuals, the penalties also increased to $2.5 million.

Penalties for unfair contract terms will come into effect the day after 12 months have passed after the bill receives Royal Assent but the higher CCA penalties will apply the day after Royal Assent is granted.

“The increase in penalties should serve as a strong deterrent message to companies that they must comply with their obligations to compete and not mislead or act unconscionably towards consumers,” ACCC Chair Gina Cass-Gottlieb said. “These maximum penalty changes will allow the Courts to ensure that the penalties imposed for competition and consumer law breaches are not seen as a cost of doing business, but rather as a significant impost and something likely to raise the serious attention of owners or shareholders.”

Before the amendments introduced penalties for businesses that include unfair contract terms in their standard form contracts with consumers and small businesses, the Courts could declare specific terms of a contract unfair and therefore void, but it could not impose any penalties on businesses that included them in standard form contracts.

“We have long highlighted the adverse consequences of unfair contract terms on consumers and small business, including franchisees, and suggested that they be outlawed and penalties are required to provide a stronger incentive for businesses to comply,” Cass-Gottlieb added.

“Businesses have 12 months to review and update their standard form contracts before these penalties apply. These changes will improve small business and consumer confidence that they will not be taken advantage of when entering into or renewing standard form contracts in the future,” she added. “Many small business complaints about big business are about unfair contract terms and it will be an enormous boost to small businesses that there will be a far stronger deterrent against the use of such terms.”

The changes will also expand coverage to more small business contracts, up to small businesses which employ fewer than 100 persons or have an annual turnover of less than $10 million. The changes also clarify other aspects of the laws, such as more clearly defining ‘standard form contracts’.

“Standard form contracts provide a cost-effective way for many businesses to contract with significant volumes of customers,” Cass-Gottlieb said. “However, by definition, these contracts are largely imposed on a ‘take it or leave it’ basis. The unfair contract terms laws are vital to protect consumers and small businesses against terms in these contracts that take advantage of this imbalance in bargaining power. We are pleased that these laws have been strengthened.”

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“These are real problems for small and family businesses and rebalancing the relationship imbalances between small business and large enterprises will promote economic growth,” Billson said. “It is very pleasing to see election commitments being progressed quickly by Small Business Minister Julie Collins, Assistant Treasurer Stephen Jones and the Assistant Minister for Competition, Charities and Treasury Andrew Leigh.”

The bill being introduced into Parliament in relation to unfair contract terms will introduce civil penalty provisions prohibiting the use of, and reliance on, unfair terms in standard form contracts. This will enable a regulator to seek a civil penalty from a court.

The other bill that will increase penalties for corporations engaging in anti-competitive behaviour will see the penalty leap from $10 million to $50 million.

The Ombudsman has recently met with many small and family businesses who have highlighted these issues as an impediment as they don’t have the power or resources to stop unfair terms being imposed on them.

“We see in many contracts we review, examples of unfair terms,” Billson said. “Too often a large business with relative superior bargaining power acts unfairly against a small business or multiple smaller businesses.

“We have seen contracts where a big company is allowed to cancel or vary the contract with two days verbal notice, but the small business is required to provide 90 days’ notice in writing,” Billson added. “We have seen contracts where the big company is able to keep deposits for at least 12 months after the agreement with a small business ends with no fixed end date. I encourage large enterprises doing business with smaller firms to be a kindly customer – patient and understanding, with good and generous intent, especially around contract terms.”

The Ombudsman stressed that is also crucial that these new laws are enforced by regulators to defend the economic interests of small-business owners,.

“Fines need to be more meaningful and not just an easily absorbable ‘cost of doing business’ that a big business can easily afford to pay that doesn’t cause powerful firms to think more carefully about their behaviour and change their approach,” he concuded.

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Fuji has been ordered to stop enforcing these terms in current small-business contracts and to cease using these terms for the next five years.

The orders apply to 11 types of standard form contracts Fuji entered with small businesses for printers and related software. The unfair contract terms included terms providing for automatic renewal, excessive exit fees and unilateral price increases.

The decision is the outcome of court action initiated by the Australian Competition and Consumer Commission (ACCC) in October 2020. The matter came to the ACCC’s attention via complaints from small businesses, including a complaint from the Australian Small Business and Family Enterprise Ombudsman, concerning standard form contracts used across the printing industry more generally.

“We took this court action because Fuji’s unfair contract terms allowed this large company to leverage the significant power imbalance between it and small business customers to impose unnecessary and unjustifiable terms on these businesses,” ACCC Deputy Chair Mick Keogh said. “Fuji’s unfair contract terms were imposed on many small businesses who had signed contracts containing these terms, and Fuji took action, including litigation, to enforce these terms.

“We continue to strongly advocate for law reform to prohibit unfair contract terms and enable the Court to impose penalties in cases where such terms are imposed and enforced against small businesses, as here, or consumers,” Keogh added.

The orders apply only to contracts entered into with small businesses, which are businesses employing fewer than 20 staff.

Since November 2016, Fuji has entered into or renewed approximately 34,000 contracts, the vast majority of which were made using the standard form contracts at issue in this case. Many of those contracts are still in force. It is not known how many of these contracts were with small businesses, although it is likely this is a substantial number of these contracts.

Under the Court orders, Fuji is obliged to contact current customers with relevant contracts and ascertain if they are small businesses and make them aware of the orders. Fuji must also publish information about these orders on its website. Fuji was also ordered to implement a compliance program and pay part of the ACCC’s costs.

Fuji on their part admitted that these terms were unfair, and consented to the declarations and other orders made by the Court.

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The Australian Small Business and Family Enterprise Ombudsman Bruce Billson has welcomed the development, which is the fulfilment of an election promise by the Albanese government.

Billson has previously met with different small businesses who have highlighted the unfair contracts problem.

“We see in many contracts we review, examples of unfair terms. This is an area ripe for change,” Billson said. “Power imbalances between small business and large enterprises are exacerbated by unfair business practices and unfair contract terms.”

Billson said that addressing those issues through the proposed legislation will aid in rebalancing the small business-large enterprise relationships and promote economic growth.

“I encourage large enterprises doing business with smaller firms to be a kindly customer – patient and understanding, with good and generous intent, especially around contract terms,” the Ombudsman said. “Small businesses are run by real people who deserve our respect and empathy everyday.”

Billson has also welcomed the government’s move to update the definition of a small business in the proposed legislation to increase the eligibility threshold from fewer than 20 employees to fewer than 100 employees and introduces an annual turnover threshold of less than $10 million as an alternative threshold for determining eligibility.

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Unfair contract terms in standard form contracts are where there is an advantage for one party under the contract, but the other party does not have the same rights. These were first addressed by the law back in 2016.

Back then, after years of discussion, the Federal Government gave small businesses the same protection against unfair contract terms that consumers had enjoyed for years.

What is an unfair contract term?

Three tests are applied to determine if a contract term is unfair:

• Does it create an imbalance of power between the two parties?
• Is it really necessary, to protect the business’s interests?
• Is it going to cause one side or the other to suffer as a result?

The catch was that small-business owners had to take action against the big company imposing unfair terms. That meant approaching the courts and asking them to make a ruling. That was a huge, gaping hole in the legislation, no doubt as a result of intensive pressure by the big business lobby. Very, very few SMEs would have either the money or the intestinal fortitude to front up for such a court case. The best they could do, which was my approach, was to point out the unfair terms, and hope the big company would agree with you and delete or change them.

The latest changes bring actual penalties

I have flagged this before, but this latest step introduces actual penalties if unfair contract terms are included in a Standard Form Contract. I have summarised the main changes here:

1. The most important proposed change is to make unfair contract terms illegal in the first place. No more nonsense of putting or keeping an unfair clause in, and waiting for a small business (or the Ombudsman) to call it out. The only downside to the big company is that the offending clause would not be able to be enforced. No penalty. Now, it will be illegal to “propose, apply, or rely on” an unfair contract term.
2. There will be a monetary penalty for breaches; up to $500,000 for an individual; and a minimum of $10,000,000 for a corporation.
3. Once a contract term has been declared to be unfair, no other company can use a similar term. That will prevent having the same things presented to the courts over and over again.
4. The number of contracts that legislation applies to has been increased by removing the maximum contract value threshold.

What does this mean for small-business owners?

At the moment, nothing. The legislation was submitted to Parliament on 9 February 2022. Then, of course, we had a Federal election in May so there will be a significant backlog of parliamentary business for the new government to deal with. So don’t get your hopes up just yet, but I’m confident that this next step will make it through and become law.

If (when?) that happens, it will be another small step along the path of closing the power gap between small business and their big corporate customers. In the meantime, keep watching the standard form contracts presented to you for offending, unfair contract terms.

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