If you franchise a business in Australia, the agreement you ask a franchisee to sign almost certainly counts as a standard form contract. That single label triggers a set of obligations under the unfair contract terms regime in the Australian Consumer Law (the ACL) that changed dramatically in late 2023. An unfair term in your franchise agreement is now not only void, meaning unenforceable, but proposing one can expose you to civil penalties of up to $100 million as a body corporate, on top of ACCC enforcement action.
These obligations sit alongside your existing duties under the Franchising Code of Conduct, including the obligation to act in good faith. This article sets out who the regime catches, what your actual duties are, what happens if you get it wrong, and the practical steps to take before you hand a new franchisee a contract to sign.
Who the unfair contract terms regime catches
The unfair contract terms provisions are in Part 2-3 of the ACL, which is Schedule 2 of the Competition and Consumer Act 2010 (Cth). They apply where two things are true at once: you are dealing with a consumer contract or a small business contract, and that contract is a standard form contract.
A franchise agreement is a contract for the supply of goods and services, so the question is usually whether it is a small business contract. Under s 23(4) of the ACL, a contract is a small business contract if at least one party to it makes the contract in the course of carrying on a business and, at the time the contract is made, either:
- the party employs fewer than 100 persons; or
- the party's turnover for its last income year that ended at or before the contract was made is less than $10 million.
For counting employees, a casual employee only counts if employed on a regular and systematic basis, and a part-time employee counts as a fraction of a full-time equivalent. In practice, most of the small businesses that take on a franchise fall comfortably inside these thresholds, so the regime will apply regardless of the dollar value of the contract. Note that only one party needs to satisfy the headcount or turnover test. A large corporate franchisor can still be caught if the franchisee on the other side of the agreement is a small business.
The second requirement is that the contract is a standard form contract. Under s 27 of the ACL a contract is presumed to be standard form unless the other party proves otherwise, and a court must consider factors such as whether one party had all or most of the bargaining power, whether the contract was prepared before any discussion, whether the other party was effectively required to accept or reject it, and whether they had an effective opportunity to negotiate. It is possible for a contract to still be standard form even where the franchisee got a chance to negotiate minor or insubstantial changes, or to pick from options you set.
Franchise agreements are almost always drafted by the franchisor, presented on a take-it-or-leave-it basis, and renewed on substantially the same terms. For that reason they are very likely to be treated as standard form contracts. A practical consequence follows: you should assume the regime applies to your franchise agreement and audit it, rather than assume it does not.
Duty one: do not include unfair terms in your standard form contract
The most important change came through the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth). Before that Act, an unfair term was simply void under s 23(1) of the ACL. The contract continued to bind the parties if it could operate without the unfair term, but there was no penalty for having put the term there in the first place. From 9 November 2023, that changed.
Since that date, s 23(2A) of the ACL now makes it unlawful to make a standard form consumer or small business contract that contains an unfair term, if you proposed that term. Every unfair term you proposed is treated as a separate contravention. This is a direct obligation on the party doing the drafting, which in a franchise relationship is normally the franchisor.
What makes a term unfair
A term is unfair under s 24 of the ACL where three things are all present. It must cause a significant imbalance in the parties' rights and obligations under the contract. It must not be reasonably necessary to protect the legitimate interests of the party it benefits. And it must cause detriment, financial or otherwise, to the other party if it were applied or relied on.
The second limb carries a presumption that works against you. Under s 24(4), a term is presumed not to be reasonably necessary to protect your legitimate interests, and the burden is on you to prove otherwise. A court weighing all of this must also consider how transparent the term is and the contract as a whole. A term is transparent if it is in reasonably plain language, legible, presented clearly and readily available to anyone affected by it.
Section 25 of the ACL sets out a non-exhaustive list of terms that may be unfair, and several of them map directly onto common franchise drafting. They include a term that lets one party but not the other:
- avoid or limit performance of the contract;
- terminate the contract;
- penalise the other party for a breach or termination;
- vary the terms of the contract; or
- renew or not renew the contract.
Also flagged are unilateral variation of the upfront price, unilateral variation of the goods or services supplied, a right to assign the contract to the other party's detriment without consent, and limits on one party's right to sue. Termination clauses, restraint and non-compete provisions, unilateral variation clauses, audit rights and broad indemnities are the kinds of provisions a franchise lawyer will examine closely when reviewing a franchise agreement for fairness.
What is excluded
Not every term is in scope. Under s 26 of the ACL, a term is excluded if it defines the main subject matter of the contract, sets the upfront price, or is required or expressly permitted by an Australian law. For franchise agreements this is significant, because terms that simply reflect what the Franchising Code of Conduct mandates are protected. The exclusions are narrow, however, so they do not rescue terms that merely happen to sit in a regulated agreement.
Duty two: do not apply or rely on an unfair term
The second duty, created at the same time, applies even if the agreement was signed before the 2023 changes. Under s 23(2C) of the ACL, it is unlawful to apply or rely on, or purport to apply or rely on, an unfair term of a standard form consumer or small business contract. This matters for franchisors holding older franchise agreements. A term you put in a document years ago may not have attracted a penalty when it was signed, but relying on that same term today, for example enforcing a unilateral variation or a penalty provision, is now itself a contravention.
The upshot is that the obligations are ongoing. It is not enough to fix your template before you next sign a franchisee. You also need to stop enforcing old terms that are unfair, because doing so from 9 November 2023 onwards is a separate breach.
Updating existing agreements and the good faith overlay
Because the regime continues to bite on terms you rely on, a routine part of compliance is reviewing agreements that are already on foot and flagging which clauses should no longer be enforced. When you amend your master agreement for new signings, keep the good faith obligation in mind. Clause 6 of the Franchising Code of Conduct requires each party to a franchise agreement to act towards the other in good faith, in respect of any matter arising under the agreement, and it applies to a person proposing to become a party during negotiation of a proposed agreement. A clause that operates harshly and arbitrarily, or one that was inserted to take advantage of a prospective franchisee's lack of bargaining power, sits awkwardly with both the good faith duty and the unfair contract terms regime.
Consequences of non-compliance
The consequences stack on top of each other, and they are now financial as well as contractual:
- The term is void: Under s 23(1) of the ACL an unfair term is void, and the contract continues to bind the parties only if it is capable of operating without it. This can unwind arrangements you were relying on.
- Civil pecuniary penalties: Since 9 November 2023, contravening s 23(2A) or (2C) can attract a penalty. Under s 224 of the ACL, for a body corporate the maximum is the greater of $100 million, three times the value of the benefit obtained that is reasonably attributable to the contravention, or 30% of the body corporate's adjusted turnover during the breach period. For an individual the maximum is $2.5 million.
- Enforcement and remediation: The ACCC enforces the regime and can seek a court declaration that a term is unfair, injunctions, orders preventing you from including substantially similar terms in future contracts, and redress orders to compensate people who have suffered loss.
The seriousness of this area is not theoretical. In Australian Competition and Consumer Commission v Fuji Xerox Australia Pty Ltd [2022] FCA 928, the Federal Court made declarations that a range of terms in Fuji Xerox's standard form small business contracts, including unilateral variation and termination clauses, were unfair. The case illustrates how ordinary, widely used commercial drafting can fall foul of the regime once a court applies the s 24 test.
A compliance checklist for your franchise agreement
To put these obligations into practice, work through the checklist below before your next franchisee signs:
- Confirm the regime applies: Assume your agreement is a standard form contract for a small business. Check that you have not already excluded yourself by leaving the analysis to chance.
- Audit your template against s 25: Work through the list of potentially unfair terms and identify any clause that gives you unilateral rights the franchisee does not have.
- Review each flagged clause against the s 24 test and the transparency factors: Consider whether each term is reasonably necessary to protect your legitimate interests, and whether you could document that necessity. Plain, legible drafting and clear presentation help.
- Check exclusions: Identify terms that define the main subject matter, set the upfront price, or are required or expressly permitted by the Franchising Code or another law.
- Stop relying on unfair old terms: Audit what you actually enforce in existing agreements, not just your template, because reliance is itself a contravention.
- Update affected clauses: Where a term cannot be justified, redraft it so it binds both parties equally or only operates in genuinely commercial circumstances.
Where a lawyer is needed
The unfair contract terms analysis is judgement-heavy. Whether a term creates a significant imbalance, or whether it is reasonably necessary to protect your legitimate interests, turns on the specific facts of your franchise system, and the presumption in s 24(4) shifts the burden onto you. A franchise lawyer can review your master agreement clause by clause, identify the provisions that carry the most risk, help you document the commercial justification for terms you genuinely need, and make sure your agreement stays consistent with your obligations under the Franchising Code, including good faith. If you have been notified by the ACCC or face a dispute over an existing clause, that review becomes urgent.
The clause that will actually cost you
The single most expensive mistake a franchisor makes in this area is not an exotic clause. It is a routine unilateral variation or termination right that is drafted so it protects the franchisor without any corresponding right for the franchisee, and then actually invoked. Before the 2023 changes such a clause was unenforceable but carried no penalty, which made it easy to leave in place. In the current environment, that same clause, written into a new agreement or relied on in an existing one, is a penalty-generating contravention. Give your master franchise agreement the clause-by-clause audit it needs this week, before a dispute or an ACCC inquiry does it for you.