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Unfair Contract terms in Franchising

By Ana on Apr 20, 2021 5:52:36 PM

A recent court enforceable undertaking given to the ACCC by Back in Motion Physiotherapy Pty Ltd (Back in Motion) has served as a reminder to ensure that franchise agreements do not contain unfair contract terms.

Background

Back in Motion is a franchisor with a network of over 500 franchisees who provide physiotherapy and related services in Australia and New Zealand.

Back in Motion has used a standard form franchise agreement since about 2004.

The Courts have the ability to declare terms or clauses in franchise agreements void if they are deemed unfair.

Specifically, section 23 of the Australian Consumer Law provides that a term of a consumer contract or small business contract is void if:

1 the term is unfair; and

2 the contract is a standard form contract.

What is an Unfair Term?

A term of a small business contract is unfair if:

1  it would cause significant imbalance in the parties’ rights and obligations arising under the contract; and

2   it is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and

3   it would cause detriment to a party if it were applied or relied on.

While a court must be satisfied that all three elements exist for the term to be unfair, the contract as a whole and the extent to which the relevant term is transparent may be considered.

The party who is advantaged by the term must show that the term is necessary to protect the legitimate interests of that party.

Unfair Terms in the Back in Motion Franchise Agreement

The standard Back in Motion franchise agreement contained a restraint of trade clause which provided that any franchisee who wanted to leave the group was not allowed to be involved in any competing physiotherapy practices located within a radius of up to 10 kilometres of a Back in Motion Physiotherapy franchise for up to 12 months (the Area Restraint clause).

The standard franchise agreement also included a clause under which Back in Motion could charge a franchisee a “buy out fee” equal to four times their annual royalty fees, if the franchisee wanted to be released from the restraint of trade clause (the Buy Out clause).

Back in Motion took the view after it was contacted by the ACCC that these clauses contained in the standard franchise agreement, may be unfair contract terms.

Enforceable Undertaking

Back in Motion has given the ACCC an undertaking not to include the Area Restraint clause or the Buy Out clause in future franchise agreements.

Further, Back in Motion has given the ACCC an undertaking not to enforce the Area Restraint clause against any franchisee who leaves the franchise group or any franchisee who left the franchise group in the last 12 months.

A further restraint of trade clause included in the Back in Motion standard franchise agreement, restricts former Back in Motion franchisees from actively soliciting a client they know has been a client of a Back In Motion franchise located within 10 kilometres of the former Back In Motion franchisee’s franchise, for nine months.

The ACCC has noted that the restraint of trade clause which relates to clients continues to apply.

 

Disclaimer

The information in this article is general in nature and is not intended to address the circumstances of any person or other entity. Although we do our best to provide timely and accurate information, we do not guarantee that the information in this article is accurate or that it will continue to be accurate in the future.

Ana

Written by Ana