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Franchise agreements and ‘unfair’ contract terms – increased risk for franchisors

Previously, an ‘unfair’ contract term could be declared void. However, from 9 November 2023, franchisors are prohibited from entering into standard form contracts with franchisees that contain unfair terms. Franchisors are also prohibited from relying on unfair terms, which have been renewed or varied on or after 9 November 2023. Doing so may attract substantial financial court penalties, now potentially in the millions.

Lenders - New reforms to Unfair Contract Terms Regime attract harsh penalties

Lenders to amend loan agreements to remove “unfair contract terms” to avoid risk of harsh penalties. 

The new “unfair contract terms” provisions came into play on and from 9 November 2023, and captures Lender’s loan agreements and term sheets.

Case Note: Bellas v Powers [2023] NSWSC

The case of Bellas v Powers [2023] NSW SC involved a dispute over the enforceability of a clause that imposed a higher interest rate on a loan facility in the event of default. The court held that the clause was a penalty as it was extravagant and unconscionable in comparison with the greatest loss that could be proved to have followed from the breach. The term was therefore deemed void and unenforceable.

Changes to the Australian Consumer Law: Businesses Risk $50M Fines For Each Unfair Contract Term Within Their Standard Form Agreements

The Australian Consumer Law has now changed, meaning that businesses with standard contracts will soon be at risk of incurring penalties in excess of $50 million for each unfair contract term within their standard form agreements. 

The definition of small business contracts in section 23(4) will be amended to apply to a business that has either:

  1. fewer than 100 employees; or
  2. an annual turnover of less than $10 million (calculated on the business’ last income year).

Casual employees are not counted unless employed on a regular and systemic basis, and part-time employees are counted as a fraction of a full-time employee.

The change to this definition potentially expands the scope of businesses that would be captured under this section, as it would no longer be confined to businesses with fewer than 20 employees.

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