Franchise agreements in Australia are facing increasing legal scrutiny following changes to the Australian Consumer Law (ACL) that took effect on 9 November 2023. Under the revised unfair contract terms (UCT) regime, it is now unlawful to include or rely upon unfair terms in standard form contracts with small businesses. This shift has major implications for the franchising sector, where standardised contracts are the norm and the balance of power typically favours franchisors. The Australian Competition and Consumer Commission (ACCC) has made it clear that unfair contract terms in franchise agreements are a key enforcement priority. If a court finds a business in breach of these provisions, the consequences can be severe—up to $50 million in penalties for corporations and $2.5 million for individuals. Franchisors who have not reviewed their contracts for compliance are at serious legal and reputational risk.
Why Franchise Agreements Are Under Scrutiny
The ACCC’s December 2023 report presents the findings of targeted compliance checks conducted with ten franchisors across various industries, including food retailing, education, personal services, and maintenance. The focus was on small or emerging franchise systems, particularly those with fewer than 40 franchisees. These reviews were prompted by the understanding that newer or smaller franchisors often use standard form contracts without adequate legal customisation. While most franchisors complied with disclosure obligations under the Franchising Code of Conduct, the ACCC found that every single franchise agreement reviewed included at least one clause that raised concerns under the UCT provisions of the ACL. These problematic clauses typically fall into five categories: unilateral variation, withholding or setting-off payments, audit powers, restraint of trade, and termination clauses.
Unilateral Variation Clauses
A unilateral variation clause allows one party—usually the franchisor—to make changes to the contract or related documents without the consent of the other party. These clauses were found in all ten agreements reviewed by the ACCC. They often appeared in the context of operations manuals and approved product or supplier lists. Although it may be reasonable for a franchisor to retain some flexibility to adapt to changing business or legal environments, problems arise when the clauses are drafted so broadly that they give the franchisor absolute discretion to impose new requirements. In many agreements, the franchisee was given very short notice—sometimes as little as 48 hours—to implement operational changes, with failure to comply considered a breach that could lead to termination. Such terms significantly increase the imbalance in rights and obligations and are likely to be considered unfair unless clearly limited to changes that are reasonably necessary to protect the franchisor’s legitimate interests.
Withholding or Setting-Off Payments
Another common issue identified in the ACCC’s review was the inclusion of clauses allowing franchisors to withhold or offset payments owed to franchisees. These clauses appeared in seven of the ten agreements and allowed franchisors to deduct amounts they claimed were owed by the franchisee, even where the debt was disputed or not yet due. In many cases, franchisees were not given reciprocal rights to withhold payments or seek offsets when the franchisor owed them money. This type of financial control can be especially harmful for small businesses, which rely on consistent cash flow to operate. The lack of transparency and imbalance created by one-sided set-off clauses may render them unfair, particularly where there is no notice requirement or process for dispute resolution.
Audit Powers and Associated Costs
Audit clauses were found in all ten agreements and generally allowed franchisors to conduct audits of a franchisee’s business and financial records at their discretion. While the ACCC acknowledges that franchisors have a legitimate interest in ensuring compliance, it raised concerns about clauses that required franchisees to bear all audit-related costs, including travel and accommodation, regardless of whether any issues were found. Some contracts also imposed high default interest rates on underpayments. Only a few agreements included limitations to ensure costs remained reasonable. The ACCC’s view is that while audit rights are not inherently unfair, they must be exercised in a way that does not impose disproportionate financial burdens on franchisees, especially in cases where no wrongdoing has been identified.
Restraint of Trade Provisions
All ten agreements included restraint of trade clauses designed to prevent franchisees from operating a competing business after the agreement ends. While protecting business goodwill is a legitimate concern, the ACCC flagged concerns about clauses that were overly broad in duration, geography, and scope. Many contracts used cascading restraint clauses, meaning they listed multiple combinations of time periods and geographical zones to ensure that at least one would be enforceable. For example, some clauses sought to restrict former franchisees from operating similar businesses anywhere in Australia for up to five years. The ACCC views such clauses as problematic when they are so expansive that they effectively prevent franchisees from earning a living. If a restraint goes beyond what is reasonably necessary to protect the franchisor’s interests, it is likely to be deemed unfair under the UCT regime.
Termination Clauses and Power Imbalances
Termination clauses that allow the franchisor to end the agreement in a wide range of circumstances, especially without cause or for minor breaches, were another recurring concern. Nine of the ten agreements reviewed granted the franchisor broad termination rights, while only two gave franchisees comparable rights. In one case, the franchisor could terminate the agreement without any breach occurring, provided they gave written notice. The ACCC believes that such clauses are likely to be unfair, particularly when they expose franchisees—who often make substantial upfront investments—to termination with little or no remedy. Fair contract design should include mutual rights to terminate in serious circumstances, along with opportunities to remedy breaches before termination is invoked.
The Legal and Commercial Risks of UCTs
The legal risks of including unfair contract terms have increased significantly under the revised ACL. For contracts entered into, renewed, or varied on or after 9 November 2023, businesses can face enforcement action and substantial civil penalties if their agreements contain UCTs. The changes also expand the definition of small businesses eligible for protection, now covering businesses with fewer than 100 employees or annual turnover of less than $10 million. This means most franchisees fall within the scope of the UCT regime. Beyond the legal consequences, franchisors that rely on harsh or one-sided contract terms may undermine franchisee trust and damage the long-term sustainability of their network. Contractual fairness is not only a regulatory requirement—it is also good business practice.
What Franchisors Should Do Now
Franchisors are strongly encouraged to conduct a legal review of their franchise agreements, disclosure documents, and any other standard form contracts currently in use. Particular attention should be paid to clauses that grant unilateral power, restrict franchisee activity post-termination, or create financial burdens without reciprocal protections. Where potential UCTs are identified, franchisors should amend or remove them and seek legal advice to ensure ongoing compliance with both the ACL and the Franchising Code of Conduct. It is no longer sufficient to simply include disclaimers stating that all terms are reasonable—courts will assess the actual effect and fairness of each clause.
Final Thoughts
Franchise systems are built on long-term relationships, and legal compliance is essential to preserving brand reputation and operational success. The ACCC has clearly signalled its intent to hold franchisors accountable for unfair practices. In this new legal environment, proactive compliance is not just advisable—it is essential. Reviewing and updating your franchise agreements is a critical step toward protecting your business, reducing legal exposure, and maintaining a transparent and mutually beneficial relationship with franchisees. If you are unsure whether your agreements comply with the ACL or wish to assess your exposure under the UCT regime, now is the time to seek legal advice and take corrective action.
