Competition and Consumer Law Impacts on the Franchise Industry

Trade Practices Out – Competition and Consumer Law In

All franchise businesses, whether they provide goods or services, and whether they deal with consumers or other businesses (ie within a franchise system of franchisor/master franchisee/franchisee) must be aware of these laws and take steps to comply.

Top 10 Urgent Franchise System CCA Checklist Competition and Consumer Law Impacts on Franchise Industry

1. Majority of changes came into effect on 1 January 2011

2. Many changes affect business-to-business transactions as well as business-to-consumer transactions

3. Unfair contract terms deemed to be void

4. Consumer guarantees replace implied warranties

5. Mandatory two day reporting period for instances of injury, illness or death caused by consumer goods or product-related services

6. Misleading and deceptive conduct provisions remain unchanged

7. Increased investigative, audit and enforcement powers granted to ACCC

8. Scope of remedy of damages extended to enable claims for consequential loss

9. Substantial penalties for offences and civil penalties

10.Urgent action required to ensure compliance for Franchisors and Franchisees.

Trade Practices Out – Competition and Consumer Law In

All franchise businesses, whether they provide goods or services, and whether they deal with consumers or other businesses (ie within a franchise system of franchisor/ master franchisee/franchisee) must be aware of these laws and take steps to comply.

The New Competition and Consumer Laws

The changes from 1 January 2011 will see the Trade Practices Act 1974 [TPA] reborn, or re-badged, as the Competition and Consumer Act 2010 [CCA] with a carve out of Australian Consumer Law [ACL], and from 1 July 2010 the Unfair Contract Terms came into effect. Other amendments, including new civil pecuniary penalties, disqualification orders, substantiation notices, compensation for non-party consumers, infringement notices and public warning notices will start from 1 July 2010.

“Consumers” and Other Concepts

One of the seemingly most important definitions in the ACL is “consumer”, which is purportedly defined in Section 2 by reference to Section 3. However, this does not actually define “consumer”. The concept (as currently in the Trade Practices Act) is that a person is taken to “acquire goods” (Section 3(1)) or “services (Section 3(3)) “as a consumer”:

  • where the price or cost does not exceed $40,000.00; or
  • the goods or services are “of a kind ordinarily acquired for personal, domestic or household use or consumption”; or
  • the goods which are acquired consist of a vehicle or trailer “acquired for use principally in the transport of goods on public roads”.

Accordingly, provisions of the ACL that apply to a “consumer” will apply to many business transactions including some dealings between franchisor and franchisee. Franchise operations manuals need to be checked and updated to cover the new changes.

It is necessary to look at each specific provision in the ACL to determine when it applies. Primarily it will affect franchisees dealing with customers but franchisor activities can also be affected.

Unfair Contract Terms

These provisions cover standard form consumer contract, for sale or supply of goods, land, or services to an individual where the acquisition is wholly or predominantly for personal, domestic or household use or consumption, but not to a business. Franchise systems selling to consumers must be aware of the changes.

Consumer Guarantees

The consumer guarantees and rights contained in Division 1 of Part 3-2 of the ACL cannot be excluded by contract (Section 64). Franchisees now need to be informed of these extra obligations. Franchisors need to commence information programs and training of franchisees so that the sales process within the franchise system is updated.

Safety of Goods and Services

Under Part 3-3 of the ACL safety warning notices may be required, and reports of injuries are required within 2 days. Franchisees who do not report injuries may cause significant damage to the reputation of the franchise, as new penalties apply to failure to report.

Limitation of Liabilities

It is not possible to exclude the application of the provisions of Part 5 of the ACL providing rights of action for damages etc (Section 276). A term of a contract that has the effect of excluding these provisions is void. Each franchisor needs to review their franchise agreement and other contracts to ensure that updating is completed as a consequence of these provisions.

ACCC Action

It can be expected that the ACCC and other regulators will actively enforce the ACL, and use the available enforcement powers, including civil pecuniary penalties. ASIC is already actively using its power to issue infringement notices. Franchisors need to be aware that where a franchisee causes ACCC enforcement action it is likely that ACCC enquiries will also involve investigations of the franchisor .

What Action Must be taken by Businesses?

All businesses within a franchise system need to urgently review their documentation for consumer and commercial transactions to ensure compliance with the ACL.

Documents, manuals and practices need to be checked to ensure they do not contravene the provisions relating to unfair contract terms, where applicable, or be unconscionable. Alterations may be needed so the documents do not contravene the provisions relating to consumer guarantees, or contain any misleading or deceptive, or false or misleading representations or materials. Apart from these very general requirements, there are numerous specific provisions in the ACL, and the Regulations.

As well as a careful review of consumer and commercial documentation, franchises should consider establishing and implementing appropriate compliance programs to ensure knowledge of and compliance with the requirements of the ACL.

The time to act is now!!

Franchisee impacts:

The new unfair contract terms will apply when the franchisee sells their product to a consumer and the price does not exceed $40,000. This means that most sales direct to a consumer, mail order or online sales, and also sales to a wholesaler will be covered by the provisions. Unfair terms in standard form contracts with these consumers are void.

For example, if the franchise’s website involves clicking an ‘I agree’ button for an online purchase, the terms and conditions of this contract should be closely reviewed as they may be void if considered unfair.

Many franchisees telephone members of their CRM mailing list, or ‘cold call’ members of the public with an offer. These sales may be considered unsolicited consumer agreements. Very substantial provisions relate to these agreements, ranging from the hours that the call is permitted to be made, through to termination requirements.

Franchisors and franchisees should also carefully consider whether claims about the system’s products are accurate and can be substantiated. The ACCC may investigate claims such as health benefits, green, organic or biodynamic claims, and advertising claims such as was/ now pricing. Franchisors should examine these claims, as penalties and enforcement powers have both been increased and usually the franchisor controls the release of this information.

This article is a short summary of the new Competition and Consumer Law. For more detailed information please contact DW Fox Tucker Lawyers.

For more information, please contact:
Sandy Donaldson

Sandy Donaldson
p.  +61 8 8124 1954
e.  Email me

This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Should you wish to discuss any matter raised in this report, or what it means for you, your business or your clients' businesses, please feel free to contact us.

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