Franchise Agreements generally contain a restraint of trade provision restricting a franchisee from operating a competing business after the Franchise Agreement ends. This will be for a certain time period within a certain geographical area.
A franchisor, Back In Motion Physiotherapy Pty Ltd (Back In Motion), recently provided the ACCC with a court enforceable undertaking to remove certain terms from its Franchise Agreement which they admitted may be unfair. By giving the undertaking, this meant that the ACCC would not take further court action against Back In Motion.
The restraint within Back In Motion’s Franchise Agreement prevented a franchisee’s involvement in a competing business located within a 10km radius of any Back In Motion Physiotherapy franchise for 12 months after the Franchise Agreement ended.
This effectively prevented ex-franchisees from operating in many areas of Australia given the number of existing franchised businesses throughout the country.
Also contained in the Franchise Agreement was a ‘buy out fee’ equal to 4 times the franchisee’s annual royalty fees payable if the franchisee wanted to be released from the restraint.
Back In Motion admitted that these could be potential unfair contract terms within the meaning of the Australian Consumer Law. This is a provision that:
- causes significant imbalance between the parties’ rights and obligations;
- isn’t reasonably necessary to protect the legitimate commercial interests of the stronger party advantaged by the provision; and
- would cause detriment to the weaker party if enacted.
Back In Motion have undertaken:
- not to enforce these select terms in the future; and
- to remove the terms from their Franchise Agreements moving forward.
This undertaking suggests that the ACCC are continuing to:
- actively monitor the compliance of franchisors with industry laws;
- review Franchise Agreements; and
- pursue franchisors who contain potentially unfair terms in their Franchise Agreements.
Franchisors should therefore regularly undertake the appropriate reviews and seek legal advice about whether their standard-form Franchise Agreements may contain unfair contract terms.
At Salerno Law we are experienced in acting for both franchisors and franchisees in all aspects of franchising law. Get in contact if you need our assistance.
Luke has specialised in franchising law since his admission into practice and has acted for a diverse range of franchisors and franchisees of a variety of franchise systems. He is also an active member of the Queensland Law Society Franchising Law Committee where he keeps on the forefront of the latest developments in laws affecting franchising, and contributes towards submissions to government on topical issues facing the franchising industry.
DISCLAIMER: This article is only meant to give you general information and should not be relied on as legal advice. Speak to one of our lawyers for more information.