In late 2023 Dr Michael Schaper published his ‘Independent Review of the Franchising Code of Conduct’ (Independent Review). Forming part of his findings, the fifteenth recommendation made by Dr Schaper specified that ‘Further work should be done to limit the use of unreasonable restraints of trade in franchise agreements’.

Earlier this month, the Hon Julie Collins MP, Minister for Small Business, released the ‘Government response to the Independent Review of the Franchising Code of Conduct’ (Government Response), which agreed, or at least in principle, with each of the recommendations within the Independent Review.

In addressing Dr Schaper’s fifteenth recommendation on the use of unreasonable restraints of trade in franchise agreements, the Government Response specified action via two avenues:

1. Competition Taskforce Review

The government directed its Competition Taskforce (established by Federal Treasury in August 2023) to invite the general public to make submissions on the matter of ‘worker non-compete clauses and other restraints’.

These submissions are intended to inform the Government on whether reform is needed in this area. It is unclear on how such reform, if any, would be introduced into the franchising sector, including whether any reform would form a part of the re-making of the Franchising Code of Conduct before 1 April 2025.

Submissions have been open since 4 April 2024 and are due to close 31 May 2024.

2. Guidance from the ACCC

The government also included it will be requesting the ACCC to ‘consider providing further guidance on when a restraint of trade provision may constitute unfair contract terms’. It appears this direction to the ACCC will be supplemental to the already-published report from the ACCC in December last year, which explored ‘Unfair contract terms in franchise agreements’ (UCT Report).

As a part of the UCT Report, the ACCC confirmed that restraint of trade clauses are not inherently unfair, but cascading restrictions may reduce transparency of the clause and raise issues on uncertainty regarding the scope of the restraint. These ‘cascading’ restrictions have been commonplace in franchise agreements as this style of drafting allows the Courts to read the clause down, sever any parts it considers unreasonable, and have the balance enforced against the restrained party.

The ACCC also highlighted that restraints which go beyond what is reasonably necessary to protect a franchisor’s legitimate interests are likely to be unfair. In essence, the effect of this comment means that if a restraint of trade provision in a franchise agreement is unenforceable at common law then it will also likely be an unfair contract term.

Have cascading restraint of trade clauses in franchise agreements had their day?

In the past, there has been little consequence of including an unreasonable restraint of trade provisions in a franchise agreement. In the event a Court deems a part or all of a restraint clause to go beyond what is reasonably necessary to protect the legitimate interests of the party benefiting from the restraint, it would either be severed and the balance of the clause would be enforceable (if it were a cascading restraint clause), or be deemed unfair and therefore void.

However, since the introduction of changes to the unfair contract terms regime in November 2023, franchisors now face the risk of receiving a significant financial penalty in the event they enter into a standard form contract which includes an unfair contract term (in many cases, their franchise agreements).

Given the ACCC confirmed in the UCT Report that ‘restraints which go beyond what is reasonably necessary to protect a franchisor’s legitimate interests are likely to be unfair’, franchisors should ensure that they are only including restraint provisions to the extent they need to protect a legitimate business interest, and that the scope of that restraint only captures what is reasonably necessary to protect such interest.