Law For Small Businesses: Liabilities, Leases and Legalities Dr - - PowerPoint PPT Presentation

Uncovering The New Unfair Contracts Law For Small Businesses: Liabilities, Leases and Legalities

Dr Michael Schaper ACCC Deputy Chair Institute of Public Accountants 2017 Tasmania Congress

Competition and consumer issues in Tasmania

37,049 businesses

• perating in

Tasmania in 2016

4063

entries

3929

exits

Source: ABS cat no 8165.0.

2017: TP Jones stores purchased by Roberts Ltd (Ruralco) 2016: Momentum Energy (owned by Hydro Tas) issued with infringement notices for renewable energy advertising claims 2016: Market study into Launceston petrol prices 2012: Court action against Victorian business claiming meat was from King Island

Unfair Contract Term Laws

Protect both consumers and small businesses from unfair terms where they have little or no opportunity to negotiate New law applies to standard form small business contracts entered into or renewed since 12 November 2016

Consumer Example: ACCC v Chrisco Hampers

In 2015, the Federal Court found that Chrisco included an unfair contract term in 2014 lay-by agreements relating to the ‘HeadStart Plan’

• The term allowed Chrisco to continue

to take payments by direct debit after the consumer had fully paid for their lay-by order

• Consumers were required to ‘opt out’

to avoid having further payments automatically deducted

Why Do Small Businesses Need Protection?

On average small businesses were offered about 8 standard form contracts in the past 12 months Small businesses are less likely to thoroughly review contracts … too complicated and they lack legal expertise 30% of small businesses spend less than 9 minutes reviewing standard form contracts 60% of small businesses claimed to have experienced unfairness in terms and conditions 44% of small businesses reported experiencing some harm as a result of the unfair terms

Source: The Commonwealth Treasury, on behalf of CAANZ, undertook a survey from 23 May 2014 to 1 August 2014 on business contracting practices and unfair contract terms.

What’s An Unfair Contract Term?

Standard form contracts cannot contain terms that:

cause a significant imbalance in rights are not reasonably necessary to protect the business’s interests, and cause any detriment to the consumer

• r small business

A court or tribunal looks at transparency and the contract as a whole before deeming a term unfair. Unfair term is void (treated as though it never existed), however the rest of contract will continue to bind. Terms that set out the price are not covered by the UCT law.

To Whom Does The Small Business Unfair Contract Law Apply?

Applies to standard form contracts One of the parties to contract has less than 20 employees

Upfront price is less than $300,000 ($1 million for multi- year contracts)

Laws enforced by ASIC (financial products and services), and ACCC and state/territory ACL regulators (every-day goods and services)

Industry review

Three common problems Terms allowing the contract provider:

to unilaterally vary all terms potentially broad and unreasonable powers to protect themselves against loss or damage an unreasonable ability to cancel or end an agreement

• x

The ACCC conducted a review into potential unfair terms in standard form contracts covering:

advertising telco retail leasing independent contracting franchising waste management agriculture

Advertising

• A standard form contract for

advertising included a term allowing the publisher to remove content for any reason without prior notice

• The publisher amended the term so it

can only remove an advertisement in limited, defined circumstances (such as being obscene or defamatory)

Response

Telecommunications

• Telco providers impose ‘early

termination charges’ (using various calculations) on customers that cancel their contracts before the end of the specified term

• One provider removed the charge on

some SB plans, only requiring payment for the device. Another provider agreed to review charges to ensure they are fair and reasonable

Response

Franchising

• A franchise agreement requires

attendance at training courses or

• meetings. The term says the

franchisee must pay $1000 if they fail to attend

• The franchisor amended the term so

that franchisees only pay the cost per person of the training

Response

The contract between Mrs Smith’s Bakery and Big Supplier says:

• The agreement lasts for 12 months and sets a price of $3

per muffin

• The contract will automatically renew if Mrs Smith’s

Bakery doesn’t opt out of the agreement six months before it ends

• Big Supplier can change the price of its muffins at any

time, and Mrs Smith can’t terminate the contract if it does

Mrs Smith’s Bakery

What’s Fair Under The New Law?

Excluded Contracts and Terms

Excluded contracts

• Contracts entered into before

12 November 2016 (unless renewed on or after this date)

• Shipping contracts
• Constitutions of companies,

managed investment schemes or

• ther kinds of bodies
• Certain insurance contracts
• (eg car insurance)
• Contracts in sectors exempted by

the Minister (no sectors exempt) Excluded terms

• Terms defining the main subject

matter of the contract

• Terms setting the upfront price

payable

• Terms required or permitted by

law (eg Franchising Code).

What Financial Products & Services Are Likely To Be Covered?

• Contracts for business loans
• Credit cards
• Client or broker agreements
• Contracts covered by an industry

code, such as – the Code of Banking Practice – the Customer Owned Banking Code of Practice

www.asic.gov.au

For more information

Potential Unfair Terms In Financial Contracts

Source: ASIC

Automatic Rollover

• A small business enters into a

fixed-term lease. At the end of the lease term, unless it elects to purchase the goods or has made arrangements to return the goods, the firm is automatically entered into another fixed-term

• lease. To exit this new lease

contract, early termination fees apply. Right To Unilaterally Vary The Contract

• A small business enters into a

loan contract. Under a term of the contract, the lender has the right to vary any term or condition of the contract, including interest or fees, if notice is given in writing. The small business does not have the right to end the contract, even if the lender increases its fees significantly (e.g. by 20%).

Determining Upfront Prices In Financial Contracts

Source: ASIC

• Scenario: A small business seeks a loan of

$950,000 over 25 years from a large

• business. The interest rate on the loan is 10%

per year. A late fee of $50 is payable for each late payment.

x

When assessing whether a small business credit contract falls within the $300,000 threshold or $1 million for contracts for more than 12 months, any interest payable or contingent fees are excluded from upfront price payable.

Frank enters into a three year franchise agreement with Big Franchise. The agreement includes the following fees:

• Initial (up-front) franchise fee $400,000
• Royalty of 5% of future sales (volume

unknown)

• Termination fee $6,000

Frank’s Franchise

So What Is Included in Upfront Price?

Accountancy Engagement Letters

• Is the letter a standard form? Are the terms offered
• n a take it or leave it basis?

Key Question

• There is a legal presumption that a contract is a

standard form - unless you can show otherwise

Prove Otherwise

• Does the letter refer to other documents which

must be complied with? They may also be covered

Other Documents

Complaining About Financial Contracts

• You can make a complaint directly to your financial services provider.
• If they cannot resolve your complaint, try the Financial Ombudsman Service or Credit &

Investments Ombudsman (if provider is a member of the scheme and dispute falls within their jurisdiction).

• You can also make a complaint directly to ASIC. However, ASIC does not generally act for

individuals and will only take action if the matter is within their area of responsibility.

• It is not ASIC's role to endorse contract terms or to state that they are unfair.

– Only a court can decide whether or not a term is unfair.

• ASIC, as well as any party to the contract, may apply to a court to have

a term declared unfair.

• 1300 300 630 or www.asic.gov.au

Late payments – a growing area of concern. Credit provider reports – Veda and others. Increasing director accountability for franchising disclosure - current Pastacup case.

Other Current Issues

Has applied to ‘large merchants’ since 1 September 2016. Will apply to all other merchants (businesses) from 1 Sept 2017. Businesses can recover their costs of accepting cards. Permitted cost of acceptance includes the merchant service fee, rental and maintenance of terminals for card payments, and other fees. Applies to Visa (credit, debit and prepaid), MasterCard (credit, debit and prepaid), EFTPOS, and ‘Companion’ AMEX cards (issued by banks etc). Excludes Bpay, PayPal, Diners Club, taxis. From 1st June, banks must provide businesses with a statement

• utlining their cost for each applicable card scheme.

New Law Banning Excessive Payment Surcharges

ACCC Small Business Contacts

Small business helpline 1300 302 021 www.accc.gov.au/smallbusiness

Small Business Info Network Sign up at www.accc.gov.au/sbin Free Online Training Programs www.ccaeducationprograms.org Small Business in Focus