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 2017: TP Jones stores purchased by Roberts Ltd (Ruralco) 37,049 businesses operating in 2016: Momentum Energy (owned by Tasmania in 2016 Hydro Tas) issued with infringement notices for renewable energy advertising claims 4063 3929 entries exits 2016: Market study into Launceston petrol prices Source: ABS cat no 8165.0. 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 Unfair contract terms
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? A court or tribunal looks at Standard form contracts transparency and the contract cannot contain terms that: as a whole before deeming a term unfair. cause a significant imbalance in Unfair term is void (treated as rights though it never existed), however the rest of contract will continue to bind. are not reasonably necessary to protect the business’s interests, and Terms that set out the price are not covered by the UCT law. cause any detriment to the consumer or small business
To Whom Does The Small Business Unfair Contract Law Apply? One of the parties Upfront price is less Applies to to contract has than $300,000 standard form less than 20 ($1 million for multi- contracts year contracts) employees Laws enforced by ASIC (financial products and services), and ACCC and state/territory ACL regulators (every-day goods and services)
Industry review • x The ACCC conducted a review into potential unfair terms in standard form contracts covering: Three common problems Terms allowing the contract advertising provider: telco to unilaterally vary all terms retail leasing potentially broad and independent contracting unreasonable powers to protect themselves against franchising loss or damage waste management an unreasonable ability to cancel or end an agreement 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 Response limited, defined circumstances (such as being obscene or defamatory)
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 Response payment for the device. Another provider agreed to review charges to ensure they are fair and reasonable
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 Response that franchisees only pay the cost per person of the training
What’s Fair Under The New Law? Mrs Smith’s Bakery 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
Excluded Contracts and Terms Excluded contracts Excluded terms • Contracts entered into before • Terms defining the main subject 12 November 2016 (unless matter of the contract renewed on or after this date) • Terms setting the upfront price • Shipping contracts payable • Constitutions of companies, • Terms required or permitted by managed investment schemes or law (eg Franchising Code). other kinds of bodies • Certain insurance contracts • (eg car insurance) • Contracts in sectors exempted by the Minister (no sectors exempt)
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 For more information www.asic.gov.au
Potential Unfair Terms In Financial Contracts Right To Unilaterally Automatic Rollover Vary The Contract • A small business enters into a • A small business enters into a fixed-term lease. At the end of the loan contract. Under a term of the lease term, unless it elects to contract, the lender has the right purchase the goods or has made to vary any term or condition of arrangements to return the the contract, including interest or goods, the firm is automatically fees, if notice is given in writing. entered into another fixed-term The small business does not lease. To exit this new lease have the right to end the contract, contract, early termination fees even if the lender increases its apply. fees significantly (e.g. by 20%). Source: ASIC
Determining Upfront Prices In Financial Contracts 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. • 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% x per year. A late fee of $50 is payable for each late payment. Source: ASIC
So What Is Included in Upfront Price? Frank’s Franchise 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
Accountancy Engagement Letters • Is the letter a standard form? Are the terms offered Key Question on a take it or leave it basis? Prove • There is a legal presumption that a contract is a standard form - unless you can show otherwise Otherwise Other • Does the letter refer to other documents which must be complied with? They may also be covered 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
Other Current Issues Late payments – a growing area of concern. Credit provider reports – Veda and others. Increasing director accountability for franchising disclosure - current Pastacup case.
New Law Banning Excessive Payment Surcharges 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 1 st June, banks must provide businesses with a statement outlining their cost for each applicable card scheme.
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
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