Friday, 7 November 2008

ACCC to target tardy traders


Introduction
ACCC Chairman Graeme Samuel recently stated that the ACCC will target big businesses that unilaterally and arbitrarily delay payment to a small business supplier. The ACCC indicated that such conduct is likely to constitute unconscionable conduct under the Trade Practices Act 1974 (TPA) - http://www.smartcompany.com.au/Free-Articles/The-Briefing/20081027-ACCC-to-go-after-late-payers.html

Why is the ACCC interested in this area? What provisions can it use to challenge this conduct?

Background
The ACCC’s concern about big businesses delaying payment to small businesses is somewhat surprising. In the past, actions by big businesses to change trading terms unilaterally or to delay payment were usually seen by the ACCC as raising private contractual issues that did not require ACCC intervention. The ACCC left small traders to take their own legal action.

There were some exceptions. One particularly well known example a number of years ago involved a major grocery wholesaler that unilaterally extended its payment terms to small business suppliers from 30 to 120 days. To add insult to injury when this wholesaler did get around to paying their small business suppliers, they would automatically discount the invoice to give itself the benefit of the early payment discount!

Another well-known practice by the major grocery wholesalers and retailers, which was investigated by the ACCC, involved storage pallets. Storage pallets for grocery items are rented by the party that has use of them. The small business supplier pays the rental on the pallet from the time their goods are loaded onto the pallet until the time that the goods are delivered to the wholesaler or retailer. On delivery of the goods, property in the pallet passes from the small business supplier to the wholesaler or retailer which is then responsible for the rental payments.

Many of the major wholesalers and retailers decided some years ago to unilaterally change the terms on which they accepted pallets from small business suppliers. Instead of property in the pallet passing when the small business supplier delivered it to their wholesaler or retailer customer, the passing of property in the pallet was delayed for 30 days by imposition of a new contractual term by the wholesalers and retailers into their agreements with small business suppliers. As a result, the small business supplier remained liable for paying rental on the pallet for 30 days after it had come into the possession of the major wholesaler or retailer. The small business supplier also became legally responsible for any damage to the pallet which was caused by the wholesaler or retailer while it was in their possession.

This unilateral change resulted in most of the pallet rental costs of the major wholesalers and retailers being transferred to small business suppliers without their agreement.

Recent developments
The ACCC’s interest in policing tardy payments to small businesses follows a commitment made by Prime Minister Kevin Rudd at the small business summit in Brisbane on 24 October 2008. At this summit, Kevin Rudd announced that all Federal Government Departments would pay small business suppliers and contractors within 30 days as a way of helping them with their cash flow during these current difficult economic conditions. If a Department fails to pay within 30 days, the small business will have the right to charge penalty interest on the unpaid debt.

Kevin Rudd also called on big business to follow the Federal Government’s example and commit to paying small businesses within 30 days - http://www.news.com.au/business/story/0,27753,24553740-5017675,00.html

A few days later, on 27 October 2008, Graeme Samuel was reported as stating that the ACCC could take action against businesses that delayed paying their small business suppliers. For example, extending payment terms from 30 to 120 days could be seen as constituting unconscionable conduct - http://www.smartcompany.com.au/Free-Articles/The-Briefing/20081027-ACCC-to-go-after-late-payers.html

On 28 October 2008, there were further detailed reports about the ACCC stance on tardy payers. In one such report, the Chairman of the ACCC identified a number of factors that would be relevant to its assessment of whether a particular matter should be investigated as potentially unconscionable. It would be relevant that the conduct had been “unilateral”, “arbitrarily applied” “harsh and oppressive”, "imposed without consultation” and caused “extraordinary hardship” - http://www.smartcompany.com.au/Free-Articles/The-Briefing/20081027-ACCC-to-go-after-late-payers.html

The ACCC’s public stance on late payments to small businesses by big businesses was immediately praised by the Rudd Government - http://www.abc.net.au/news/stories/2008/10/28/2402841.htm?section=justin

Relevant legislation
There are two provisions in the TPA that could be used to target unconscionable conduct in the commercial context, sections 51AA and 51AC.

Section 51AA requires a finding that the small business suffered from a special disadvantage such as illiteracy, low levels of education, a significant lack of commercial sophistication. Therefore, section 51AA is unlikely to be the ACCC’s preferred approach to this issue.

Section 51AC is more likely to be used by the ACCC to target tardy traders.

Section 51AC provides –
(1) A corporation must not, in trade or commerce, in connection with:
(a) the supply or possible supply of goods or services to a person (other than a listed public company); or
(b) the acquisition or possible acquisition of goods or services from a person (other than a listed public company);
engage in conduct that is, in all the circumstances, unconscionable.
Section 51AC prohibits unconscionable conduct both in a supply and acquisition situation. In the context of taking action against big businesses for tardy payment, it is the acquisition situation that would be relevant. In other words –
(1) A big business must not, in trade or commerce, in connection with:
(b) the acquisition of goods or services from a small business (other than a listed public company);
engage in conduct that is, in all the circumstances, unconscionable.
In subsection 51AC(4) a range of non-exclusive factors are listed which the Courts are to consider in determining whether unconscionable conduct has occurred in an acquisition situation. In the following section, each factor in subsection 51AC(4) with be discussed in turn.
(4) Without in any way limiting the matters to which the Court may have regard for the purpose of determining whether a corporation or a person (the acquirer ) has contravened subsection (1) or (2) in connection with the acquisition or possible acquisition of goods or services from a person or corporation (the small business supplier), the Court may have regard to:
(a) the relative strengths of the bargaining positions of the acquirer and the small business supplier...
Factor (a) requires that there be a disparity in bargaining power between the big business acquirer and the small business supplier. This is not only a question purely of relative size but is likely to extend to an analysis of how dependant the small business is on the big business acquirer. For example, does the big business acquirer purchase a large proportion of the small business’s total sales or is there an exclusive supply arrangement?

This factor will be relatively easy to establish in the context of tardy payers, as the small business has already supplied the goods or services to the big business and is simply awaiting payment. It would not be feasible for the small business to take legal action against its customer to recover debts owing due to the cost of the proceedings and likely loss of that customer’s business.
(b) whether, as a result of conduct engaged in by the acquirer, the small business supplier was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the acquirer...
Factor (b) relates to whether the conditions imposed by the big business acquirer were reasonably necessary for the protection of its legitimate business interests. It is hard to see how the unilateral decision of the big business acquirer to delay payment or change other terms of the contract could be seen as protecting a legitimate interest. Rather such conduct is likely to be seen as opportunistic and illegitimate.
(c) whether the small business supplier was able to understand any documents relating to the acquisition or possible acquisition of the goods or services...
Factor (c) is not likely to be relevant to the issue of late payers.
(d) whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the small business supplier or a person acting on behalf of the small business supplier by the acquirer or a person acting on behalf of the acquirer in relation to the acquisition or possible acquisition of the goods or services...
Factor (d) is likely to be one of the most important factor in establishing that late payment is unconscionable. It is likely that the very act of unilaterally changing trading terms would be seen as by the Court as an unfair tactic. There may be instances where a big business withheld payment in an attempt to extract some other concession. For example, where a big business withheld payment to a small business for the purpose of extracting some favourable trading terms such as larger volume rebates or stocking payments. In such circumstances, the big business may be seen as using unfair pressure on the small business.
(e) the amount for which, and the circumstances in which, the small business supplier could have supplied identical or equivalent goods or services to a person other than the acquirer...
Factor (e) is not relevant to an investigation into tardy payment. Rather this factor arises when a big business tries to push down the selling prices of a supplier below the prices charged by that supplier’s competitors.
(f) the extent to which the acquirer's conduct towards the small business supplier was consistent with the acquirer's conduct in similar transactions between the acquirer and other like small business suppliers...
Factor (f) is quite similar in its focus to factor (e). This focus is on determining whether the big business acquirer is treating the same types of suppliers in a different or discriminatory manner. This factor asks whether the big business’s conduct towards a small business supplier is consistent with their conduct towards other similar kinds of suppliers in like transactions.

Indeed factors (e) and (f) could be seen as encapsulating the essence of unconscionable conduct – namely the singling out a particular small business operator for discriminatory and unfair treatment usually to achieve some ulterior purpose.
(g) the requirements of any applicable industry code...
(h) the requirements of any other industry code, if the small business supplier acted on the reasonable belief that the acquirer would comply with that code
Factors (g) and (h) will not be relevant to the majority of situations of tardy payments as there are no general industry codes of conduct. The Franchise Code of Conduct is unlikely to apply as it is usually the franchisee that owes money to the franchisor. The Horticulture Code and Oil Code could be relevant to small businesses in those particular industries.
(i) the extent to which the acquirer unreasonably failed to disclose to the small business supplier:
(i) any intended conduct of the acquirer that might affect the interests of the small business supplier; and
(ii) any risks to the small business supplier arising from the acquirer's intended conduct (being risks that the acquirer should have foreseen would not be apparent to the small business supplier); and
Factors (i) is unlikely to be relevant as the act of delaying payment or otherwise unilaterally altering trading terms would appear to be opportunistic conduct rather than planned. Tardy payment is a change to the ordinary trading relations between a big and small business rather than an intended, but undisclosed, future plan of action.
(j) the extent to which the acquirer was willing to negotiate the terms and conditions of any contract for the acquisition of the goods and services with the small business supplier; and
(ja) whether the acquirer has a contractual right to vary unilaterally a term or condition of a contract between the acquirer and the small business supplier for the acquisition of the goods or services; and
Factors (j) and (ja) would have to be satisfied for any action against a tardy payer to be successful. Factor (j) refers to the willingness of the big business acquirer to negotiate terms and conditions. Clearly if the big business acquirer was willing to discuss terms and conditions with the small business, it would be very difficult to establish unconscionable conduct. For such an action to be successful, the big business acquirer would have to be acting unilaterally.

Factor (ja) asks whether the acquirer has a contractual right to unilaterally vary a term or condition of a contract with a small business supplier. If there is such a right to vary terms unilaterally then any action for tardy payment would not succeed. Indeed, satisfaction of this factor would appear to be a necessary precondition to running any successful action against a big business for tardy payment.
(k) the extent to which the acquirer and the small business supplier acted in good faith.
Finally, factor (k) inquires into the extent to which both parties acted in good faith. It is arguable that the unilateral alteration of a long standing trading arrangement without notice to the small business would not be considered to be acting in good faith.

Conclusions
On an impressionistic level, section 51AC would appear to give the ACCC adequate power to take action against big business acquirers that unilaterally delayed payments or otherwise sought to change pre-existing trading terms. A number of the relevant factors under subsection 51AC(4) could be satisfied in most cases of tardy payment. It also appears that factors (j) and (ja) would necessarily have to be satisfied for any action for tardy payment to be successful.

However, as stated above, the essence of commercial unconscionable conduct is the singling out a particular small business for discriminatory and unfair treatment usually to achieve some ulterior purpose. The problem with using section 51AC to challenge tardy payers is that their conduct may not be discriminatory in its application. Rather, the big business acquirer is more likely to unilaterally delay payment or change trading terms for all its small business suppliers across the board. Furthermore, the big business acquirer is unlikely to have any ulterior purpose in delaying payment or changing trading terms other than to improve their cash flow position.

Ultimately, it is unlikely that a Court is going to find that even the tardiest payers have engaged in unconscionable conduct. Courts are much more likely to decide that late payments and other unilateral changes to trading terms should properly be characterised as a breach of contract sounding in damages, rather than as some new species of unconscionable conduct.

This does not mean that large companies should be blasé about this issue. Even though the ACCC is unlikely to be ultimately successful in such cases, this does not mean that the ACCC will not vigorously pursue a handful of investigations into such conduct. Big businesses should appreciate that being the subject of such an ACCC investigation, particularly an unconscionable conduct investigation, is likely to be a very costly exercise that would be best avoided.

The best way to avoid unwanted ACCC attention in this area is to make sure that big businesses discuss any proposed changes to payment terms and other contractual terms with their small business suppliers in an effort to reach a mutually acceptable position.

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