Pay party clauses

‘They’re gouging hotel owners’: Labor to outlaw pay parity clauses to challenge Expedia, Booking.com duopoly Labor has announced another competition and consumer policy - namely a commitment to "outlaw" target pay parity clauses amongst online travel agents. Labor has been very active announcing a number of proposed policies in the competition and consumer area. On the other hand, as as far as I can tell, the Coalition hasn't announced any policies in this area.

https://www.smartcompany.com.au/industries/tourism/labor-expedia-booking-pay-parity/?

Puffery pastry

Retail Food Group breached consumer law in $400,000-plus franchise bungle, Court finds Important case in relation to the obligations of franchisors to franchisees, particularly the representations about likely future financial performance. Still scratching my head at RFG's claim that its pre-contractual representations, including those about likely future financial performance, were mere puffery. It's almost likely saying no reasonable person could believe anything which RFG says about the likely performance of its stores, particularly Michel's Patisserie stores!

https://www.smartcompany.com.au/industries/retail/retail-food-group-breach-consumer-law/

Ultra Tune to pay $2.6 million penalty

While the full judgment is not out yet, it promises to be a very interesting read given these comments by Justice Bromwich, quoted in the ACCC Media Release: “The cover up that Ultra Tune attempted reflects a significantly heightened need for deterrence, in relation to conduct that was already a most serious and fundamental breach of the Franchising Code in taking the deposit in the first place, reflecting as it does Ultra Tune’s attitude in relation to its contravening conduct,” Justice Bromwich said. “There must be no tolerance for manufacturing evidence to deceive a regulator, and even less when the deception is maintained in this Court.” Justice Bromwich also ordered Ultra Tune to pay the ACCC's costs on an indemnity costs.

https://www.accc.gov.au/media-release/ultra-tune-to-pay-26-million-penalty

Federal Government failing small business in legal services procurement

I always like having a brief look at the current Panel Head Agreement for the Provision of Legal Services to the Australian Government just to see how unfriendly it is to small business law firms. The current version of the Agreement continues in that long tradition by requiring law firms to - (1) provide a wide range of value added services at no cost, including training sessions and letting government departments use your offices at no charge (2) take out high levels of insurance cover (3) provide extensive warranties and indemnities (4) commit to highly onerous reporting requirements and (5) pay the AG's a Panel Fee set as a percentage of total billings. Surprisingly, one major legal area which is not covered by the Agreement is the provision of consumer law advice. This seems particularly strange given the extension of the unfair contract term (UCT) laws to small businesses from November 2016.

Surely Federal Government departments are going to need some advice about how not to fall foul of these UCT laws in their standard form contracts, most likely starting with the AG's own Agreement for the Provision of Legal Services!

ACCC Essentials – understanding the Australian Competition and Consumer Commission’s 2018 Compliance and Enforcement Priorities

Introduction

It is vitally important for all Australian businesses to have a thorough understanding of the way in which the ACCC prioritises its enforcement activities, given the highly interventionist and aggressive approach which the ACCC takes to both competition law and consumer protection matters.  Indeed, the ACCC is one of the most aggressive enforcers of the competition law provisions in the world.

Furthermore, the ACCC has been successful in its calls for significant increases to the maximum financial penalties for contraventions of the Australian Consumer Law 2010 (ACL), with the proposed changes likely to be in effect by 1 July 2018.   

It is also important to recognise the strong reputation which the ACCC has amongst consumers as an active and effective regulator. One of the implications of the ACCC’s strong reputation is that any business pursued by the ACCC is usually judged very harshly by the Australian public, the media and their customers.  As a result, businesses which become the subject of an ACCC investigation or legal proceedings brought by the ACCC often suffer significant and long-lasting reputational and brand damage.

This paper will outline the Australian Competition and Consumer Commission’s (ACCC) approach to enforcement and identify the key enforcement and compliance priorities.

Why does the ACCC have priorities?

The main explanation for having priorities is that it provides greater transparency in the way the ACCC will be using its resources. However, there are also important practical reasons for having priorities.

As explained by ACCC in its most recent Annual Report it received 405,382 contacts in the 2016-2017 financial year, of which 234,913 were recorded on the ACCC database.[1]

The following table shows a rough breakdown of how those contact and complaints are processed by the ACCC:

As is apparent, there is no way that the ACCC could pursue all of these complaints. Rather, the only way the ACCC could pursue any of these complaints effectively is by establishing clear and specific enforcement priorities.

While the ACCC received 405,282 contacts last year it was only able to conduct initial investigations into 259 of those complaints. An initial investigation generally involves the ACCC writing a letter to the business which has been complained about, to ask for an explanation of their conduct. This number is significantly lower than in the previous year where the ACCC conducted 427 initial investigations. One explanation for the reduction is that the ACCC is becoming much more selective in the matters it is deciding to pursue.

The ACCC commences in-depth investigations in relation to a much small subset of the total complaints. These are investigations which the ACCC Commissioners have determined are important and need to be pursued in more depth.  These investigations would have been allocated an initial investigatory and/or legal budget and often result in litigation.  The number of in-depth investigations has also declined significantly, from 167 in the 2015-16 financial year to 79 in the last financial year.

Finally, the ACCC listed 24 litigation matters in its 2016-2017 Annual Report. However, if one considered all formal resolutions, such as section 87B undertakings and infringement notices, the total number of formal resolutions is likely to be much higher at around 50 formal resolutions in the 2016-2017 period.

What are the ACCC’s 2017 Enforcement and Compliance Priorities?

ACCC’s Goals

On 20 February 2018, the ACCC released its Compliance and Enforcement Priorities for 2018 (Priorities).[2]  These Priorities must be considered as a whole, as the ACCC takes a multifaceted approach to selecting the matters which it will pursue.

First, the ACCC will consider the overall goals of their legislation. Second, it will consider the outcomes which it is likely to achieve by pursuing a particular enforcement matter and the type of conduct which the relevant business is engaging in.  Finally, the ACCC will determine whether the conduct falls into the specific ACCC 2018 priorities or “hit list”.

As a guiding principle, the ACCC will not pursue any enforcement matter unless it is confident that:

(1)   it can achieve meaningful remedies; and

(2)   the conduct is of a type which has caused or may cause significant consumer detriment, including detriment to small business consumers.

There are many cases where the ACCC could achieve a meaningful outcome but decides not to pursue the matter because the complainant has the resources and motivation to achieve the same outcomes through private action.  Similarly, there are many matters that involve particularly egregious conduct, which the ACCC will not pursue because it will not be able to achieve worthwhile outcomes, for example in relation to some phoenix activity.

The ACCC’s enforcement activity is directed achieving the following three main goals:

·        promoting competition amongst businesses

·        promoting fair trading by business

·        protecting consumers in their dealings with business.

These goals reflect both the competition and consumer law functions of the ACCC, which is to fix market failure and to ensure that consumers have as near to perfect information as possible, so they can make rational purchasing decisions.

ACCC’s 2018 Hit-List

The ACCC has made some changes in the 2018 Priorities document to the way in which it outlined its Priorities in the past. In previous versions of the Priorities, the ACCC would set out the general priority factors before listing the specific priority areas or “Hit List”. 

However, in the 2018 Priorities the ACCC effectively started with its “2018 Hit-List” or the specific areas where the ACCC will be focusing a large proportion of its enforcement resources in the coming year.

The 2018 “Hit List” is as follows:

• consumer issues in new car retailing, including responses by retailers and manufacturers to consumer guarantee claims, and other matters identified in the ACCC’s 2017 New Car Retailing Industry Report

• consumer issues in the provision of broadband services, including addressing misleading speed claims and statements made during the transition to the NBN

• systemic issues involving large or national traders avoiding or misrepresenting consumer guarantee rights

• competition issues in the financial services sector

• competition and consumer issues in the provision of energy as an essential service, including matters identified in the ACCC’s retail electricity pricing inquiry report and the ACCC’s wholesale gas inquiry

• competition and consumer issues concerning the use of digital platforms, algorithms and consumer data, with a focus on emerging markets and matters identified by the ACCC’s digital platforms inquiry

• ensuring small business receives the protections of industry codes and the unfair contract terms law, with a focus on Franchising Code of Conduct issues involving large or national franchisors

• ensuring better product safety outcomes for consumers in the online marketplace

• issues arising from the Takata airbags recall

• conduct that may contravene the new misuse of market power provisions and concerted practice provisions of the Act

• competition and consumer issues in the agriculture sector, with a focus on the dairy inquiry, Horticultural Code of Conduct enforcement, and analysis of the viticulture industry

• competition issues in the commercial construction sector

The interesting aspect of the 2018 Priorities is that many of these Priority areas were identified as Priorities in 2017.   For example, new car retailing, agriculture, commercial construction, unfair contracts, franchising, product safety issues in relation online platforms and broadband speed and performance claims were all identified as Priorities in 2017. This suggests that the ACCC did not achieve everything it wished to achieve in relation to these areas in 2017.

The ACCC has also identified a number of new Priority areas in 2018 - namely:

• financial services
• energy
• digital platforms, algorithms and consumer data
• Takata airbags recall
• misuse or market power and concerted practices.

That these specific areas would be Priority areas in 2018 was to be expected.  For example, it was anticipated that financial services would be a priority area given:

• that the government gave the ACCC additional resources in the 2017-2018 Budget to establish a dedicated Financial Services Unit; and

• the commencement of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in February 2018

The ACCC has also been doing extensive work in the energy sector for some time, through market studies into the areas of gas and electricity.  The inclusion of energy in the 2018 Priorities may suggest that the ACCC will be looking at taking enforcement action in the energy sector in 2018.

Digital platforms, algorithms and consumer data is clearly a priority area in 2018 due to the commencement of the Digital Platforms Enquiry. In December 2017, the Government directed the ACCC to conduct an 18 months investigation into digital platforms, focusing on such companies as Google and Facebook amongst others. 

The ACCC has also had a long running involvement in the Takata airbag voluntary recall. However, the ACCC’s role was escalated significantly in February 2018 when the Assistant Minister to the Treasurer decided to issue a compulsory recall of the Takata airbags.

Finally, the ACCC will be focusing its attention in 2018 on the investigation and enforcement of conduct which is caught by the new changes to the Competition and Consumer Act 2010 (CCA), primarily the changes to the misuse of market power provisions and the introduction of the concerted practices provisions.

One interesting addition to the 2018 Priorities is the reference to “systemic issues involving large or national traders avoiding or misrepresenting consumer guarantee rights”.  It would appear specific area that this has been added to the 2018 Priorities due to a concern within the ACCC about large national traders are continuing to mislead their consumers about their consumer guarantee rights.[3]

There are also a number of industries which were on the 2017 Priority Hit List which can now breathe a collective sigh of relief as they did not make the cut in 2018 – namely:

• airlines in relation to their consumer guarantees;
• businesses involved in country of origin labelling;
• businesses involved in commission-based sales business models; and
• private health insurers.

Enduring priorities

The ACCC has also adopted a practice of identifying a number of enduring priorities defined as conduct which is so detrimental to consumer welfare and to the competitive process that the ACCC will always regard them as a priority. The enduring priority areas have not changed in 2018:

Cartel conduct

The ACCC will always prioritise cartel conduct causing detriment in Australia. When dealing with international cartels, the ACCC will focus on pursuing cartels that have a connection to, or cause detriment in Australia; that is, cartels that involve Australians, Australian businesses or entities carrying on business in Australia

Anti-competitive conduct 

The ACCC will always prioritise anti-competitive agreements and practices, and the misuse of market power.

Product safety

The ACCC will always prioritise product safety issues which have the potential to cause serious harm to consumers.

Vulnerable and disadvantaged consumers

The ACCC recognises that vulnerable and disadvantaged consumers can be disproportionately impacted by conduct in breach of the Act. The ACCC therefore prioritises conduct that impacts these consumers.

Conduct impacting Indigenous Australians

The ACCC acknowledges that certain conduct in breach of the Act has the potential to specifically impact on the welfare of Indigenous Australians. The ACCC also recognises that Indigenous consumers living in remote areas face particular challenges in relation to asserting their consumer rights. The ACCC will always prioritise its work in these areas while these challenges remain.

Priority factors

Finally, the ACCC outlines the general priority factors which it will weigh up when making a decision to pursue a “non-Priority area” matter. These general priority areas are:

• conduct that is of significant public interest or concern 

• conduct that results in substantial consumer or small business detriment 

• national conduct by large companies, recognising the potential for greater consumer detriment and the likelihood that conduct of large businesses can influence other market participants 

• conduct involving a significant new or emerging market issue or where our action is likely to have an educative or deterrent effect 

• where our action will assist to clarify aspects of the law, especially newer provisions of the Act.

The above factors largely duplicate the general priority factors set out in 2017.  Notably two factors which the ACCC will no longer take into consideration when deciding whether to pursue an enforcement action are the blatancy of the conduct and whether the relevant business is a serial offender – both of which appear to be surprising omissions.

                                                                               

Increased ACL penalties

Without doubt the most important development in 2018 will be the introduction of vastly higher penalties for contraventions of the ACL.

Currently, the maximum penalties for contravening the ACL are $1.1 million for corporations and $220,000 for individuals for each contravention.

However, in late 2017, Parliament released the draft amendment bill on ACL penalties.[4] If passed this bill will increase the maximum penalties for civil and criminal contraventions of the ACL to:

• $10 million; or
• if the court can determine the total value of the benefit obtained from the offence, three times the value of that benefit; or
• if the court cannot determine the value of the benefit, 10% of the corporation’s annual turnover in the preceding 12 months. 

The maximum penalties for individuals will increase to $500,000 per contravention.   

These changes are scheduled to take effect from 1 July 2018.

As is apparent, this amendment represents a quantum leap in terms of the size of penalties which may be awarded by the Court for contraventions of the ACL.  This change should be of particular concern for businesses with a history of previous contraventions of the ACL.  Courts are much more likely to impose multi-million-dollar penalties against companies which have engaged in multiple prior contraventions of the ACL.

Essentials

In order to minimise risks and avoid problems with the ACCC (and other State and territories regulators) it is important for businesses to conduct a detailed Competition and Consumer Law Risk Assessment of every aspect of their operation. This would start with an identification of all risks in the business both from a:

1. competition perspective – for example, the nature of all agreements with competitors, suppliers and service providers, and other third parties and

2. consumer law perspective – for example, the representations made to consumers in marketing and promotional materials, the fairness of standard form contract terms and how complaints handling procedures are managed

Once the business has conducted detailed Competition and Consumer Law Risk Assessment, businesses should take steps to implement a comprehensive and up-to-date Compliance Program, consisting of the following elements:

1. Compliance Policy

2. The appointment of a Compliance Officer

3. Other relevant policies such as a Complaints Handling Policy and a Whistle-blower Policy

4. The establishment of an effective Complaints Handling procedure and

5. Regular Competition and Consumer Law Compliance Training.

Taking steps to conduct a Risk Assessment and implement a Compliance Program will benefit the business by helping them to better identify and manage all competition and consumer law risks in the business. Taking these steps will also benefit the business in terms of mitigating the extent and severity of the much larger pecuniary penalties which the ACCC will be seeking from the Courts for ACL contraventions in second half of 2018.

---

[1] ACCC, ACCC – AER Annual Report 2016-2017, Commonwealth of Australia, p 143 at https://www.accc.gov.au/system/files/ACCC%20and%20AER%20Annual%20Report%202016-17_0.pdf

[2] ACCC, 2018 ACCC Compliance and Enforcement Policy, at https://www.accc.gov.au/about-us/australian-competition-consumer-commission/compliance-enforcement-policy-priorities

[3] Rod Sims, 2018 compliance & enforcement priorities, Speech presented at CEDA Sydney, 20 February 2018 at https://www.accc.gov.au/speech/2018-compliance-enforcement-priorities

[4] Treasury Laws Amendment (2018 Measures No.3) Bill 2018 (Cth).

Servcorp cops a serve for unfair contract terms

Servcorp has consented to orders declaring a number of its contractual terms as unfair.  I always like going back and having a looking at the comments the company made when it got sued by the ACCC. Here is what Servcorp said in September 2017: "SRV is disappointed that the ACCC has decided to commence legal proceedings against it,"he (Pearce) said. "SRV maintains that its serviced office agreements are negotiable contracts and do not constitute standard-form contracts regulated by the unfair contract terms regime under the Australian Consumer Law." "In its 39 years of existence, Servcorp's agreements with its clients have never been challenged by any government authority as to their fairness or legitimacy, SRV currently operates in over 60 jurisdictions globally," he said. Servcorp executive director Taine Moufarrige told Fairfax Media that Servcorp has instructed its lawyers, PWC, to defend the proceedings. I really thought (particularly after reading the above fightin' words!) that this case may go the distance, all the way to a judgment. I guess we will have to wait a little bit longer for some meaningful case law in relation to the now not so new UCT laws.

https://www.accc.gov.au/media-release/servcorp%E2%80%99s-business-contract-terms-declared-unfair

Clear and Present Danger: Spotlight on Unfair Contract Terms in Small Business Contracts

Introduction

It is vitally important for all Australian businesses to have a thorough understanding of the new Unfair Contract Term (UCT) laws in relation to small business contracts.  These laws, which came into effect on 12 November 2016, state that any term in a small business standard form contract which is found to be an UCT will be void and unenforceable. While it is ultimately up to a court or a tribunal to determine whether a term is an UCT, the Australian Competition and Consumer Commission (ACCC) and the Australian Securities and Investment’s Commission (ASIC) have now signalled that they will be taking enforcement action in relation to UCTs which they find in small business standard form contracts.

Why was the UCT law introduced?

As explained by the ACCC, the new UCT laws were needed due to the prevalence of UCTs in small business standard form contracts. As stated by the ACCC -[1]

• 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 unfair terms;
• Small businesses are less likely to thoroughly review the contract due to the fact that such contracts are often too complicated and the small business lacks the requisite legal expertise; and
• 30% of small businesses advised that they spend less than 9 minutes reviewing each standard form contract.

The ACCC also found that on average small businesses were offered about 8 standard form contracts over a twelve-month period.

How does the UCT law work?

There are number of discrete steps which businesses need to work through to determine whether a particular term is a UCT:

• Is the contract a standard form contract (SFC)?
• Is the SFC being offered to a small business?
• Is the value of the SFC below the statutory contract value thresholds?
• Is the contract term or the particular type of contract excluded from the new laws?
• Is the term unfair?
• Is the term transparent?
• Have we looked at the whole contract?

1. Is the contract a standard form contract (SFC)

A SFC is a contract which is offered on a take it or leave it basis. In other words, the terms of the contract are not subject to negotiation between the parties. 

Section 27(2) of the ACL sets out a range of factors which a court may take into account to determine whether a contract is a STC:[2]

• Whether one of the parties has all or most of the bargaining power;
• Whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
• Whether another party was, in effect, required either to accept or reject the terms in the contract in the form they were presented;
• Whether another party was given an effective opportunity to negotiate the terms of the contract; and
• Whether the terms take into account the specific characteristics of another party to the particular transaction.

Importantly, section 27 of the ACL creates a reverse onus of proof in relation to whether a contract is a SFC. This section states that if one party to a proceeding alleges that a contract is a SFC, it is presumed to be a SFC unless the other party proves otherwise. Accordingly, larger businesses will have to prove that the contract is not a SFC, which they may be able to do by disproving the factors listed above.

2. Is the SFC being offered to a small business?

If the contract is determined to be a SFC, the next step is to determine whether the SFC has been offered to a small business. 

The UCT laws only apply to SFC’s which are offered to small businesses which are defined as businesses which employ less than 20 people, including casual employees, employed on a regular and systematic basis.

The calculation of the number of employees is made at the time the contract is entered into. This means that an increase in the number of employees employed by a small business, to more than 20 employees, after the entry into various SFCs will not have the effect of excluding its SFC’s from the UCT laws. By the same token, a reduction in the number of staff employed by a business, to below 20 employees, after the entry into various SFCs will not transform all of that business’s SFC into SFC’s which are subject to the new UCT laws.

The ACCC has suggested that if a large business is in doubt about how many employees a business they are dealing with has, they should seek a written assurance from the small business about its employee numbers. The other option suggested by the ACCC is to simply assume that the contract is caught by the new small business UCT laws.

3. Is the value of the SFC below the statutory value limits?

In addition, the employee requirement, there is also contract value threshold which must be satisfied before the new UCT laws apply. The current thresholds are that the total upfront value of the SFC is either below $300,000 for a one year contract or under $1 million for a multiple year contract.

The upfront value of the contract is calculated at the time the contract is entered into and includes any contingent payments which are referrable to the supply. 

However, as explained by the ACCC, any amounts which cannot be calculated with certainty at the time of entry into the contract are unlikely to be included in the upfront price. For example, a franchise royalty which is expressed as a percentage of the franchisee’s sales will not be included in the upfront price calculation. This approach to calculating the upfront price will result in a much large number of SFCs being caught by the new UCT laws for small business.

4. Is the contract term of contract excluded from the new laws?

The next step is to work out whether any of the various exclusions apply.

The most significant exclusion relates to the upfront price payable. The legislation makes it clear that a term which “sets the upfront price payable under the contract” is not an UCT. In other words, the new UCT laws cannot be used by small businesses to effectively argue that the price payable under the contract is unfair and as such that they have no obligation to pay for the goods or services. 

Section 26 of the ACL also excludes terms from the scope of the UCT laws if they define the subject matter of the contract. A small business cannot claim that a term giving effect to the supply of the primary good or service is an unfair term. Indeed, it would be a strange result if a small business could allege that a contract for the supply of a particular product was unfair because the small business did not now wish to purchase that particular product.

Other exclusions in terms of subject matter of the term include any terms which are required or expressly permitted by a law of the Commonwealth, a State or a Territory. This could include terms requiring a small business to obtain a particular State or Territory licence or terms which reflect legislative provisions which permitting the limitation of liability (for example exclusion of liability for high risk recreational services).

The legislation also specifically excludes particular types of contracts from the scope of the new UCT laws – namely:

• contracts of marine salvage or towage;
• charter party agreements in relation to ships;
• contracts for the carriage of goods by ship; and
• constitutions of companies, managed schemes or other bodies.

Importantly, various financial services contracts are subject to the UCT legislation, such as the various SFCs used in the banking sector for credit cards, bank accounts and other financial products.

Unfortunately, most general insurance contracts have been excluded from the reach of the new laws. This exclusion was justified on the basis that general insurance contracts, such as car and home insurance, are currently regulated under the Insurance Contracts Act 1984.

5. Is the term unfair?

Once a business has worked its way through each of the above steps, the next step is to consider the substantive effect of the term and to determine whether that term is unfair. The legislation sets out three factors which, if established, would mean that a term is unfair. 

Two important issues need to be stressed about these three factors. First, these three factors are the exclusive factors which must be proven to establish that a term is a UCT. In other words, they are not three non-exhaustive factors meant as guidance for the court but rather constitute the statutory test which the court must apply. Second, the factors are cumulative in the sense that each factor must be proven in turn in order to establish that a term is a UCT.

A term of a small business contract is unfair if:

a. it would cause significant imbalance in the parties’ rights and obligations arising under the contract; and

b. it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and

c. it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

As is apparent, the first step in the process in determining whether a term is unfair is to assess whether the term itself would cause a significant imbalance in the parties’ rights and obligations. This criterion is not linked to the size of the respective parties, which is only relevant to determining whether the contract is a SFC.

The legislation also states that the term “would” cause significant imbalance. This suggests that courts will only strike down terms will have a “material” and “meaningful” impact on the rights and obligations of one of the parties. Lesser impacts are unlikely to render the term a UCT.

The court will also have to determine whether the term is reasonably necessary to protect the interests of the party advantaged by the term. The use of the term “reasonably” makes it clear that the court will be applying an objective test to determine whether the term protects a business’s legitimate interests.

Finally, the court must be satisfied that the term will cause determine to a party if it were to be applied or relied on. There are three issues to note about this factor:

(a) a party will have to satisfy the court that term will cause practical detriment to a party if it is relied on by the other party. In other words, a mere theoretical detriment is unlikely to be sufficient to satisfy this factor;

(b) a party must show either financial detriment or other detriment. Therefore, non-financial detriments, such as time or inconvenience, or even reputational damage, may be sufficient to enliven the UCT jurisdiction; and

(c) the test is prospective, in the sense that the court will be required to speculate on the effect of the term if it was applied or relied on. Therefore, a party seeking to invoke the UCT laws will not need to show that the term was enforced or even that the other party threatened to enforcement the term. The mere existence of the term in the contract will be sufficient. Additionally, a claim by a business that they would never enforce a particular term will not save that term from being characterised as a UCT.

The fact that a party does not have to prove that the other party has sought to enforce, or threatened to enforce, the alleged UCT expands the reach of the UCT legislation considerably.

6. Is the term transparent?

A further consideration in determining whether a term is a UCT is whether the term is transparent. A term is considered to be transparent if it is:

• expressed in reasonably plain language;
• legible; and
• presented clearly; and
• readily available to any party affected by the term.

The suggestion in the legislation is that terms which are not transparent are more likely to be characterised as unfair. In practical terms this means that highly legalistic language, small fonts and tightly packed and largely illegible text in SFCs may tip the balance in favour of the term being characterised as an UCT.

7. Looking at the whole contract

A final step in the process will be an obligation on the court to consider the whole contract. While not expressed in the legislation as a final step, in practice it is likely that the court will undertake a final overview of the entire contract before determining whether a particular contract term is a UCT.

The importance of this step is to ensure that a particular term is not being assessed by the court in isolation from the rest of the contract. It is likely that in many SFC’s, a number of terms will work to advantage of one party, whilst other terms will work to the advantage of the other party. Accordingly, it is important to ensure that the court looks at the overall balance of terms in the SFC to make sure that one party is not challenging a particularly disadvantageous term, whilst the same time gaining the benefit of a number of other advantageous terms.

Examples of unfair contract terms

The legislation also helpfully sets out some examples of the types of terms that may be unfair. The following is a summary of the examples of potential UCTs listed in the legislation - namely terms which:

(a) permit one party to unilaterally avoid or limit performance under a contract;

(b) permit one party to unilaterally, terminate, vary, assign, or renew the contract or to unilaterally determine whether the contract has been breached or to interpret its meaning;

(c) penalise one party for a breach or termination of the contract;

(d) permit one party to vary the upfront price payable under the contract without giving the other the right to terminate the contract;

(g) permit one party to unilaterally vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract;

(i) limit one party's vicarious liability for its agents or its right to sue another party; and

(l) limit the evidence one party can adduce in proceedings or imposes an evidential burden on one party in proceedings relating to the contract.

The main distinguishing feature in the above examples is that they provide one party with unilateral rights and powers under the contract. For example, unilateral rights to terminate the contract without cause or the exclusive right to interpret the meaning of the terms of the contract.

Another important feature of the above examples is whether they may be seen as apportioning contractual risks between the parties in an uneven way. Implicit in these examples is a concern about a larger business forcing a smaller business customer to assume most, if not all, of the contractual risk arising under the SFC.

ACCC Guidance

On 10 November 2016, the ACCC issued a report entitled Unfair terms in small business contracts: A review of selected industries.[3] The purpose of this Report was to provide a breakdown of the common terms of concern identified in particular industries, and to discuss the kinds of changes that businesses made.

Unsurprisingly, the ACCC identified the following types of terms as being of particular concern:

• Unilateral variation clauses
• Limited liability and wide indemnity clauses
• Unilateral termination and renewal clauses
• Terms imposing early termination charges
• Cost recovery terms;
• Liquidated damages clauses; and
• Overly broad restraints of trade clauses

Additional risk areas

In addition to the areas identified above, businesses should also be conscious of the following potential risk areas:

Whole of agreement terms

Whole of agreement terms are quite standard in most SFCs. These clauses seek to exclude one parties’ liability for pre-contractual representations, particularly pre-contractual oral representations, which may have been made by the large business to the small business customer. I believe that these is a risk that such terms may be found to be UCTs in circumstances where inconsistent pre-contractual representations have in fact been made by the large business and relied upon by the small business customer.

Choice of law terms

Terms which seek to exclude Australian jurisdiction in favour of overseas jurisdiction in relation to transactions made by small businesses within Australia may also be characterised as unfair. While such clauses are likely to be unenforceable to the extent that they seek to exclude mandatory protections such as those contained in the ACL in relation to consumer guarantees, it is arguable that such clauses may also be UCTs. Such clauses are particularly common in the IT industry in relation to the sale of hardware and software products to small businesses.

Arbitration clauses

Arguably a clause in a SFC that states that a small business customer can only obtain a remedy under a SFC through compulsory arbitration in an overseas location, such as Singapore, may be characterised as an UCT, particularly where the contract value is relatively low. This is particularly the case where the term seeks to exclude all other legal avenues and makes binding arbitration in a foreign country the sole and exclusive dispute resolution process available to the small business consumer under the contract.

Class action exclusion clauses

It is also arguable that contractual terms which prevent small business consumers from participating in class action litigation against large business suppliers may be characterised as a UCT. Such terms may be seen as unfairly excluding a small business’s legitimate legal rights to seek redress under the contract by joining a class action.

Conclusions

With the introduction of the new UCT laws for small business SFCs on 12 November 2016 it is vitally important for businesses to carefully review all of their SFCs to ensure that they do not contain any UCTs. This is particularly important given both the ACCC and ASIC have signalled that they will be moving from the education phase to the enforcement phase in relation to the new UCT laws. While the process of reviewing each SFC can be quite a laborious process (particularly for businesses with a large number of SFCs) the costs and inconvenience of undertaking this process are greatly outweighed by the clear and present danger of failing to identify and remove all UCTs from your small business SFCs.


[1] Dr Michael Shaper, ACCC Deputy Chair, Competition & Consumer Issues for SME’s, presentation to SME Committee, Law Council of Australia and Law Society of NSW Conference, ‘Small Business: Still the Centre of Attention”, 25 August 2016.
[2] Section 27(2) ACL
[3] ACCC, Unfair terms in small business contracts: A review of selected industries, November 2016 at http://www.accc.gov.au/system/files/B2B%20UCT%20-%20Final%20-%20Unfair%20terms%20in%20small%20business%20contracts%20%20A%20review%20of%20selected%20industries_0.PDF