New unfair contract terms law to protect small business

Summary: On 16 March 2016, the ACCC and ASIC hosted a webinar about the new law that will apply from 12 November 2016 which aims to protect small businesses from unfair terms in business-to-business standard form contracts.

Published: 31 March 2016

Mike Hawkins: Good evening and thank you for joining us.  I’m Mike Hawkins, the Executive Officer of Business Enterprise Centres Australia.  We’re a national network of over 60 members providing low cost business advisory services, to business intenders and established small businesses.  We work very closely with the regulatory agencies to make sure that our members, as in our small business members, are very much aware of the – of what they need to do to comply with the various regulations. Tonight I’m joined by experts from the Australian Competition & Consumer Commission and the Australian Securities and Investments Commission to discuss the new small business unfair contract terms law, which will apply to small business contracts from 12 November  2016.  Consumers have had fair – unfair contract term protections, however, since July 2010.  In November 2015, the unfair contract terms protections were extended to cover small business contracts. This was in recognition that small businesses, like consumers, are vulnerable to unfair terms, in standard form contracts as they are often offered contracts in a take it or leave it basis and lack the resources to understand and negotiate contract terms. Let me introduce our panellists for this evening. Firstly, on my immediate left, Dr Michael Schaper, Australian Competition & Consumer Commission or ACCC.  Michael is the Deputy Chair.  Welcome, Michael.

Michael Schaper: Evening, Mike.

Mike Hawkins: And, secondly, Brett Bassett, Australian Securities & Investments Commission, Senior Executive Leader, Small Business Compliance and Deterrence and Regional Commissioner, Queensland, welcome Brett.

Brett Bassett: Thanks very much, Mike.

Mike Hawkins:The ACCC, along with State and Territory Australian consumer law regulators, has responsibility for enforcing the unfair contract terms law for everyday goods and services.  Likewise, the ASIC has responsibility for enforcing the law in relation to financial products and services.  I’m just going to flick now to – and give you an overview, a slide coming up on the screen there as to what we’re going to be talking about tonight.

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So we’ll be discussing what an unfair contract term is, including examples of potentially unfair terms.  We’re going to follow that with details about which contracts the law will apply to and what you should do if you think there is an unfair term in the contract your small business has entered into.  At the end of this webinar, we will be answering questions from the audience.  Some of you may have already submitted questions in advance, and thank you for doing so.  If you haven’t, or if you would like to pose additional questions, you can submit by clicking on the ‘Ask a Question’ function on the bottom of your screen.  Now, we may not get to all of your questions today, but both the ACCC and ASIC will review their website content and frequently asked and answered questions after this webinar to ensure key questions raised are covered.  A recording and transcript of this webinar will also be available on both agencies’ websites.  So, let’s get straight into it.  Dr Michael Schaper, ACCC, can you tell me, please, what an unfair contract term is under this law and what is the test that is applied?

Michael Schaper: Thanks, Mike. Well, let me start with an example that might be familiar to many of you out there, even wearing your guise of being a consumer. Not that long ago, Exetel, a telco firm, a telecommunications business, had a term in its standard contract for consumers that allowed it to vary on its own motion, basically unilaterally, any part of the agreement that it had with consumers for any reason, and in fact Exetel later relied on that term in its contract to tell customers who were on a 12 month fixed term plan that they either needed to change their plan or leave the Exetel network.  Now, that’s an arrangement where many of us would look at it and say that’s really unfair in terms of people have signed up for 12 months for a year in the expectation that they’ll get the service, is there really a need to give people this ultimatum, especially when they’ve already made the commitment?  And so unfair contract terms, whether we’re talking about business related ones or whether we’re talking about consumer ones have at their essence three key questions that we always need to think about.

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First of all, are they creating a major or a significant imbalance in the rights and responsibilities between the two parties that are signing up to the  contract?  So is there a significant imbalance?  Secondly, why, if there is an imbalance, does it exist?  Is it really necessary to protect, for example, commercial business interests, or is it just there because one party thinks that it’s more convenient?  And finally, if that function is used, if that clause is relied upon, is it going to cause the other party to suffer, is it going to, in effect, be exposed to a significant detriment?  So the three phrases you’ll see bandied about tonight are is there a significant imbalance between the two sides, is the unfair – supposedly unfair clause really necessary and, thirdly, is it going to cause someone, one side or the other, to suffer as a result of it?  Now, a final point about this, Mike, and it’s a really important one to bear in mind though, is that when you look at it you can’t just simply pull a singular line out of a contract, you’ve got to look at it in context, you’ve got to say how does this fit into the contract as a whole and also how clear, how transparent was this to the other side when they signed up?  If they were well-known to them, as we’ll discuss later on, then it may well be that it’s not really unfair.  So there’s some key elements.  Mike?

Mike Hawkins: Look, well, thanks, that’s a very robust answer.  Thank you very much for that, Michael.  Look, to both of you, what types of terms do the ACCC and ASIC think may raise concerns under the new law, and I’ve got a slide coming up here just to sort of give us a little bit of information here.

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So if you could give me some indications as to some of the – well, I’ll actually tell you.  There’s eight types of terms that the ACCC and ASIC consider to be potentially unfair and they are the right to unilaterally vary the contract, early termination fees, limited liability or no liability, automatic rollover, the right to terminate agreement with no cause, liquidated damages, wide indemnities and forfeiture clauses.  So I’ll come back to you again, Dr Michael Schaper, ACCC, can I hear from you about terms that give a larger business the right to unilaterally vary the contract?

Michael Schaper: Yes. Let’s have a look at this idea of what’s referred to as unilaterally varying something and really what that simply means is that one side has the right to change part of the contract without the agreement of the other side and that, of course, can be potentially unfair.  Now, sometimes these can be about key elements of any contract.  For example, if one side in a commercial contract has the ability to change the price the products are being offered, the number of products, the range of products that its dealing with, then that can have a major impact on the other party that have signed up to the contract and it’s especially unbalanced if one side can do this, but the other one doesn’t have a reciprocal right.  For example, one firm may say I’m going to change the price of a product, but the other firm can’t get out of the contract even if the new financial dynamics really don’t make it worthwhile for it to stay in there anymore.  One of the examples we’ve already encountered in the consumer area, but still has relevance here to businesses, is ByteCard which was a case dealing with a firm that’s also known as NetSpeed Internet Communications and they had an internet service arrangement that allowed them to unilaterally, off their own back, vary the price of the contract without giving their customers any right to terminate the contract.  So, in effect, the customer was trapped into the contract regardless and forced to pay whatever the new price might be which, as I pointed out just then, could be set by the firm whenever and however they wanted it to be.  So I think most of us would see that that’s unfair and in this case that was one that a court did find unfair.

Mike Hawkins: Indeed.

Michael Schaper:  Back to you, Mike.

Mike Hawkins: Indeed.  Thank you very much, Michael.  Look, Brett, we haven’t forgotten that you’re there.  Could you please tell us about early termination fees?

Brett Bassett: Sure, Mike.  I’ll talk about it in three specific areas.  I’ll talk firstly about what an early termination fee is.  The second thing I’ll talk about is give our viewers some examples of what an early termination fee may actually look like in respect of their day to day lives, and the third thing I’ll talk about are what we look at or get concerned about in respect of early termination fees.  So, in respect of what an early termination fee is, it’s nothing more or less than somebody – one party to a contract having to pay the other party to the contract as a result of wanting to terminate their contract early.  The party that actually wants to terminate the contract early has to pay something as a result of having to do so and the reason, Mike, that they do that is because it’s quite appropriate and reasonable in certain circumstances for the party that is actually suffering a loss as a result of that termination being entitled to a payment.  So that’s, in effect, what an early termination fee is or an early termination clause is.  In respect of where our viewers might actually see it on a day to day basis, the simplest example I can give is in respect of consumer leases.  So if you have a fixed term contract to lease goods or services or a product for a fixed period of time, generally what happens at the end of that period of time you have to make a decision do you want to continue with the lease, at which time you will roll it over, or do you want to get out of the lease and terminate the lease.  What often happens is people don’t make that determination.  That is, they don’t actually make a decision that they want to stop the lease or they want it to roll over, so what generally happens is at the end of the fixed term the contract will automatically roll over.  Now, if the contract automatically rolls over and you, as the person that’s actually renting the -  leasing the goods or services want to get out of that  contract, then you will have to pay what we’re talking about, the early termination fee.  So that’s pretty much, Mike, how it works in respect of general day to day activities.  What do we get concerned about in respect of early termination fees?  There’s a couple of things.  Michael Schaper has already made mention of the term unilateral variation.  One concern that we have about early termination fees is where the party that has to pay the early termination fee doesn’t actually know that that termination fee is either in the contract or has been varied.  That’s a concern for us.  So what are the key things that we look at in respect of whether or not an early termination fee may be unfair?  We look at things such as do both parties to the contract, including the party that has to pay the early termination fee know of its existence?  That in itself is not necessarily enough. What we also are concerned about ensuring is that the party that’s paying the early termination fees understands what the fee is, how much they have to pay and, importantly, how that fee is calculated.  The third thing that we’re really focussed on making sure that people understand is that disclosure is really, really important.  Parties have to understand when they can vary a contract, how they go about varying the contract and, importantly, what the termination fee looks like at the end.  So, in general, we look at all of those things in the holistic view.  An early termination fee in itself may not be unfair.  You need to look at those other issues that I’ve spoken about around what the fee is itself, how it’s calculated, is there sufficient disclosure, et cetera, Mike, before making a determination that the early termination fee is in fact unfair.

Mike Hawkins: Dr Michael Schaper, ACCC, has the ACCC got a view about automatic renewals and can you please tell us a little bit about this?

Michael Schaper: Yeah, Mike, I think that’s a really important one of that list there of the eight that we’ve got up there.  Automatic renewals are an important issue and this often occurs when a contract ends, but often effectively unbeknownst to the other side, it actually rolls over into a new term.  If, perhaps, we can put up another slide, I’ll give you an example of this here that we’ve encountered recently.

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And we did this in our consumer unfair contract terms context, but it’s still very relevant, I think, in terms of the same situation applying directly to small businesses.  Now, in the case of Chrisco Hampers it wasn’t quite an automatic renewal, but if you have a look at the information there basically customers were signing up and then unless they chose to opt out of the contract with a very large degree of notice beforehand, they were effectively locked into a following contract the year after.  So, we’ve got some real concerns about similar arrangements applying to small businesses where, for example, either a business has to give a large amount of notice well in advance of what seems like the logical time to end or they have to pay a large cancellation fee to end the contract.  Now, both of those are going to be problematic for many businesses and they’re the sort of things that already do exist in a number of commercial contracts, Mike.  So I think that’s an important one.

Mike Hawkins: Mmm, absolutely.  I entirely agree with you.  Now, staying with you, Michael, on that we’re talking about limited liabilities, can you comment on that area for me, please?

Michael Schaper: Look, liabilities and the responsibilities of both sides in a contract are important, but we do come across arrangements where large firms put into place contracts that effectively shift all of the responsibility over to the bigger – to the smaller firm, or they restrict the legal rights of the small business that they have against the bigger business, for example, their ability to sue them.  So let’s take an example, a hypothetical one, you get a removal company and it says we’re not going to take any liability for any loss or any damage to your company records, your company goods, if we’re moving you from one premises to another.  Now, while it might be fair for a removalist to say that we’re not going to take any responsibility for anything we don’t have any control over, but if you’re a removal company and you’re removing things and you damage things, I think most of us would say that you do have some responsibility there.

Mike Hawkins: Oh, look, fair point, and a very good example, thank you.  Crossing to you, Brett Bassett from ASIC again, liquidated damages, Brett, what can you tell us about this?

Brett Bassett: Thanks, Mike.  Liquidated damages are pretty simple to explain.  Liquidated damages are monies that are payable by one party to a contract to the other party of the contract if that first party breaches the contract.  Mike, that’s pretty much what a liquidated damage is, and when we’re thinking about whether or not a liquidated damage might be unfair the things that we look at are what are the circumstances surrounding the imposition of that liquidated damage, how much are they and do they accurately and fairly reflect the cost of the breach that led to the termination.  As a general rule, the way that we look at it in respect of liquidated damages is the higher the liquidated damages probably the more chances that they’re going to be unfair.  Thanks, Mike.

Mike Hawkins: And, thank you, Brett.  And just to put this into context, we’re still talking about those terms that raise concerns under the unfair contract terms law.  So, look, another one of those was with regards to the right to terminate an agreement with no cause or for no reason.  That seems like it could be unfair.  Over to you, Michael.

Michael Schaper: Mike, these can be really problematic.  An arrangement where one side can terminate the contract for any reason whatsoever, or even without a reason, can create real problems for a business.  It effectively leaves the other side dangling, they don’t really know where they stand.  Now, it can be something as lopsided as one side and one side only can unilaterally, effectively, can terminate the contract, but it could even be sometimes where both sides have the right to do it, but it may not mean, for example, a small franchisee who has the right to terminate a contract, but if they do that, they’re not going to recoup any of the monies, the investment that they’ve made into it.  So I mentioned ByteCard before as an example.  Now, in that case, again, a consumer matter, there was a term in that contract which was found to be unfair because it allowed ByteCard to unilaterally terminate the contract any time that it wanted to without any cause or reason, and I think just a final point on this, Mike, that terminating agreements without any reason really leaves small businesses at a loss because it’s one thing to know that I’ve failed to do something in the contract or that the other side has a disagreement with me, but when it’s done without any rationale it’s very, very hard to actually work out how do I recover from this.

Mike Hawkins: Yeah, absolutely, and this wide indemnities area, they’re a big area of consideration too, would you agree with that, Michael?

Michael Schaper:  I touched on this a little bit before when I made mention of that issue about liabilities.  It’s effectively a variation of the same thing.  An indemnity, look, is a promise to basically pay for possible damage, for loss, for injury.  We’re particularly concerned about situations where you have clauses that make – when a large business actually says to the small business you’re going to indemnify us for any loss or damage that takes place, in fact even if the big business has contributed to it or in fact caused it.  That is tremendously lopsided here.  So I keep mentioning the ByteCard example, there was a term in that contract, for example, again which for in terms of consumers said that even where the customers hadn’t breached the contract or even where the loss or damage had been caused by the company, ByteCard itself, that the customer would indemnify ByteCard for it.  Again, an unfair contract.

Mike Hawkins: Yes, indeed.  Indeed.  Finally, Brett, on that one, I believe the Australian Securities & Investments Commission has done some work on forfeiture clauses, can you please tell me a little bit about that?

Brett Bassett: Absolutely, Mike.  So I think it’s important to talk about what a forfeiture clause is.  So a forfeiture clause is basically a clause that means that one party to a contract can retain funds that are the funds of the other party to the contract in certain circumstances.  The best way for me to explain it is through an example.  So many of our viewers have probably been overseas and I know that I’ve been overseas before and rather than wanting to take cash what I’ve done is I’ve gone and got a travel card and I’ve put say $1,000 on that travel card for use overseas.  What happens in a forfeiture clause, and there’s been some examples of this that ASIC has actually looked at, is that I might go overseas, I might use only say $950 of those dollars, if there’s a forfeiture clause in existence, then what that means is that I can’t get that $50 back.  So a forfeiture clause allows the entity that’s actually giving me that travel card to retain those funds.  So you did say that ASIC has done some work in this area, and we certainly have, so in October 2014, Mike, we raised concerns with the issue of one of these pre-loaded travel cards.  Now, the issuer agreed, as a result of the work of ASIC, to actually remove the term in the contract that allowed them to retain those funds once the person came back or they hadn’t used those funds.  We’ve also done – and the other important thing about that is with – as a result of our work, the issuer had to provide some refunds to those – to the consumers as well.  We also reviewed 16 individual products from over eight travel card issuers as well to see if there were any similar forfeiture clauses in in relation to expired funds on these cards.  Now, we did see that there were still some forfeiture clauses in existence and as a result of ASIC’s interaction and intervention, we actually ended up getting some of these forfeiture clauses removed or actually removing the inactivity fees, which we think is really, really important.

Mike Hawkins: Excellent. Look, thank you both, Brett and Michael, very interesting examples that you’ve given on that.  Dr Michael Schaper, I’d like to come back to you again and I’m going to put something up on the screen here about going through a worked example of a contract that contains some unfair terms.

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Michael Schaper: Yes, look, Mike, this is a really interesting one.  We’ve given up a hypothetical here, Mrs Smith’s Bakery.  Now, let’s just take a minute to have a quick look through here.  A one year agreement, a contract between Mrs Smith and the aptly named Big Supplier firm, an agreement about the price of the muffins, $3 each, and two really interesting parts to the contract amongst the others.  First of all, an automatic renewal clause in there, as well as a unilateral variation clause in terms of Big Supplier being able to change the price of its muffins.  Now, there the two clauses that are the most problematic ones are those last two.  As I mentioned before, this issue about the contract renews, it rolls over automatically unless Mrs Smith actually makes arrangements half way through the life of the current arrangement, six months before a one year contract expires she’s got to notify Big Supplier whether she is or isn’t into it for the following year, right, she’s automatically caught in for another year and the second one, of course, is that Big Supplier reserves the right to change the price that it’s going to buy muffins at, at any time, but even if they change them, whether they move it to $5, whether they move it to $2, Mrs Smith’s Bakery can’t get out of the contract, so both of those are unfair terms in our eyes.

Mike Hawkins: Okay. Look, again, an excellent example.  Okay, so now we know what terms may be unfair, what happens if the term is found to be unfair, your thoughts, Brett, from Australian Securities & Investments Commission, on that?

Brett Bassett: Thanks, Mike. In short, if a term is found to be unfair the court may find that that term is void.  Now, what that means is that if the term is void, it’s as if the term never existed in the contract.  So that means that that term or that part or that clause is not binding on both parties.  Now, the interesting and important thing to remember here is just because one part of a contract may actually be void or unfair, that doesn’t mean that the rest or the remaining part of the contract is void or unfair and that’s really, really important.  So if you’re a small business and there is a clause that is deemed to be unfair, you may still very much have an obligation in respect of the rest of the contract and that’s actually really, really important to note.  Now, the other thing as part of a void term in a contract is that the contract could still continue on with that clause removed, so that’s also very important.  Now, if the court does make a declaration that the term is unfair and the party that actually is relying on that unfair term continues on with that term, that may actually be a breach of the consumer law and that’s really, really important.  Now, if that happens, the court can do a couple of things.  The court can actually make an order for an injunction seeking to stop that party using that term, the court can make an order relating to how that term should actually be used in the – and how it would be – how it would apply to the small business, and the court may also make any other orders that it deems appropriate in respect of those terms.  So, Mike, that’s it in respect of what a – what the result could be if there is an unfair contract term.

Mike Hawkins: Excellent, thank you very much for that, Brett.

Michael Schaper: And, Mike, I think there’s a really important point here that’s worth taking note in there that Brett used the word ‘court’ and it’s a really important one to realise that the ACCC, ASIC, the other state based and consumer law regulators don’t have a unilateral power. We can’t effectively step in and say this is an unfair contract and you, as a large business, you must stop this, we don’t have that power, only the courts can do it.

Mike Hawkins: Mmm.  Mmm.

Michael Schaper: So the role of regulators like ourselves is to investigate these matters, take them to the courts where we think it’s appropriate, but ultimately it’s the courts, not the regulators, that make the final call.

Mike Hawkins: Excellent, and that’s a very, very valid point. Thank you, Dr Michael Schaper. I’m going to stay with you on this.  I’m going into a little bit more detail about which contracts the new protections will apply to, so can you tell me exactly which contracts the new laws will apply to and I’ve got another slide screenshot coming up here.

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Michael Schaper: Yes, let’s have a look at this one.  It is important because not all contracts are covered.  I think, really, in the world of small business the simple answer would be most, but not all.  There’s a couple of qualifying conditions.  So first of all, one of the businesses has got to be a small business in terms of head count, in terms of number of employees.  In other words, one of the two businesses in this contractual arrangement has got to have less than 20 employees.  The upfront price payable is the second issue and we’re going to tease this out a little bit more next for you, but the amount has got to be less than $300,000 if it’s a contract covering just a year, or less than a million dollars if it expands more years than just the one. The other one is it also applies when two small businesses relate to each other as well, so it can be between two small businesses, but obviously in terms of large firms those are pretty important considerations.

Mike Hawkins: Mmm, and I’m still staying with you on this because I’ve got some more information I need to get on this so that we can give our viewers some sort of substance.  Can you give me some more detail on when a contract will be a standard form contract?

Michael Schaper: It’s an important one here, we’re using the words ‘standard form contract’ and many people would say, well, does that simply mean it’s a document that’s been printed out that I signed?  It’s a little bit more sophisticated than that.  The law will basically say that the starting point will be that it’s a standard form contract.

Mike Hawkins: Yes.

Michael Schaper: What is also referred to amongst lawyers as rebuttable presumption, but it basically means a big firm can step aside and try and prove that it’s not the case, but the starting point, if there is a case of apparent unfair contract terms, is that this is a standard form contract.  Standard form means not literally that nothing has been changed from a preordained sheet of paper, what it does mean is what genuine level of negotiation took place beforehand.  So what you might find is that a contract where basically it’s given on a take it or leave it basis, or where the small business genuinely doesn’t have a chance to negotiate the terms, is likely to fall into that definition of what is a standard form contract.

Mike Hawkins:  Right. Excellent. A very good explanation, thank you very much, Michael.  Brett Bassett, ASIC, earlier Michael mentioned less than 20 employees, as one of the tests for the law to apply, which employees are counted, do you include casual staff and are employees of a related company included?

Brett Bassett: Thanks, Mike. So there are three questions there and I’ll take each one of them separately.  So in respect of the first part, which is how do you calculate less than 20 employees?  As Michael Schaper said, it comes down to head count.  So what you do is you look at your employees and you count them.  The second thing is you can actually use and count as part of your employees casual employees, and the key there is those employees need to work on a regular and systematic basis.  So that’s how you arrive at your head count.  The second part of the question is really about do companies that are related, do you aggregate them?  The answer there is no, and so I’ll give you an example.  If you are a subsidiary company of another company, that is, you’re still part of the same conglomerate for lack of a better word and you are both related, under the unfair contract terms law, the only head count that you need to worry about are those employees in the entity that is contracting as part of that contract that is seeking to relate to the law.  So that’s pretty simple.  A couple of things to think about as well are whether or not the subsidiary company is in regular and systematic engagement of those employees.  That’s a really important thing, that’s why I’ve raised it again.  So casual employees, I’ll just reiterate, can be included in part of that head count as long as they are engaged in a systematic and regular basis.

Mike Hawkins:  Okay. Thanks, Brett, and how can a larger business know the employee numbers of a smaller business?

Brett Bassett: Yeah, that’s a good question.  Sometimes it’s a hard question to answer as well and primarily the reason for that is that the law doesn’t outline how those parties to the contract should interact in that regard.  I guess there’s a couple of ways that businesses can find that information out.  They can simply ask the other party with whom they’re seeking to engage, that’s a pretty simple one, Mike. The second thing is that the small business could tell, for example, the larger business, the larger business could ask the smaller business.  In respect of the larger business, one key thing to note here is that if the larger business thinks that the other business that they’re engaging with is in fact not a small business, that is, they think that they’ve got more than 20 employees, even though that’s a mistake that does not allow the larger business to impose an unfair contract on that smaller business.

Mike Hawkins: Right.

Brett Bassett: So that’s really important. The final thing I’ll say about head count and interactions is that we think it’s actually appropriate for the larger businesses to seek to understand with the smaller businesses exactly how many staff they have.  That’s really important from an employees’ perspective.

Mike Hawkins: Yeah, absolutely. Thank you for that. Michael Schaper again, what is the upfront price payable?  That’s a term that’s been mentioned before.  Is it the amount paid at the very start?

Michael Schaper:  Mike, we are getting into the details now of pulling apart some of the issues, but they are important if you’re trying to work out whether or not your contract is going to be covered.  So I said before that these terms apply for contracts where the upfront price payable, that term you just mentioned, is less than $300,000 or less than a million dollars if it’s for more than a year long contract, for example a multi-year contract. Now, upfront price payable doesn’t literally mean the money was only stumped up right at the front, but what it does mean any payment that is provided for, for example, a supply arrangement, a sale, a grant, and it’s clearly disclosed and absolutely made clear at the time the contract is entered into. So any part – so that’s a really important element there.  On the other hand, parts that can’t be calculated with certainty we usually won’t take it into our reckoning of it.  Let me give you an example that might make this a little bit clearer.  Perhaps if we can show a slide here.  We’ll come back to Mrs Smith’s Bakery, she a very popular business tonight.

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But she’s made an arrangement with big supplier for $3 a muffin, so in some sense there’s an amount, there is an upfront price payable, however we don’t know how many muffins are going to be supplied so, really, we can’t put that into the figure, so effectively we’re coming down to zero.  We’ve got a figure that’s well under $300,000 and well under a million dollars, so this contract, Mrs Smith’s Bakery would be covered by the unfair contract terms and would be given the protection. So upfront price payable essentially are known amounts, amounts that are contingent or ones, Mike, where they depend on something, for example, you pay a termination fee if you do this or there is a penalty if you do that, can’t always – aren’t part of that reckoning in our view of the world because they only happen if you do certain things or sometimes if you do certain things that you shouldn’t be doing in the first place.

Mike Hawkins: Sure. Sure.

Michael Schaper: So it’s about – they’re not usually taken as part of the reckoning.  Maybe we can also look at another example.  Here’s one called Frank’s Franchise.  So let’s move away from a standalone business and look at a franchise system we’ve got up here on the screen.

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Frank has entered into a franchise agreement, he’s a franchisee with Big Franchise, the company there, and he’s paying a $400,000 franchise fee, he’s also paying – in his franchise agreement he’s got a number of other provisions there, for example, a royalty of 5% of sales, although you don’t know how much he’s going to sell, and a $6,000 termination fee.  Well, which of these are we going to take into account?  Well, we do know the $400,000, that’s upfront.  It’s very clear what it is, it’s spelt out at the start and so we know it and, of course, it’s a franchise agreement that spreads out over a couple of years, so it’s well under a million dollars.  The royalty fee, on the other hand, is not quantifiable.  We don’t know how many sales are going to be there, so just like the Mrs Smith example, the volume of sales isn’t known at the outset, it’s not possible to really calculate the total amount there, so in our view we wouldn't be including that, effectively it’s got a value of zero.

Mike Hawkins: Right.

Michael Schaper: And the termination fee, $6,000, is it in, is it out?  Well, we wouldn't be including it in our reckoning of the upfront price because it’s not for a sale, it’s not for supply. Essentially, if you want to think about it, simply it’s contingent upon something happening and really it’s about if – only if things go south, really, for your business.  So hopefully, again Frank is going to be caught, or protected rather, by the unfair contract terms.

Mike Hawkins: Excellent. Thank you. You mentioned at the outset of that dissertation that you were going to get into the nitty gritty and you certainly have so thank you very much for that, Michael.  Brett, just moving along, can I understand – well, I understand the law will apply to the upfront price of credit contracts slightly differently, can you please tell us a little bit about that?

Brett Bassett: Certainly, Mike, in short, the area where it’s different is in respect of interest that’s payable as a part of some type of credit contract.  So, the interest basically gets excluded, so let’s go back to Mrs Smith. So Mrs Smith might want to engage or enter into a mortgage for $950,000 over a 25 year period.  So it’s over the upfront amount of $300,000, but because it’s multi-year and it’s under a million dollars, it’s still caught. Now, Mrs Smith may have entered into a high interest rate of say 10% over that period of time. Under the unfair contract terms we would exclude the 10% interest that is payable by Mrs Smith on that mortgage and therefore it only is relating to the upfront cost of the $950,000 itself.

Mike Hawkins: Okay. Thank you very much for that, Brett Bassett, ASIC.  So just staying with you, so now we know which contracts the law will apply to, Brett, can you give me a bit more detail about when the law will apply to contracts?

Brett Bassett: Sure, Mike. So you made mention earlier in the discussion that the start dated is the 12th of November 2016, that’s the big day.  So, in effect, there’s a couple of different things, if a new contract is entered into on or after the 12th of November 2016, that is caught.  If a contract is in existence and it’s varied on or after the 12th of November 2016, that is also caught and it’s only relating to the variation of – the variation terms of the contract itself, not the entire contract.

Mike Hawkins: Right.

Brett Bassett:  If the contract renews automatically or rolls over, the law will apply if the contract is automatically renewed on or after the 12th of November 2016 and if, for example, you’ve got a month by month contract or a contract that is part of a periodic basis, it will only kick in when the contract moves into the new contract period after the 12th of November 2016.

Mike Hawkins: Okay. Thank you very much.  So coming back to you, Dr Michael Schaper, Australian Consumer & Competition Commission, are there any terms not covered by the new law?

Michael Schaper:  Look, there are, and there are some important exclusions.  Some of them are a little bit esoteric for most of the audience, some of them are right at the heart of the contract.  Let’s just look at some of the more esoteric ones first of all.  Some areas like shipping contracts, constitutions of companies, managed investment schemes, life insurance, home insurance, car insurance, they’re exempt from the new law.  The minister can also exempt some sectors, industry sectors, although currently there are none of those available – none of those are exempted.  Two important areas though that you do need to bear in mind in any case are the upfront price payable.  We’ve used this before and we’ve used it in terms of defining when a contract is eligible to be covered by these, but you can’t essentially challenge the price that you’ve agreed to pay under the contract.  You cannot take a contract, in other words, and say I agreed in the case of Mrs Smith that I was going to pay $3 a muffin, but now I think $3 in itself is an unfair price, you cannot challenge that price.  Mrs Smith couldn’t do that.  In our previous example we also used Frank the franchisee.  He was paying a $400,000 franchise fee to enter into a franchise system and 5% royalties as an ongoing fee, he won’t be able to challenge those amounts.  They’re fairly important.  And finally, there are some areas, for those talking about franchisees, not just Frank, but many other people who operate a franchise system, for where there are state or federal laws that expressly require certain contract terms, for example, the Franchising Code of Conduct has a requirement about certain information that has to be disclosed, then they’re effectively exempt from the provisions as well, they’re already covered there as well.

Mike Hawkins: Yeah, that makes it clearer for me anyway.  Thank you.  Look, staying with you, Michael, what do businesses need to do to get ready for the new law, coming into, again, in effect on the 12th of November 2016, a very important date, over to you again, Michael.

Michael Schaper: 12th of November is a big date, it looms large in everyone’s mind and it’s not that far away.  It really is important to start getting ready now.  What it means is that you need to review your contracts.  If you are a large business that undertakes and signs into contracts with small businesses and standard contracts as we’ve discussed, you want to be asking yourself some of the questions we’ve mentioned earlier on tonight.  Mike, we gave examples of eight core areas.  They’re not conceivably all the ones, but I think they’re good starting points, to say do our contracts already have potentially unfair terms.  You might want to think about how do we mend these, how do we deal with them if they are.  If you are a small business on the cusp of signing a contract, you might want to ask yourself questions also about when do I want to enter into an agreement?  Do I want to do it before the 12th or do I want to – can I wait until after the 12th, if that’s an option for me, or even if I’m renewing a contract as well.  So that’s a really important date for you.  The other one that you probably all should be aware of is that in the initial stages, we at the ACCC, will be looking at five industries.  Not the only ones that we will have attention to, but there are five that we’ve got an immediately focus on, advertising industry, telecommunications services for small businesses, franchising which has already been mentioned several times tonight, retail leasing and independent contracts.  So they will be areas that we’ll be putting an immediate set of attention on.

Mike Hawkins: Yes.

Michael Schaper: And in fact we’re already working in that area.

Mike Hawkins: Okay. Great. Thank you. Look, finally, just to sort of put – bring this all together, where should I go if I think there is an unfair term in a standard form contract that has been offered to me, and I’m going to ask you, Brett Bassett from ASIC, if you can comment on that, please?

Brett Bassett: Yeah, that’s a really good question, Mike.  If there is an unfair term in a contract, then as a starting point we would think that businesses should try and sort that out amongst themselves.  That’s probably the easiest and the most efficient and effective way of dealing with it.  Obviously in order for that to occur, both businesses need to be able to talk to each other.  If one business, unfortunately, decides that they don’t want to talk to the other business, then that’s when you may need to go and get some legal advice or get lawyers involved.  Of course as Michael Schaper made mention of before, the ASIC and the ACCC do and may undertake some type of investigation into some of these instances, but generally our two organisations don’t act for individuals.  We tend to look at issues, and I dare say will do so in this arena, where there are more systemic or significant issues and where there is a greater cause of detriment to a wide population.  If, of course, you still are looking for assistance, we have a range of Small Business Commissioners throughout Australia and we’ve just had the new Small Business and Family Enterprises Ombudsman, Kate Carnell, commence in her new role just last week, and the final area or group where you could try and get some assistance is through the Financial Services ombudsmen.  There are a range of different organisations that help also around those type of areas. Thanks, Mike.

Mike Hawkins: Thank you very much.  And, look, thank you very much both gentlemen for really getting to the nub of what was involved in this unfair contracts term.  I think you’ve explained it brilliantly, thank you. We now come to the stage of proceedings where we’ve got a few questions that have come through from our viewers who have put in these questions when they were registering for the webinar.  So I’m going to ask both the panellists here questions and we do have a little bit of time left, so we’ve probably got about three or four, I think.  So first of all to Brett Bassett, I’ve got a question here from Dylan and Dylan asked, “Does the new law apply to contracts written overseas?” Brett?

Brett Bassett: That’s a good question, Mike, and a good question from Dylan.  It really does depend on the circumstances of the individual contract and the parties that are engaging generally.  If both parties are in Australia and the goods and services are provided within Australia, Mike, the answer is it will apply. If one of the parties to the contract is overseas, then generally what we would look at is where the service or the production of the goods or services is taking place. If that’s in Australia, then I would say it would go close, but you’d need to also think about those other trigger provisions that Michael Schaper has made mention of before.  It’s hard to come up with a definitive answer, so what we would say is in each situation, we would look at the individual circumstances, Mike.

Mike Hawkins: Excellent, and thank you very much for that, and I think Dylan will be very satisfied with that answer.  The next question I’ve got comes from Stef and she asked, “Does the new law apply to franchise – how does the new law apply to franchise agreements?”  Dr Michael Schaper, that’s a good question for you, I think.

Michael Schaper: We’ve used, Mike, a lot of franchising examples today, I think, so that gives you the flavour to the answer that’s very obviously is, yes, it applies to franchise agreements, however, as I mentioned not that long ago, if a contract term is required or expressly permitted by the Franchising Code of Conduct, the mandatory laws that applies to franchising in Australia, then any – that sort of unfair contract term provision might not still apply to these terms, so there still is that exemption, if you want to think about it in that way.

Mike Hawkins: Yeah, okay, and that’s – and thank you very much for that.  And staying with you, Kim has asked, “What if my agreement is made up of multiple documents, are all the documents captured under the new law”?  What do you think?

Michael Schaper:  Well, look if a contract refers to other documents as being part of the contract or it requires you – you’ve got a contract here, but it also requires you to comply with yet another set of documents, then those other documents in our reckoning really are part of the contract.   A classic one, it’s not all franchising tonight, but since we’re on the franchising theme, Mike, franchising agreements often have, for example, a provision that says franchisees have got to comply with an operations manual that spells out in a lot of detail a lot of the minutiae about what happens in – within the franchise system.  So in our view, that operations manual would then form, effectively, part of the contract.

Mike Hawkins: Oh, okay. Right.

Michael Schaper: That’s a really good example.

Mike Hawkins: Yeah. Yeah.

Michael Schaper:  But you can think of a lot of standalone, independent standard form of contracts also where it might be a referral to another document, that would be caught in.

Mike Hawkins: Great. No. No. No, good answer, thank you. Thank you. From Russell, and this one is for you, Brett, “Can a larger business include a wide ranging or sweeping term in a contract to deal with a situation that only happens very infrequently?” That’s an interesting question.

Brett Bassett: Yeah, it is, Mike, and thanks, Russell, for the question.  Generally, unfair contract terms may be allowed in the contract of business if the business that is seeking to have the term imposed has a legitimate reason for having it in there.  So a strong clause, such as the one that we’re talking about may actually be a legitimate clause to have in the contract, however when we’re looking at it, what we would look at is what’s the reason for having the clause in there and what is the result if the clause is imposed and is it too excessive, and by way of excessive an example would be if there’s a clause that says for a minor breach of a contract, the contract in its entirety could be terminated, that may actually be unfair.  So, once again, it comes down to the individual reasons behind why the contract is in and what are the repercussions if the term is actually left in the contract and it has to be used.

Mike Hawkins: Okay. Yeah. Yeah, thank you.  Thank you, that makes it a bit clearer from my point of view too. Look, I’m just staying with you, Brett, on this and we’ve got one from Kylie, “Does the law apply to contracts between a small business and another small business?”

Brett Bassett: Michael Schaper has already given the answer to this so I will paraphrase, in short, the answer is yes, as long as both businesses, or at least one of the businesses is under that 20 head count and the upfront costs as part of the contracts are $300,000 or less than a million dollars over a multi-year period.  Thanks, Mike.

Mike Hawkins: Thank you.  Look, I’ve got – I just want to get through another couple because I’m looking at them onscreen and I think, look, these are really good questions, so I’m just going to go for it, even though we’re pushing for time.  Dr Michael Schaper, one from Matthew, “Can a term still be unfair it is never – if it is never or rarely used by the business that put it in the contract?” Michael?

Michael Schaper: The short answer is yes and so, again, we’re in short answer phase here.  It’s not so much how often the provisions are used that’s really the issue, it’s does it exist in the contract and could it be utilised, that’s the really important thing.  We’re not looking at conduct, we’re looking at what the provision actually is there.  If it’s a term that is rarely used, the question you’ll want to ask yourself, twofold, well, first of all if it’s never used does it really need to be in the contract, especially this phase where you’re reviewing terms to make sure that they’re not unfair, and the second one is if a business is trying to protect itself legitimately against certain situations where it thinks something may come up, and it’s unlikely but we want to be sure, then perhaps what you need to be thinking about is we need to come up with a clause that covers that specific problem rather than just put in a very broad phrase, a very wide ranging term, as Brett just mentioned, that could be applied to so many situations that were it to be used it would run – a really good chance it would run foul of these laws.

Mike Hawkins:  Okay. Okay. Look, as I said, we’re finishing up with two questions now, and I’m staying with you, Michael, from Andrew, “Does the law apply to government contracts?”  An interesting one.

Michael Schaper: It is, isn’t it?  Look, if you’ve got a government trading enterprise, and by that I mean a government entity that is actually operating effectively as a commercial entity, then the unfair contract terms will apply to it, but the day to day business of government, for example, procurement activities, tenders, where government really isn’t carrying on as a business is not subject to these laws.  We are looking at this issue, we are talking to government departments about that, as part of those – review that I mentioned before, because we recognise that it is a significant amount of – especially independent contracting work that a lot of small businesses do.

Mike Hawkins:  Yeah. Excellent. Thank you, and our final question from tonight and it’s to you, Brett, and it’s from Harry, “Does the law apply to mortgages and business loans?” Mmm.

Brett Bassett: The answer is, yes, Mike, it does, as long as a couple of key thresholds are met.  Number one, getting back to the example I gave before around Mrs Smith wanting the $950,000 loan, so as long as the upfront price does not include interest, as long as the upfront price is less than $300,000 or, for a multi-year contract, less than a million dollars, the unfair contract terms certainly do apply, Mike.

Mike Hawkins:  Excellent. Thank you very much, Brett, and that really brings to a conclusion our webinar for this evening.  I’d like to thank you all for watching.  Thank you to all those people who have submitted questions and how probing they were too. Thank you to Brett Bassett from Australian Securities & Investments Commission, Dr Michael Schaper from the Australian Competition & Consumer Commission, thank you, gentlemen once again for having all of those answers ready and making sure that hopefully people are a bit more comfortable about this legislation that’s coming in to benefit small business.  I’ll just put another slide up here.

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So just to let you know that the law comes into effect on the 12th of November 2016.  Start preparing now.  Both our panellists have said start preparing now.  For more information, here’s some sites that you can visit and they are very topical sites, they’re very up to date, so if you have a question, and there’s an opportunity to inquire on those websites, please put your questions there, but you will find a great deal of content, great deal of information on those websites, and all it needs for me to say is thank you everybody for watching our webinar.  We hope you found it as informative and interesting as we had in making it for you and with that I again thank our panellists and wish you a very good evening.