Major changes needed to get rid of unfair contract terms

Speakers: 
Mr Rod Sims, Chair
Conference: 
COSBOA National Small Business Summit
31 August 2018

ACCC Chair Rod Sims addresses the Council of Small Business Organisations Australia’s National Small Business Summit regarding recent ACCC enforcement action relating to unfair contract terms, limitations that the ACCC has identified in the business-to-business unfair contract terms law and the codes of conduct.

Transcript: 

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Introduction

Good afternoon ladies and gentlemen, and thank you for inviting me to the Council of Small Business Organisations Australia’s National Small Business Summit 2018.

As you know, the work of the Australian Competition and Consumer Commission, or ACCC, often has implications for small business as we take actions to ensure businesses can compete on their merits, consumers are protected, and small businesses are not deceived and receive the protection of industry codes of conduct.

Our former deputy chair Dr Michael Schaper, who was primarily responsible for small business for the past 10 years, left the ACCC in May to pursue a new role with the Australian Medical Association. We wish him well, after doing a great job for us, and for you.

Our new Deputy Chair Mick Keogh OAM is responsible for small business, franchising and agriculture. Mick’s career has been largely centred on the agricultural sector, to which he has a long and diverse history including periods of employment as a farm manager, a university researcher, an agribusiness consultant and an agriculture policy advisor.

Mick remains involved in family farming in southern NSW, and so he maintains a strong connection to the beating heart of small business in Australia. Farmers and small business owners share many mutual interests, as most farms are themselves small businesses, with all the associated risks, rewards, and of course, competition concerns that come with it. You will all come to know him well.

Today, I will briefly touch on three matters.

First, some recent enforcement actions relating to unfair contract terms.

Second, the limitations that the ACCC has identified in the business-to-business unfair contract terms law, and the many changes we think should be made. For the sake of brevity, I will refer to these provisions as unfair contract terms for the remainder of the speech.

And third, and finally, I will touch on codes of conduct and whether or not they are effective for small businesses.

Enforcement outcomes

Our enforcement work continues to focus and deliver benefits to Australian small businesses.

It is important to note, however, that our enforcement model does not seek to address every matter that comes to our attention, as we do not have the resources to do so, but rather to identify important and systemic issues, make targeted strategic interventions, with a view to leveraging off these to drive broader compliance.

Our Compliance and Enforcement Policy will always make reference to our interest in small business. Last year we focussed on the introduction of the vital and new unfair contract term provisions. This has seen a number of enforcement interventions including three court proceedings.

  • The ACCC has taken successful court action against a major waste management company, JJ Richards & Sons Pty Ltd, for unfair contract terms including an automatic five-year rollover clause, a unilateral price variation term and a broad indemnity provision.
  • The Federal Court has declared by consent that 12 terms in standard form contracts used by two Servcorp Ltd subsidiaries are unfair and therefore void.
  • The ATM provider Cardtronics has admitted that its subsidiary, DC Payments, offered contract terms with small businesses that may be unfair under the Australian Consumer Law. The company has given a court-enforceable undertaking to the ACCC to change terms that may be unfair for businesses under existing contracts. Importantly, Cardtronics has cooperated with the ACCC’s investigation, and undertaken not to enforce unfair terms for all existing merchants, some of whom entered contracts six years ago, which is a welcome outcome.

While these are positive outcomes, the existing unfair contract term model has some severe limitations that greatly reduce its effectiveness, to which I will now turn.

Changes needed to business-to-business unfair contract term law

The business-to-business unfair contract term law is an extremely valuable law that works to protect small businesses against terms that just should not be in contracts. We have, however, seen the law’s limitations and believe the law should be strengthened considerably.

Fortunately, the Government has committed to commence a review of the unfair contract term law before the end of this year.

As part of the review, the Government will draw upon data collected from regulators and other key stakeholders. We will be bringing together the issues we’ve identified and making the case for significant strengthening of the law. So what are the limitations?

There are two fundamental problems.

The biggest limitation that the ACCC has identified is this: unfair contract terms are not illegal.

They should be!

Currently, the Australian Consumer Law, or ACL, allows a potentially unfair contract term to be challenged in a court so it can be declared void but it does not prohibit such a term being included in a contract.

The second biggest limitation to the current regime is that the ACCC cannot seek civil pecuniary penalties when a term in a contract is declared unfair and void by the court. Nor can we issue infringement notices for contract terms that are likely to be unfair. By making unfair contract terms illegal, the ACCC would be able to seek pecuniary penalties and issue infringement notices.

Prohibition and penalties

These limitations force the ACCC into the position of being a compliance agency for companies, which we should never be. Under the current arrangements, companies can simply amend their unfair contract terms when the ACCC raises an issue with them, and there is nothing that we can do to hold them to account for prior conduct.

Penalties and infringement notices should apply if unfair contract terms are included in standard form contracts. Otherwise, no real incentive exists for businesses to ensure their standard contract do not contain such terms.

Given unfair contract terms are not illegal or attract penalties, current unfair contract term laws are not in line with other provisions of the CCA.

There are also many other problems to be addressed.

Definition of a standard form contract

One of the keys to the current unfair contract term regime is the definition of a ‘standard form contract’.

Under the current law only terms in a standard form contract can be declared void. The ACL provides a number of factors that need to be considered to determine whether a contract is standard form. These factors include whether another party was given an effective opportunity to negotiate the terms of the contract. It’s unclear whether this factor can be satisfied by showing that the term was varied in relation to other consumers or small businesses. This is problematic because, if it can, then this may push contracts which were intended to be covered by the regime outside of it. An important issue for the forthcoming review is to consider whether the full suite of contracts that are in fact standard form contracts are covered.

Thresholds

Under the current law, a contract is a ‘small business contract’ if:

  • the contract is for the supply of goods or services or the sale or grant of an interest in land;
  • at least one party to the contract is a business that employs fewer than 20 people, including casual employees; and
  • either the upfront price payable under the contract does not exceed $300 000 or, if the contracts is for a duration or more than 12 months, the upfront price payable does not exceed $1 million.

When the unfair contract terms regime was extended to cover small businesses, we expected that these thresholds would cover most small business transactions, but we are finding that is not the case.

In the ACCC’s experience this threshold sometimes excludes businesses that we think should be protected from unfair contract terms. For example, we think it is likely that the majority of authorised motor dealers fall outside the current thresholds because of the high value of the products sold and perhaps also the number of employees.

In our Dairy Inquiry we came across a number of potentially unfair contract terms in milk supply contracts that allow retrospective changes in farmgate milk prices. For some of those contracts where there is a fixed volume and price for the duration of the contract, the upfront price exceeds the threshold and so the unfair contract term protections do not apply.

We are also aware of a number of potentially unfair payment terms in the trucking industry, however, many of the businesses that we spoke to employed more than 20 people and so were over the threshold.

There is no logical reason why the small businesses in these examples should be excluded from the protections of the unfair contract term legislation. The ACCC will recommend that these thresholds are reviewed in the upcoming review of the business-to-business, or B2B, unfair contract term regime.

Compulsory information gathering powers

The ACCC’s compulsory information gathering power under section 155 of the CCA is a vital tool in investigating potential breaches of competition and consumer laws. It enables us to compel businesses and individuals to provide information and documents.

While we exercise this power very carefully, when we have a reason to believe that a business is not complying with the law, it is the primary way we gather evidence of that non-compliance.

However, because including an unfair contract term in a standard form contract is not currently illegal under the CCA, the ACCC cannot use s155 to investigate whether a term is unfair and, instead, we largely rely on evidence being provided voluntarily.

In circumstances where small businesses might be unwilling to cooperate with the ACCC for fear of commercial retribution, it is difficult for us to collect the necessary evidence to enforce the unfair contract term regime.

The Final Report of the recent review of the ACL recognised the practical challenges when a regulator is not able to collect evidence as to whether a term is unfair.

In August 2017, consumer affairs ministers agreed that ACL regulators, including the ACCC, should be allowed to use their existing powers to obtain information and evidence to determine whether a standard form contract term is unfair. Legislation was introduced to give effect to this proposal in March 2018 and it is still before the Senate. It is extremely important that this legislation is passed as soon as possible so the ACCC can more efficiently enforce unfair contract term protections.

Codes of conduct

Finally, I will touch on mandatory codes of conduct.

Mandatory codes of conduct can play an important role in setting standards for better business practices, and they can add a lot of value when they are correctly designed and administered.

To be effective, codes must be enforceable with strong incentives to comply.

It is important that these codes are reviewed from time to time to examine their efficacy. At the moment we have an independent review of the Food and Grocery Code of Conduct and a parliamentary inquiry into the franchising and oil codes of conduct, for example.

In these reviews we are making the case that the consequences of breaching the codes must be sufficiently serious to provide incentives for businesses to comply. Where penalties are unavailable there is little incentive to comply.

The ACCC therefore recommends that:

  • civil pecuniary penalties (and thereby infringement notices) be introduced for all breaches of all codes
  • the amount of civil pecuniary penalties available under the CCA for a breach of a prescribed industry code to be increased to at least reflect the penalties currently available under the ACL.

Conclusion

Unfair contract terms and mandatory codes are only as good as their enforceability is, and, as a regulator, we can only be as effective our enabling legislation allows us to be.

As Australia’s competition and consumer regulator, the ACCC would like to see stronger protection for businesses who fall victim to unfair terms in their contracts. Stronger codes and protections against unfair contract terms means a more level playing field for businesses to compete upon, and that remains our goal.

Thank you for your time today.

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