Small Businesses: Liabilities, Leases and Legalities Who should - PDF document

Uncovering the new Unfair Contracts Law for Small Businesses: Liabilities, Leases and Legalities Who should you trust? Dr Michael Schaper FIPA ACCC Uncovering The New Unfair Contracts Law For Small Businesses: Liabilities, Leases and Legalities Dr Michael Schaper ACCC Deputy Chair Institute of Public Accountants 2017

Unfair Contract Term Laws Protect both consumers and small businesses from unfair terms where they have little or no opportunity to negotiate New law applies to standard form small business contracts entered into or renewed since 12 November 2016 Some industries of focus: advertising, telcos, franchising, retail leases, waste management, contracting, agriculture Unfair contract terms Consumer Example: ACCC v Chrisco Hampers In 2015, the Federal Court found that Chrisco included an unfair contract term in 2014 lay-by agreements relating to the ‘ HeadStart Plan’ • The term allowed Chrisco to continue to take payments by direct debit after the consumer had fully paid for their lay-by order • Consumers were required to ‘opt out’ to avoid having further payments automatically deducted

Why Do Small Businesses Need Protection? On average small businesses were offered about 8 standard form contracts in the past 12 months Small businesses less likely to thoroughly review the contract…too complicated and they lack legal expertise 30% of small businesses spend less than 9 minutes reviewing standard form contracts 60% of small businesses claimed to have experienced unfairness in terms and conditions 44% of small businesses reported experiencing some harm as a result of the unfair terms Source: The Commonwealth Treasury, on behalf of CAANZ, undertook a survey from 23 May 2014 to 1 August 2014 on business contracting practices and unfair contract terms . What’s An Unfair Contract Term? A court or tribunal looks at Standard form contracts transparency and the contract cannot contain terms that: as a whole before deeming a term unfair. cause a significant imbalance in Unfair term is void (treated as rights though it never existed), however the rest of contract will continue to bind. are not reasonably necessary to protect the business’s interests, and Terms that set out the price are not covered by the UCT law. cause any detriment to the consumer or small business

What’s Fair? Mrs Smith’s Bakery The contract between Mrs Smith’s Bakery and Big Supplier says: • The agreement lasts for 12 months and sets a price of $3 per muffin • The contract will automatically renew if Mrs Smith’s Bakery doesn’t opt out of the agreement six months before it ends • Big Supplier can change the price of its muffins at any time, and Mrs Smith can’t terminate the contract if it does What’s Fair? Mrs Smith’s Bakery The contract between Mrs Smith’s Bakery and Big Supplier says: • The agreement lasts for 12 months and sets a price of $3 Ok per muffin • The contract will automatically renew if Mrs Smith’s Bakery doesn’t opt out of the agreement six months Problematic before it ends • Big Supplier can change the price of its muffins at any Problematic time, and Mrs Smith can’t terminate the contract if it does

To Whom Does The Small Business Unfair Contract Law Apply? One of the parties One of the parties Upfront price is less Upfront price is less Applies to Applies to to contract has to contract has than $300,000 than $300,000 standard form standard form less than 20 less than 20 ($1 million for multi- ($1 million for multi- contracts contracts year contracts) year contracts) employees employees Laws enforced by ASIC (financial products and services), and ACCC and state/territory ACL regulators (every-day goods and services) Excluded Contracts and Terms Excluded contracts Excluded terms • Contracts entered into before 12 • Terms defining the main subject November 2016 (unless renewed matter of the contract on or after this date) • Terms setting the upfront price • Shipping contracts payable • Constitutions of companies, • Terms required or permitted by managed investment schemes or law (e.g. Franchising Code). other kinds of bodies • Certain insurance contracts (e.g. car insurance) • Contracts in sectors exempted by the Minister (no sectors exempt)

Upfront Price When assessing whether a small business credit contract falls within the $300,000 threshold or $1 million for contracts for more than 12 months, any interest payable is excluded from the upfront price payable. • Scenario : A small business seeks a loan of $950,000 over 25 years from a large business. The interest rate on the x loan is 10% per year. A late fee of $50 is payable for each late payment. Source: ASIC What’s Included in the Upfront Price? Frank’s Franchise Frank enters into a three year franchise agreement with Big Franchise. The agreement includes the following fees: • Initial (up-front) franchise fee $400,000 • Royalty of 5% of future sales (volume unknown) • Termination fee $6,000

What’s Included in the Upfront Price? Frank’s Franchise Frank enters into a three year franchise agreement with Big Franchise. The agreement includes the following fees: • Initial (up-front) franchise fee $400,000 Covered • Royalty of 5% of future sales (volume Not Relevant unknown) • Termination fee $6,000 Not Relevant What Financial Products & Services Are Likely To Be Covered? • Contracts for business loans • Credit cards • Client or broker agreements • Contracts covered by an industry code, such as – the Code of Banking Practice – the Customer Owned Banking For more information Code of Practice www.asic.gov.au

Potential Unfair Terms In Financial Contracts Right To Unilaterally Automatic Rollover Vary The Contract • A small business enters into a • A small business enters into a fixed-term lease. At the end of the loan contract. Under a term of the lease term, unless it elects to contract, the lender has the right purchase the goods or has made to vary any term or condition of arrangements to return the the contract, including interest or goods, the small business is fees, if notice is given in writing. automatically entered into another The small business does not fixed-term lease. To exit this new have the right to end the contract, lease contract, early termination even if the lender increases its fees apply. fees significantly (e.g. by 20%). Source: ASIC Accountancy Engagement Letters Key Question • Is the letter a standard form? Are the terms offered on a take it or leave it basis? Prove • There is a legal presumption that a contract is a Otherwise standard form - unless you can show otherwise Other • Does the letter refer to other documents which Documents must be complied with? They may also be covered

Industry review • x The ACCC conducted a review into potential unfair terms in standard form contracts covering: Three common problems Terms allowing the contract advertising provider: telco to unilaterally vary all terms retail leasing independent contracting potentially broad and unreasonable powers to protect themselves against loss or franchising damage waste management an unreasonable ability to cancel or end an agreement agriculture Advertising • A standard form contract for advertising included a term allowing the publisher to remove content for any reason without prior notice • The publisher amended the term so it Response can only remove an advertisement in limited, defined circumstances (eg if it’s obscene or defamatory)

Telecommunications • Telco providers impose ‘early termination charges’ (using various calculations) on customers that cancel their contracts before the end of the specified term • One provider removed the charge on some SB plans, only requiring Response payment for the device. Another provider agreed to review charges to ensure they are fair and reasonable Franchising • A franchise agreement requires attendance at training courses or meetings. The term says the franchisee must pay $1000 if they fail to attend • The franchisor amended the term so Response that franchisees only pay the cost per person of the training

Agriculture • Contracts said suppliers must allow businesses the right to enter and inspect the property where produce is grown at any time • One trader amended its contract to Response only allow inspections to occur following a two-week notice, or at an agreed time Resolving Disputes • Talk to the contract provider • Talk to your state small business commissioner office • Talk to your lawyer • Talk to the ACCC or your state or territory fair trading agency • Talk to the ASIC about financial contracts Ultimately, only a court or tribunal (not the ACCC or ASIC) can decide that a term is unfair.