Penalties looming for unfair small business contracts

On 14 October 2018, the ACCC’s Deputy Chair, Mick Keogh, again reiterated the ACCC’s view that major changes are required to unfair contract laws for small businesses at the Franchise Council of Australia Law Symposium. This speech follows similar comments from the ACCC Chair, Rod Sims, at his address to the Council of Small Business Organisations Australia in August of this year.¹

According to Mr Keogh, the ACCC considers that there are two fundamental flaws with this regime:

1. Unfair terms are not illegal – The current legislation does not make unfair contract terms illegal in standard form small business contracts. At the moment, a potentially unfair contract term can be challenged in Court. If the term is judged to be unfair, the Court can declare the term void and not enforceable.
2. No civil pecuniary penalties or infringement notices are available for unfair terms – The ACCC cannot seek civil pecuniary penalties when a term is declared unfair by the Court or issue infringement notices for small business contract terms that are likely to be unfair.

The ACCC is essentially frustrated that it is not holding a large enough stick. In the absence of significant financial penalties, the ACCC’s view is that the stakes are simply not high enough to force businesses to make compliance with these laws a priority. In fact, Mr Keogh went so far as to suggest:

“…businesses could be considered to have an added incentive to include potentially unfair terms in their contracts. The worst that can happen under the law is that if some of the terms are subject to legal challenge, the [sic] might be declared unfair and effectively struck out of the contract, but the contracts otherwise remains in force”².

The ACCC wants to be able to hold businesses to account for their unfair conduct. In order to do this, the ACCC wants these laws to be strengthened to ensure their utility in protecting small businesses. In a nutshell, the ACCC wants its big wooden stick! The ACCC also wants the thresholds for defining ‘a small business contract’ reviewed to potentially expand the scope of the law to a greater number of contracts.

The small business unfair contracts regime was first enacted in November 2016 and, at the time, the Federal Government committed to review it within two years. Therefore, the due date for the Government’s review is imminent. The Government will be drawing upon the experiences of the ACCC in administering this law, as well as the views of other key stakeholders. The ACCC has made it clear that it will be making its case for strengthening these laws and by making these public statements, the ACCC is ensuring that its views are widely known in time for this review.

Unfair contract laws are, without a doubt, a hot topic for the ACCC and these issues have permeated various inquiries, investigations and proceedings commenced by the ACCC in recent times. Unfair contract practices were a critical feature of the ACCC’s inquiry into the dairy industry for which it released its final report on 30 April 2018 and, more recently, the ACCC’s market study into the wine grape industry, which commenced in September 2018.

The ACCC has successfully commenced Court actions for unfair contract terms against JJ Richards & Sons Pty Ltd and Servcorp Limited³.  Proceedings against Ashley & Martin and Mitolo Group Pty Ltd are still before the Courts.

The ACCC has also obtained Court enforceable undertakings from a number of companies which have co-operated with the ACCC’s investigation into unfair terms in small business contracts, including Husqvarna, Cardtronics, Wisdom Properties Group, Warrnambool Cheese and Butter, Fairfax Media, Lendlease Property Management, Sensis and Uber4. Typically, these undertakings have involved the business undertaking to the ACCC to amend the terms of their contracts and refrain from enforcing the unfair terms. These businesses are also generally required to carry out a compliance program with respect to the Australian Consumer Laws for a number of years.

In light of these public statements and the ACCC’s heavy focus on unfair contracting practices involving small businesses, we can certainly expect that the ACCC will be strongly pushing Government for tougher laws and we will have to wait to see whether the ACCC is successful in getting any traction with this issue. Addisons will be closely monitoring this area for further developments and will keep you updated.

---