Key Takeaways for business owners
- The expanding unfair contracts provisions within the Australian Consumer Law are now clearly being enforced by the ACCC - and in the appropriate cases, the ACCC is commencing prosecutions.
- Businesses relying on standard contract and franchise agreements must be careful when drafting their contracts, in order to account for the terms of the franchising law and the ACL.
- Businesses must also bring a robust position to deal with any claims by the ACCC or consumers, business consumers, and the franchisees, when dealing with the disputes.
The Federal Court has recently delivered several decisions which must give corporations engaged in retail and financial services some pause for thought - especially in relation to their preparation of standard contract terms and conditions.
This article discusses two recent matters:
- Australian Competition and Consumer Commission v Fuji Film & Business Innovation Australia Pty Ltd (2022) FCA928; and
- Australian Competition and Consumer Commission v Retail Food Group Ltd (2022) FCA 961
The first decision analyses the far-reaching powers within the Australian Consumer Law to prohibit and strike down unfair contracts. The second decision relates to the banning of unconscionable conduct in respect of franchise operations.
Unfair contracts legislation
- expand the basis upon which a consumer or small business contract might be struck down for unfairness; and
- increase the penalties applicable to entities where their contracts contravene these provisions.
There is legislation currently before the Parliament to increase the penalties up to $50m for Corporations (see the Treasury Laws Amendment (Competition and Consumer Reforms No. 1) Bill 2022: More competition, better prices Exposure Draft).
Unfair contracts provisions in the ACL
Part 2-3 of the ACL provides that if a contract is a standard form contract, and a term in the contract is unfair, then that term is void. This applies to both consumer contracts and small business contracts.
A consumer contract is one for the supply of goods or services, for personal domestic or household use. A small business contract is one for the supply of goods or services to a business that employs fewer than 20 persons, and where the upfront price does not exceed $300,000 - or if over a longer duration, the amount payable in any 12 month period does not exceed $1,000,000. This will cover many small businesses.
An unfair term is one that would lead to a significant imbalance in the parties’ rights or obligations, where the term is not necessary to protect the interests of the person seeking to rely on it, and where it would cause detriment to the other party if it were relied upon.
This of course applies to standard form contracts only, and is dependant on whether the term is transparent.
ACCC v. Fuji
On 12 August 2022 in the Federal Court of Australia matter of Australian Competition and Consumer Commission v Fuji Film & Business Innovation Australia Pty Ltd (2022) FCA928 (‘ACCC v. Fuji’), Stewart J imposed orders and penalties on an equipment provider (Fuji) with respect to its standard terms and conditions entered into with businesses and consumers.
This case related to the supply of office equipment such as printers and photocopiers by way of sale, lease or licence.
The Australian Competition & Consumer Commission (‘ACCC’) alleged that around 34,000 separate contracts entered into between Fuji and its small business customers were unfair within the meaning of s.24 of the ACL, or pursuant to the terms of the Australian Securities and Investments Commission Act 2001.
The Judgment and orders were given by consent following a mediation between Fuji and the ACCC. The nature of the unfairness was described in the Judgment and included unfair terms which could not be negotiated between the parties, and included terms in favour of Fuji such as:
- allowing unilateral variation by Fuji of the price charged;
- providing for automatic renewal of the contract, unless notice was given by the customer within a certain period of time;
- additional contractual terms incorporated by reference to extraneous documents, which were not easily accessible by the customer;
- limitation of Fuji’s liability for any delay in supplying equipment;
- obligation on the customer to pay all costs Fuji incurs in exercising its rights, including legal costs on a full indemnity basis where there was no corresponding right for the consumer;
- a warranty given by the customer that they had read all the various material, including those documents and clauses incorporated by reference to extraneous documents;
- significant caps and reduction of Fuji’s liability and removal of liability for consequential loss;
- indemnification of Fuji for loss and damage, even subject to exclusions for wear and tear and Fuji’s own negligence;
- an entitlement of Fuji to suspend provision of services but still require the customer to pay for those services which are suspended;
- rights of Fuji to terminate the contract immediately without any corresponding right for the customer;
- obligation for balloon payments by the customer when terminated by Fuji;
- obligation at the end of the minimum term of the contract to either return the equipment or pay any shortfall;
- provisions in respect to the return of the documents irrevocably binding the consumer, but Fuji is not bound until it indicates it has adequate stock; and
- a right to Fuji to invoice even if goods have not yet been provided.
Comment on ACCC v. Fuji
The decision in ACCC v. Fuji was by consent, and there was no disputation or contested judicial determination as to the meaning and effect of the relevant provisions, and their unfairness.
The settlement was reached for the purpose of concluding the prosecution by ACCC of Fuji.
There was no detailed analysis of those individual 34,000 contracts, or the circumstances of each individual consumer and small business.
With this in mind, businesses must be mindful of these provisions.
The ACL provides a basis for consumers and small businesses to seek to set aside contracts which they otherwise seek to exit, without paying for the goods and services provided.
This prosecution also indicates a desire by the ACCC to actively enforce these provisions. Any business relying on bulk, standard form contracts should carefully analyse their terms and seek advice before finalising.
Franchising code breach
On 9 August 2022, Justice Katzmann delivered a separation interlocutory case management decision in the matter of Australian Competition and Consumer Commission v Retail Food Group Ltd (2022) FCA 961. Orders were made to progress claims by ACCC against franchisors concerning the way they implement franchise agreements which allegedly contain unconscionable terms.
The court considered that the case could be heard by sample (i.e. by looking at a few example clauses), rather than trawling through every single franchise agreement.
The ACCC alleged that franchisors had breached both the Australian Consumer Law and the Franchising Code of Conduct in the way that they had reached agreements with franchisees, and the way they managed the franchise arrangements.
In particular, it is alleged that there was improper use of combined marketing funds, as well as a failure to disclose where those funds were drawn from, and for what purposes they were used.
In the application, the ACCC sought an order that the facts of each of 47 individual franchises should be determined. The defendant franchisor sought that this be limited to an analysis of sample cases only.
Her Honour agreed with the submissions of the respondents and considered that the best way to deal with the multiple disputes was to hear the claim by representative sample, rather than engage in analysis of each individual transaction. The purpose of this was to promote the overarching purpose of the Civil Practice and Procedure Provisions and to reduce inefficiencies and contain costs.
Australian Competition and Consumer Commission v Retail Food Group Ltd (2022) FCA 961 represents a basis upon which a robust response to allegations and claims by the ACCC can be brought by franchisors to manage disputed claims, to minimise costs, without having to endure expensive time consuming and unnecessary litigation.
Of course, whether the ACCC succeeds is yet to be seen.
If you have a query relating to any of the information in this article, or would like to speak with Nick Maley, Partner within Holman Webb’s Workplace Relations Group in respect of a separate matter – please don’t hesitate to get in touch today