Consumer law may affect ag contracts

An extension of section 23 of the Australian Consumer Law (ACL) offering farmers and other small business operators protection from unfair terms and conditions in standard form contracts took effect on Saturday.

It applies to new contracts or variations to existing contracts, signed or agreed to after Saturday, and provides a legal avenue for small business owners and operators to challenge clauses they consider will allow a large business to impose unfair terms and conditions on their business.

According to the ACCC, the new law will apply when one party is a small business (usually less than 20 people) and the upfront contract price payable is no more than $300,000 or $1 million if the contract is for more than 12 months, and is for supply of goods or services or sale or grant of an interest in land.

While a standard form contract was not defined, the ACCC last week said it considered they were contracts that "provide little or no opportunity for the responding party to negotiate the terms" and were "offered on a 'take it or leave it' basis".

It said the small business unfair contract terms law was "a priority".

Agriculture was one of seven small business sectors selected for sampling by the ACCC over the past 12 months in relation to the new law, because of the prevalence of contracts, volume of complaints and based on submissions to the Treasury's 2014 consultation process.

"There are about 123,000 agricultural businesses, including farm businesses, in Australia," the ACCC said in its unfair terms in small business contracts report - a summary of its sampling findings.

"The majority of these are small or family-owned businesses.

"In recognition of the significant power imbalance that can exist between farmers and the businesses that they deal with - for example buyers, processors and agents - the ACCC has engaged with agriculture businesses to promote awareness of and compliance with the new unfair contract terms regime."

The ACCC said it reviewed standard form contracts volunteered by 17 traders across the horticulture, beef and cattle, viticulture, honey, cotton, poultry, grain and sugar industries.

It will look at standard form contracts in the dairy industry as part of a separate inquiry into that industry.

Clauses it identified as "potentially problematic" under the new law include those that provide businesses broad rights to reject or downgrade produce, limit liability, significantly restrict growers' ability to sell excess produce and allow for late indicative or variable pricing of produce.

While "engagement" with the agriculture sector continued, the ACCC said it has already "secured positive changes" relating to two kinds of commonly used terms.

As in all other sectors sampled, the ACCC said it identified "unilateral variation" clauses in agriculture contracts that could raise concerns under the new regime.

It said three of the contracts reviewed contained clauses that provide the trader with broad discretion to change quality of produce requirements and pricing terms.

Each trader submitted that such clauses are necessary to allow flexibility to respond to changes in regulatory requirements beyond their control, the ACCC said.

After discussions, two traders amended their contracts to make it clear changes can only be made in the event of regulatory change outside of the business's control.

The ACCC said the third trader has committed to reviewing the language used.

Unrestricted access to property was the second area of concern commonly found in agriculture supply contracts.

"Many contracts in the agriculture sector provide that suppliers must allow businesses the right to enter and inspect the property where produce is grown at any time," the ACCC said.

"The ACCC accepts that it may be necessary, from time to time, for a business to inspect the operations of a supplier to ensure compliance with the contract.

"However, the ACCC is concerned about clauses that provide a supplier must allow the other business unrestricted rights to enter and inspect their property.

"Such terms may be unduly burdensome if they do not provide notice requirements or some restrictions on when and how inspections can occur."

It has raised access clause concerns with three traders, the ACCC said, one had added a notice period to contracts, it was still negotiating with another and the third declined to amend its contract.

In the report, the ACCC pointed out its role complemented that of other ACL regulators, including State and territory consumer affairs agencies which also share responsibility for enforcing the law.

Ultimately, it will be courts or a tribunal that decides if part of a contract is unfair, it said.

If a contract clause is found to be unfair it will not be binding on the parties.

The ACCC said it had transitioned this week from "an education phase" on the new section 23 to enforcing it.

Other small business sectors it sampled were advertising, telecommunications, retail leasing, independent contracting, franchising and waste management, with a total of 46 contracts volunteered for review.

"Small businesses sign an average of eight standard form contracts a year and from November 12 these contracts (are) covered by a law preventing unfair terms in contracts that are offered on a 'take-it or leave-it' basis," said ACCC deputy chairman Michael Schaper.

"The ACCC has identified three types of problematic terms as being widespread and likely to cause concern.

"Terms that give one party an unconstrained right to unilaterally vary key aspects of a contract, that unfairly seek to shift liability from the contract provider to the small business or that provide unnecessarily broad termination rights will almost always raise concerns about unfairness.''

Dr Schaper said businesses that rely on these types of terms should be aware that they are leaving themselves open to action.

"Businesses should consider whether a contract term creates an imbalance of obligations between the parties, whether it is necessary to protect a legitimate business need, and whether it causes detriment to the other party,'' he said.

"Businesses should ensure that potentially problematic terms are only as broad as reasonably necessary to protect their legitimate interests, as terms that grant rights beyond this are likely to be unfair."