Thursday, 2 November 2017

Alphabet in the Soup: Google facing three multi-billion Euro abuse of dominance fines


Introduction

On 27 June 2017, the Commissioner Vestager announced the European Commission’s (EC) decision to fine Google 2.42 billion for abusing its dominance as a search engine.[1]  The EC found that Google had given illegal advantage to its own comparison shopping service over the services provided by its competitors.   While Google has appealed the EC decision to the General Court,[2] it appears that this is not the only competition concern facing Google in the EU.  In addition to announcing the sanction in the comparison shopping service investigation, the EC also stated that it had reached preliminary conclusions that Google has abused its dominant position in relation to the Android operating system and Adsense. 

In this post I will outline the EC’s conclusions in the comparison shopping service investigation, and provide a brief summary of the EC’s other two major Google investigations. 

Comparison shopping service investigation

As stated above, on 27 June 2017 the EC announced that it had decided to fine Google 2.42 billion for abusing its dominance as a search engine. This investigation focused on whether Google had given illegal advantage to its comparison shopping service. 

In addition to paying the fine, Google had 90 days from the date of the EC decision to stop its conduct or face further penalty payments at the rate of 5% of the average daily worldwide turnover of Alphabet, Google’s parent, for each day of non-compliance.  The EC can also backdate these payments to the date that the non-compliance started.   Given Alphabet’s annual turnover in 2016 was approximately $US90 billion, penalty fines for non-compliance could be as high as $US4.5 billion a day.

The EC decided that Google was dominant in each national market for general Internet search throughout the European Economic Area, with a market share of more than 90%.

The EC found that Google advantaged its own comparison shopping site “Google Shopping” (previously known as “Google Product Search” and “Froogle”) by:

  • Systematically giving its own product significantly better treatment by giving more prominent placements; and
  • Demoting rival comparison shopping services, by providing them with a lower ranking in generic search results.

In other words, Google placed the results from its own Google Shopping comparison site above the search results that Google’s own generic search algorithm determined were the most relevant to the consumer’s search. It also sometimes reserved space on the right hand side of the search results to display its own results.

The EC also noted that Google’s main rivals in comparison shopping were demoted on average to page 4 of the Google search results.  Rival sites were found to have been demoted by at least two different algorithims, which were first used by Google in 2004 and 2011. This resulted in a decline in clicks on these rival sites by more than 90%.

The EC found that Google’s conduct has started in 2008 in Germany and the United Kingdom and then moved to France, Italy, the Netherlands, Spain, the Czech Republic, Austria, Belgium, Denmark, Norway, Poland and Sweden.

The net effect of Google’s conduct was to assist Google Shopping to make significant gains in consumer traffic at the expense of its major rivals. As stated by the EC Google’s conduct resulted in the following traffic growth of its comparison shopping service:

  • United Kingdom – 45-fold increase
  • Germany – 35-fold increase
  • Netherlands – 17-fold increase
  • Spain – 17-fold increase
  • Italy – 14-fold increase

As concluded by the EC:

…Google’s strategy for its comparison shopping service wasn’t just about attracting customers. It wasn’t just about making its product better than those of its rivals. Instead, Google has abused its market dominance as a search engine by promoting its own comparison shopping service in its search results, and demoting those of competitors.

What Google has done is illegal under EC antitrust laws. It has denied other companies the chance to compete on the merits and to innovate. And most importantly, it has denied European consumers the benefits of competition, genuine choice of service and innovation.

Android investigation

The EC summarised its Android operating system investigation as follows;

The Commission is concerned that Google has stifled choice and innovation in a range of mobile apps and services by pursuing an overall strategy on mobile devices to protect and expand its dominant position in general internet search.

The EU has claimed that Google is manipulating handset-makers and telcommunications companies by forcing them to agree to exclusive deals to pre-install key Google apps, such as Google Search and Google Play.

Google has also been accused of paying handset-makers and telecommunications companies to pre-install Google Search, and preventing the sale of handsets using non-Google versions of Android through “anti-fragmentation” agreements.

Most significantly the EC has announced that it has reached a preliminary conclusion that Google’s conduct in relation to the Android operating systems constitutes a breach of its dominant position in the relevant market. 

Adsense investigation

Finally, the EC’s Adsense investigation relates to allegations that Google has reduced choice by preventing third-party websites from sourcing search ads from Google’s competitors. 

As stated by the EC in its Statement of Objections:

Google places search ads directly on the Google search website but also as an intermediary on third party websites through its "AdSense for Search" platform ("search advertising intermediation"). These include websites of online retailers, telecoms operators and newspapers. The websites offer a search box that allows users to search for information. Whenever a user enters a search query, in addition to the search results, also search ads are displayed. If the user clicks on the search ad, both Google and the third party receive a commission.

The EC’s concerns centre on Google’s agreements with a number of large third parties for whom Google provides search advertising intermediation services, also known as Direct Partners.

The EC alleges that Google has breached antitrust rules by imposing the following conditions:
  • Exclusivity: requiring third parties not to source search ads from Google's competitors.
  • Premium placement of a minimum number of Google search ads: requiring third parties to take a minimum number of search ads from Google and reserve the most prominent space on their search results pages to Google search ads. In addition, competing search ads cannot be placed above or next to Google search ads.
  • Right to authorise competing ads: requiring third parties to obtain Google's approval before making any change to the display of competing search ads.
The EC has claimed that the above practices have been in place for ten years.

The EC stated that Google’s actions in relation to Adsense:

...have artificially reduced choice and stifled innovation in the market throughout the period. They have artificially reduced the opportunities for Google's competitors on this commercially important market, and therefore the ability of third party websites to invest in providing consumers with choice and innovative services.

Again, the EC has formed the preliminary view that Google has abused its dominant position in order to prevented existing and potential competitors, including other search providers and online advertising platforms, from entering and growing in this commercially important area.

Conclusions

It seems inevitable that the EC will be imposing two further significant antitrust fines against Google in the near future in relation to the Android and Adsense investigations. There is also a strong likelihood that the fines for these investigations will be significantly larger than the fine imposed in relation to the comparison shopping investigation.

While comparison shopping services are an important part of Google’s business, it is arguable that the competitive impact of Google’s alleged conduct in the comparison shopping area is not as significant as the impact of its alleged conduct in relation to Android operating systems and the Adsense product.  It is also arguable that the EC will see Google’s alleged conduct in relation to Android operating systems and Adsense as a much more central part of its overall business strategy and revenue streams.

While there has been some speculation that the EC investigations are a precursor to a broader plan to ultimately break up Google into a number of smaller companies, this speculation is fanciful. [3] Not only doesn’t the EC had the same monopoly break up powers that exist in the US, but the US Department of Justice has shown very little interest in even investigating Google’s conduct, much less in taking steps to force its breakup.

The real question is whether Alphabet may itself decide to break up Google into a number of separate companies at some time in the future.  However, what is clear is that any decision by Alphabet to go down this path will not be dictated by a fear of possible antitrust breakup, as was the case with the breakup of AT&T in the early 1980's.

Monday, 30 October 2017

Recognising and Rectifying Regulatory Risks in the Retirement Village Industry


Introduction
The retirement village industry has been in spotlight over the last few months following the joint Four Corners - Fairfax investigation into Aveco Retirement Villages (Aveco). This investigation has led to calls for greater scrutiny of the entire retirement village industry. It was also the catalyst for the Australian Competition and Consumer Commission’s (ACCC) decision to launch an in-depth investigation into Aveco’s business practices. 

In this paper, I will be outlining the main compliance risks which the ACCC will be investigating in relation to Aveco – namely, misleading and deceptive conduct, unconscionable conduct and unfair contract terms.  I will also be outlining the steps which the retirement village industry can take to better manage these various compliance risks.

Retirement village industry
The retirement village industry is subject to a complex system of regulation.  Each state and territory has its own legislation which is administered by fair trading and consumer protection agencies.  For example, in NSW the industry is regulated by the Retirement Villages Act 1999 and the Retirement Villages Regulation 2009.[1] 

Even though the retirement village industry is subject to specific retirement village legislation in each state and territory, it is also subject to the provisions of the Australian Consumer Law 2010.  In other words, retirement village operators are subject to two different and largely distinct legislative regimes and as such must ensure that they fully comply with both regimes.

Australian Consumer Law 2010 (ACL)
The ACL is a single, national consumer protection law which is administered by multiple regulators. The ACCC and state and territory fair trading agencies enforce the ACL. The Australian Securities & Investment Commission (ASIC) has a role in relation to financial services.

The ACCC has primary responsibility for matters that have a national dimension, which explains its recent interest in Aveco. 

Having said this, in recent times there has been a greater degree of interagency cooperation between the ACCC and state and territory agencies. A recent notable example has been the joint investigations between the ACCC and state regulators into the VET sector which has resulted in numerous investigations and court cases. It is likely that investigations into the retirement village industry will also be conducted jointly by the ACCC and the relevant state or territory regulator.

ACCC Priorities
Each year the ACCC releases its Compliance and Enforcement Priorities which sets out the main areas that it will be focusing on in its investigations and litigation.    Therefore, it is vitally important for all retirement village operators to have a thorough understanding of the way in which the ACCC prioritises its enforcement activities, particularly given the highly interventionist and aggressive approach which the ACCC takes to consumer protection matters. 

The ACCC’s 2017 Priorities[2] identified two areas of particular relevance to the retirement village industry - namely:

  • conduct detrimentally affecting disadvantaged or vulnerable consumer groups
  • conduct involving essential goods and services

It is likely that the ACCC considers most elderly residents living in retirement villages as constituting a vulnerable consumer group.  The ACCC is also likely to see retirement villages as providing an essential service to residents.

The ACCC has also stated that it will focus its enforcement activities on conduct which is of significant public interest and concern, which explains its interests in the retirement village industry following the joint Fairfax – Four Corners investigation.

The ACCC has also adopted a practice of identifying a number of enduring priorities which it defines as conduct which is so detrimental to consumer welfare and to the competitive process that the ACCC will always regard them as a priority.  Included in the category of enduring priorities are matters which involve vulnerable and disadvantages consumers.

Finally, the ACCC lists the specific areas where the ACCC will be focusing its resources in the coming year, or the ACCC’s “Hit-List”. Notably, the ACCC 2017 “Hit List” did not include any areas of specific relevance to the retirement village industry. However, it is probably that the ACCC has already identified the retirement village industry as an addition to its 2018 “Hit List”.


Risk areas

The ACCC’s investigation of Aveo will be focusing on three areas:


  1. Misleading and deceptive conduct;
  2. Unconscionable conduct; and
  3. Unfair contract terms.

Misleading and deceptive conduct


Section 18 of the ACL prohibits misleading and deceptive conduct:

(1) A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.


As is apparent section 18 is a very broad prohibition which governs all misleading and deceptive representations whether made in writing or orally, such as statements made by sales staff to prospective consumers.

The section also applies to failures by a party to draw a consumer’s attention to an unusual term in the contract. In other words, the section catches misrepresentations by silence or omission. An example of such a term may be terms in a retirement village contract governing exit fees and associated refurbishment fees.

False and misleading representations are also prohibited under section 29 of the ACL, as follows:


(1)  A person must not, in trade or commerce, in connection with the supply or possible supply of goods or services or in connection with the promotion by any means of the supply or use of goods or services.

Section 29 then lists a number of specific types of prohibited misrepresentations, including the following which may be relevant to the retirement village industry:

(b)  make a false or misleading representation that services are of a particular standard, quality, value or grade; or
(g)  make a false or misleading representation that goods or services have sponsorship, approval, performance characteristics, accessories, uses or benefits; 
(i)   make a false or misleading representation with respect to  the price of goods or services; or 
(m)  make a false or misleading representation concerning the existence, exclusion or effect of any condition, warranty, guarantee, right or remedy (including a guarantee under Division 1 of Part 3-2)

Section 29 prohibits misrepresentations about the standard or quality of services which are to be provided, the uses or benefits of such services and the price of services. Each of these issues may be relevant to the retirement village sector, to the extent that such representations are routinely made to prospective residents.

Subsection 29 (1) (m) also prohibits misrepresentations about the effect or existence of a particular contractual term. Accordingly, a misrepresentation about the effect or existence of a contractual term, including the failure to draw the resident’s attention to an unusual term, may be actionable under section 29 of the ACL.

The main difference between section 18 and 29, is the availability of pecuniary penalties for a breach of section 29. While there are no pecuniary penalties currently available for a breach of section 18, section 29 is subject to a maximum pecuniary penalty of $1.1 million per contravention for a corporation and $220,000 per contravention for an individual.

Unconscionable conduct

The ACL also prohibits unconscionable conduct which is defined as behaviour which is so harsh that it goes against good conscience. As stated by the ACCC “to be considered unconscionable, conduct it must be more than simply unfair—it must be against conscience as judged against the norms of society.”[3]

The relevant prohibition is Section 21 of the ACL which provides:

Unconscionable conduct in connection with goods or services

 (1)  A person must not, in trade or commerce, in connection with:

(a) the supply or possible supply of goods or services to a person (other than a listed public company); or

(b) the acquisition or possible acquisition of goods or services from a person (other than a listed public company);

engage in conduct that is, in all the circumstances, unconscionable.

Section 22 of the ACL sets out a range of factors which a court may have regard to when determining whether conduct is unconscionable.  A number of these factors are relevant to contractual arrangements in the retirement village industry - namely:

(a)   the relative strengths of the bargaining positions of the supplier and the customer; and

(b)   whether, as a result of conduct engaged in by the supplier, the customer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier; and

(c)   whether the customer was able to understand any documents relating to the supply or possible supply of the goods or services; and

(d)   whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the customer or a person acting on behalf of the customer by the supplier or a person acting on behalf of the supplier in relation to the supply or possible supply of the goods or services; and

(e)   the amount for which, and the circumstances under which, the customer could have acquired identical or equivalent goods or services from a person other than the supplier; and

(i)    the extent to which the supplier unreasonably failed to disclose to the customer:

 (i)    any intended conduct of the supplier that might affect the interests of the customer; and

 (ii)   any risks to the customer arising from the supplier's intended conduct (being risks that the supplier should have foreseen would not be apparent to the customer); and

 (j)   if there is a contract between the supplier and the customer for the supply of the goods or services:

(i)     the extent to which the supplier was willing to negotiate the terms and conditions of the contract with the customer; and

(ii)    the terms and conditions of the contract; and

(iii)   the conduct of the supplier and the customer in complying with the terms and conditions of the contract; and

(iv)   any conduct that the supplier or the customer engaged in, in connection with their commercial relationship, after they entered into the contract; and

(k)  without limiting paragraph (j), whether the supplier has a contractual right to vary unilaterally a term or condition of a contract between the supplier and the customer for the supply of the goods or services; and

 (l)   the extent to which the supplier and the customer acted in good faith.

While all of the above factors are unlikely to be relevant in each particular situation, the presence of some of these factors in a given situation would be sufficient to establish a case of unconscionable conduct.

The ACCC is likely to assume that in most cases there will be a significant disparity in the relative strengths of the bargaining positions of the retirement village operator and the resident.  Other important considerations are whether the contract is offered to the resident on a take or leave it basis and whether the resident was able to understand the terms of the relevance contract.  This last issue is of particular importance give the apparent complexity of retirement village contracts.

Significant pecuniary penalties apply to contraventions of the unconscionable conduct provisions – namely maximum pecuniary penalties or $1.1 million per contravention for a corporation and $220,000 per contravention for an individual.


Unfair contract terms

The ACL also prohibits unfair contract terms in standard form contracts.  These laws apply to contracts used in the retirement village industry to the extent that they meet the definition of a standard form contract.

Is it standard form contract?
Section 27(2) of the ACL sets out a range of factors which a court may take into account to determine whether a contract is a standard form contract:

  • Whether one of the parties has all or most of the bargaining power;
  • Whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
  • Whether another party was, in effect, required either to accept or reject the terms in the contract in the form they were presented;
  • Whether another party was given an effective opportunity to negotiate the terms of the contract; and
  • Whether the terms take into account the specific characteristics of another party to the particular transaction.

Importantly, section 27 of the ACL creates a reverse onus of proof in relation to whether a contract is a standard form contract.  This section states that if one party to a proceeding alleges that a contract is a standard form contract, it is presumed to be a standard form contract unless the other party proves otherwise.  

Accordingly, the retirement village will have to prove that the contract is not a standard form contract, which they may be able to do by disproving the factors listed above.

Does an exclusion apply?
If the contract is determined to be a standard form contract, the next step is to determine whether any of the various exclusions apply.

The most significant exclusion relates to the upfront price payable.  The legislation makes it clear that a term which “sets the upfront price payable under the contract” is not an UCT. In other words, the new UCT laws cannot be used by a resident to effectively argue that the price payable under the contract is unfair and as such that they have no obligation to pay for the services. 

Section 26 of the ACL also excludes terms from the scope of the UCT laws if they define the subject matter of the contract. Accordingly, a resident cannot claim that a term giving effect to the supply of the primary service is an unfair term. 

Other exclusions include any terms which are required or expressly permitted by a law of the Commonwealth, a State or a Territory.  This could include terms required under state or territory retirement village legislation.

Is the term unfair?
The next step is to consider the substantive effect of the term and to determine whether that term is unfair.  The legislation sets out three factors which, if established, would mean that a term is unfair. 

A term of a consumer contract is unfair if:

a.  it would cause significant imbalance in the parties’ rights and obligations arising under the contract; and

b.  it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and

c.  it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

Two important issues need to be stressed about these three factors. First, these three factors are the exclusive factors which must be proven to establish that a term is a UCT. In other words, they are not three non-exhaustive factors meant as guidance for the court but rather constitute the statutory test which the court must apply. Second, the factors are cumulative in the sense that each factor must be proven in turn in order to establish that a term is a UCT.

As is apparent, the first step in the process in determining whether a term is unfair is to assess whether the term itself would cause a significant imbalance in the parties
rights and obligations.  This criterion is not linked to the size of the respective parties, which is only relevant to determining whether the contract is a standard form contract.

The legislation also states that the term “would” cause significant imbalance. This suggests that courts will only strike down terms will have a “material” and “meaningful” impact on the rights and obligations of one of the parties. Lesser impacts are unlikely to render the term a UCT.

The court will also have to determine whether the term is reasonably necessary to protect the interests of the party advantaged by the term. The use of the term “reasonably” makes it clear that the court will be applying an objective test to determine whether the term protects the retirement village’s legitimate interests. 

Finally, the court must be satisfied that the term will cause determine to a party if it were to be applied or relied on. There are three issues to note about this factor:

(a)  a resident will have to satisfy the court that the term will cause practical detriment to a resident if it is relied on by the retirement village.  In other words, a mere theoretical detriment is unlikely to be sufficient to satisfy this factor;

(b)  a resident must show either financial detriment or other detriment. Therefore, non-financial detriments, such as time or inconvenience, or even reputational damage, may be sufficient to enliven the UCT jurisdiction; and

(c)  the test is prospective, in the sense that the court will be required to speculate on the effect of the term if it was applied or relied on.   Therefore, a resident seeking to invoke the UCT laws will not need to show that the term was enforced or even that the retirement village threatened to enforcement the term.  The mere existence of the term in the contract will be sufficient.  Additionally, a claim by a res retirement village that they would never enforce a particular term will not save that term from being characterised as a UCT.

The fact that a party does not have to prove that the other party has sought to enforce, or threatened to enforce, the alleged UCT expands the reach of the UCT legislation considerably.

Is the term transparent?
A further consideration in determining whether a term is a UCT is whether the term is transparent.  A term is considered to be transparent if it is

  • expressed in reasonably plain language;
  • legible; and
  • presented clearly; and
  • readily available to any party affected by the term.
The suggestion in the legislation is that terms which are not transparent are more likely to be characterised as unfair. In practical terms, this means that highly legalistic language, small fonts and tightly packed and largely illegible text in standard form contracts may tip the balance in favour of the term being characterised as an UCT.

Looking at the whole contract
A final step in the process will be an obligation on the court to consider the whole contract. While not expressed in the legislation as a final step, in practice it is likely that the court will undertake a final overview of the entire contract before determining whether a particular contract term is a UCT.

The importance of this step is to ensure that a particular term is not being assessed by the court in isolation from the rest of the contract.  It is likely that in many standard form contracts a number of terms will work to advantage of one party, whilst other terms will work to the advantage of the other party.  Accordingly, it is important to ensure that the court looks at the overall balance of terms in the standard form contract to make sure that one party is not challenging a particularly disadvantageous term, whilst the same time gaining the benefit of a number of other advantageous terms.

Examples of unfair contract terms
The legislation also helpfully sets out some examples of the types of terms that may be unfair.  The following is a summary of the examples of potential UCTs listed in the legislation - namely terms which:

(a)   permit one party to unilaterally avoid or limit performance under a contract;

(b)   permit one party to unilaterally, terminate, vary, assign, or renew the contract or to unilaterally determine whether the contract has been breached or to interpret its meaning;

(c)   penalise one party for a breach or termination of the contract;

(d)   permit one party to vary the upfront price payable under the contract without giving the other the right to terminate the contract;

(g)   permit one party to unilaterally vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract;

 (i)   limit one party's vicarious liability for its agents or its right to sue another party; and

 (l)   limit the evidence one party can adduce in proceedings or imposes an evidential burden on one party in proceedings relating to the contract.

The main distinguishing feature in the above examples is that they provide one party with unilateral rights and powers under the contract.  For example, unilateral rights to terminate the contract without cause or the exclusive right to interpret the meaning of the terms of the contract.

Another important feature of the above examples is whether they may be seen as apportioning contractual risks between the parties in an uneven way.  Implicit in these examples is a concern about a business forcing a resident to assume most, if not all, of the contractual risk arising under the standard form contract. 

The ACCC will no doubt be carefully reviewing Aveo’s retirement village contracts to ensure that none of the terms fall foul of the unfair contract terms legislation.  It is also likely that the ACCC will be broaden its investigation to encompass other retirement village’s contracts, given the claims that Aveo’s contractual terms are common across the industry.

Rectifying Risks
In order to minimise risks and avoid problems with the ACCC (and other State and territories regulators) it is important for retirement village operators to conduct a detailed Competition and Consumer Law Risk Assessment of every aspect of their business operations.

This would start with an identification of all risks in the business both from a:

  1. consumer law perspective – for example, the representations made to residents in marketing and promotional materials, the fairness of standard form contract terms and how complaints handling procedures are managed; and
  2. competition law perspective – for example, the nature of all agreements with competitors, suppliers and service providers, and other third parties.
It is important for retirement village operators to review their operations from both a consumer law and competition law perspective.  Whilst the ACCC’s initial focus will be on consumer law issues arising in the retirement village industry, it is inevitable that it will also be on the lookout for any potential competition law problems.

Once the retirement village has conducted detailed Competition and Consumer Law Risk Assessment, it should take steps to implement a comprehensive and up-to-date Compliance Program, consisting of the following elements:

  1. Compliance Policy
  1. The appointment of a Compliance Officer
  1. Other relevant policies such as a Complaints Handling Policy and a Whistle-blower Policy
  1. The establishment of an effective Complaints Handling procedure and
  1. Regular Competition and Consumer Law Compliance Training.

Taking steps to conduct a Risk Assessment and implement a Compliance Program will benefit the business by helping them to better identify and manage all competition and consumer law risks in the business.

Conclusion
It is apparent the retirement village industry will be the focus of government and regulatory scrutiny for some time to come. Accordingly, it is important for retirement village operators to be proactive in terms of identifying all the significant risks in their businesses and taking swift and appropriate action to remove or manage these risks.  Failure by the retirement village industry to immediately act on these risks in a timely and effective manner may force a political response which would invariably lead to the introduction of further intrusive and costly regulation.





[1] The NSW Retirement Villages Regulation is currently under review.

Thursday, 2 March 2017

Clear and Present Danger: Spotlight on Unfair Contract Terms in Small Business Contracts


Introduction

It is vitally important for all Australian businesses to have a thorough understanding of the new Unfair Contract Term (UCT) laws in relation to small business contracts.  These laws, which came into effect on 12 November 2016, state that any term in a small business standard form contract which is found to be an UCT will be void and unenforceable. While it is ultimately up to a court or a tribunal to determine whether a term is an UCT, the Australian Competition and Consumer Commission (ACCC) and the Australian Securities and Investment’s Commission (ASIC) have now signalled that they will be taking enforcement action in relation to UCTs which they find in small business standard form contracts.

Why was the UCT law introduced?

As explained by the ACCC, the new UCT laws were needed due to the prevalence of UCTs in small business standard form contracts. As stated by the ACCC -[1]
  • 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 unfair terms;
  • Small businesses are less likely to thoroughly review the contract due to the fact that such contracts are often too complicated and the small business lacks the requisite legal expertise; and
  • 30% of small businesses advised that they spend less than 9 minutes reviewing each standard form contract.
The ACCC also found that on average small businesses were offered about 8 standard form contracts over a twelve-month period.

How does the UCT law work?

There are number of discrete steps which businesses need to work through to determine whether a particular term is a UCT:
  • Is the contract a standard form contract (SFC)?
  • Is the SFC being offered to a small business?
  • Is the value of the SFC below the statutory contract value thresholds?
  • Is the contract term or the particular type of contract excluded from the new laws?
  • Is the term unfair?
  • Is the term transparent?
  • Have we looked at the whole contract?
1. Is the contract a standard form contract (SFC)

A SFC is a contract which is offered on a take it or leave it basis. In other words, the terms of the contract are not subject to negotiation between the parties. 

Section 27(2) of the ACL sets out a range of factors which a court may take into account to determine whether a contract is a STC:[2]
  • Whether one of the parties has all or most of the bargaining power;
  • Whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
  • Whether another party was, in effect, required either to accept or reject the terms in the contract in the form they were presented;
  • Whether another party was given an effective opportunity to negotiate the terms of the contract; and
  • Whether the terms take into account the specific characteristics of another party to the particular transaction.
Importantly, section 27 of the ACL creates a reverse onus of proof in relation to whether a contract is a SFC. This section states that if one party to a proceeding alleges that a contract is a SFC, it is presumed to be a SFC unless the other party proves otherwise. Accordingly, larger businesses will have to prove that the contract is not a SFC, which they may be able to do by disproving the factors listed above.

2. Is the SFC being offered to a small business?

If the contract is determined to be a SFC, the next step is to determine whether the SFC has been offered to a small business. 

The UCT laws only apply to SFC’s which are offered to small businesses which are defined as businesses which employ less than 20 people, including casual employees, employed on a regular and systematic basis.

The calculation of the number of employees is made at the time the contract is entered into. This means that an increase in the number of employees employed by a small business, to more than 20 employees, after the entry into various SFCs will not have the effect of excluding its SFC’s from the UCT laws. By the same token, a reduction in the number of staff employed by a business, to below 20 employees, after the entry into various SFCs will not transform all of that business’s SFC into SFC’s which are subject to the new UCT laws.

The ACCC has suggested that if a large business is in doubt about how many employees a business they are dealing with has, they should seek a written assurance from the small business about its employee numbers. The other option suggested by the ACCC is to simply assume that the contract is caught by the new small business UCT laws.

3. Is the value of the SFC below the statutory value limits?

In addition, the employee requirement, there is also contract value threshold which must be satisfied before the new UCT laws apply. The current thresholds are that the total upfront value of the SFC is either below $300,000 for a one year contract or under $1 million for a multiple year contract.

The upfront value of the contract is calculated at the time the contract is entered into and includes any contingent payments which are referrable to the supply. 

However, as explained by the ACCC, any amounts which cannot be calculated with certainty at the time of entry into the contract are unlikely to be included in the upfront price. For example, a franchise royalty which is expressed as a percentage of the franchisee’s sales will not be included in the upfront price calculation. This approach to calculating the upfront price will result in a much large number of SFCs being caught by the new UCT laws for small business.

4. Is the contract term of contract excluded from the new laws?

The next step is to work out whether any of the various exclusions apply.

The most significant exclusion relates to the upfront price payable. The legislation makes it clear that a term which “sets the upfront price payable under the contract” is not an UCT. In other words, the new UCT laws cannot be used by small businesses to effectively argue that the price payable under the contract is unfair and as such that they have no obligation to pay for the goods or services. 

Section 26 of the ACL also excludes terms from the scope of the UCT laws if they define the subject matter of the contract. A small business cannot claim that a term giving effect to the supply of the primary good or service is an unfair term. Indeed, it would be a strange result if a small business could allege that a contract for the supply of a particular product was unfair because the small business did not now wish to purchase that particular product.

Other exclusions in terms of subject matter of the term include any terms which are required or expressly permitted by a law of the Commonwealth, a State or a Territory. This could include terms requiring a small business to obtain a particular State or Territory licence or terms which reflect legislative provisions which permitting the limitation of liability (for example exclusion of liability for high risk recreational services).

The legislation also specifically excludes particular types of contracts from the scope of the new UCT laws – namely:
  • contracts of marine salvage or towage;
  • charter party agreements in relation to ships;
  • contracts for the carriage of goods by ship; and
  • constitutions of companies, managed schemes or other bodies.
Importantly, various financial services contracts are subject to the UCT legislation, such as the various SFCs used in the banking sector for credit cards, bank accounts and other financial products.

Unfortunately, most general insurance contracts have been excluded from the reach of the new laws. This exclusion was justified on the basis that general insurance contracts, such as car and home insurance, are currently regulated under the Insurance Contracts Act 1984.

5. Is the term unfair?

Once a business has worked its way through each of the above steps, the next step is to consider the substantive effect of the term and to determine whether that term is unfair. The legislation sets out three factors which, if established, would mean that a term is unfair. 

Two important issues need to be stressed about these three factors. First, these three factors are the exclusive factors which must be proven to establish that a term is a UCT. In other words, they are not three non-exhaustive factors meant as guidance for the court but rather constitute the statutory test which the court must apply. Second, the factors are cumulative in the sense that each factor must be proven in turn in order to establish that a term is a UCT.

A term of a small business contract is unfair if:

a. it would cause significant imbalance in the parties’ rights and obligations arising under the contract; and

b. it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and

c. it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

As is apparent, the first step in the process in determining whether a term is unfair is to assess whether the term itself would cause a significant imbalance in the parties’ rights and obligations. This criterion is not linked to the size of the respective parties, which is only relevant to determining whether the contract is a SFC.

The legislation also states that the term “would” cause significant imbalance. This suggests that courts will only strike down terms will have a “material” and “meaningful” impact on the rights and obligations of one of the parties. Lesser impacts are unlikely to render the term a UCT.

The court will also have to determine whether the term is reasonably necessary to protect the interests of the party advantaged by the term. The use of the term “reasonably” makes it clear that the court will be applying an objective test to determine whether the term protects a business’s legitimate interests.

Finally, the court must be satisfied that the term will cause determine to a party if it were to be applied or relied on. There are three issues to note about this factor:

(a) a party will have to satisfy the court that term will cause practical detriment to a party if it is relied on by the other party. In other words, a mere theoretical detriment is unlikely to be sufficient to satisfy this factor;

(b) a party must show either financial detriment or other detriment. Therefore, non-financial detriments, such as time or inconvenience, or even reputational damage, may be sufficient to enliven the UCT jurisdiction; and

(c) the test is prospective, in the sense that the court will be required to speculate on the effect of the term if it was applied or relied on. Therefore, a party seeking to invoke the UCT laws will not need to show that the term was enforced or even that the other party threatened to enforcement the term. The mere existence of the term in the contract will be sufficient. Additionally, a claim by a business that they would never enforce a particular term will not save that term from being characterised as a UCT.

The fact that a party does not have to prove that the other party has sought to enforce, or threatened to enforce, the alleged UCT expands the reach of the UCT legislation considerably.

6. Is the term transparent?

A further consideration in determining whether a term is a UCT is whether the term is transparent. A term is considered to be transparent if it is:
  • expressed in reasonably plain language;
  • legible; and
  • presented clearly; and
  • readily available to any party affected by the term.
The suggestion in the legislation is that terms which are not transparent are more likely to be characterised as unfair. In practical terms this means that highly legalistic language, small fonts and tightly packed and largely illegible text in SFCs may tip the balance in favour of the term being characterised as an UCT.

7. Looking at the whole contract

A final step in the process will be an obligation on the court to consider the whole contract. While not expressed in the legislation as a final step, in practice it is likely that the court will undertake a final overview of the entire contract before determining whether a particular contract term is a UCT.

The importance of this step is to ensure that a particular term is not being assessed by the court in isolation from the rest of the contract. It is likely that in many SFC’s, a number of terms will work to advantage of one party, whilst other terms will work to the advantage of the other party. Accordingly, it is important to ensure that the court looks at the overall balance of terms in the SFC to make sure that one party is not challenging a particularly disadvantageous term, whilst the same time gaining the benefit of a number of other advantageous terms.

Examples of unfair contract terms

The legislation also helpfully sets out some examples of the types of terms that may be unfair. The following is a summary of the examples of potential UCTs listed in the legislation - namely terms which:

(a) permit one party to unilaterally avoid or limit performance under a contract;

(b) permit one party to unilaterally, terminate, vary, assign, or renew the contract or to unilaterally determine whether the contract has been breached or to interpret its meaning;

(c) penalise one party for a breach or termination of the contract;

(d) permit one party to vary the upfront price payable under the contract without giving the other the right to terminate the contract;

(g) permit one party to unilaterally vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract;

(i) limit one party's vicarious liability for its agents or its right to sue another party; and

(l) limit the evidence one party can adduce in proceedings or imposes an evidential burden on one party in proceedings relating to the contract.

The main distinguishing feature in the above examples is that they provide one party with unilateral rights and powers under the contract. For example, unilateral rights to terminate the contract without cause or the exclusive right to interpret the meaning of the terms of the contract.

Another important feature of the above examples is whether they may be seen as apportioning contractual risks between the parties in an uneven way. Implicit in these examples is a concern about a larger business forcing a smaller business customer to assume most, if not all, of the contractual risk arising under the SFC.

ACCC Guidance

On 10 November 2016, the ACCC issued a report entitled Unfair terms in small business contracts: A review of selected industries.[3] The purpose of this Report was to provide a breakdown of the common terms of concern identified in particular industries, and to discuss the kinds of changes that businesses made.

Unsurprisingly, the ACCC identified the following types of terms as being of particular concern:
  • Unilateral variation clauses
  • Limited liability and wide indemnity clauses
  • Unilateral termination and renewal clauses
  • Terms imposing early termination charges
  • Cost recovery terms;
  • Liquidated damages clauses; and
  • Overly broad restraints of trade clauses
Additional risk areas

In addition to the areas identified above, businesses should also be conscious of the following potential risk areas:

Whole of agreement terms

Whole of agreement terms are quite standard in most SFCs. These clauses seek to exclude one parties’ liability for pre-contractual representations, particularly pre-contractual oral representations, which may have been made by the large business to the small business customer. I believe that these is a risk that such terms may be found to be UCTs in circumstances where inconsistent pre-contractual representations have in fact been made by the large business and relied upon by the small business customer.

Choice of law terms

Terms which seek to exclude Australian jurisdiction in favour of overseas jurisdiction in relation to transactions made by small businesses within Australia may also be characterised as unfair. While such clauses are likely to be unenforceable to the extent that they seek to exclude mandatory protections such as those contained in the ACL in relation to consumer guarantees, it is arguable that such clauses may also be UCTs. Such clauses are particularly common in the IT industry in relation to the sale of hardware and software products to small businesses.

Arbitration clauses

Arguably a clause in a SFC that states that a small business customer can only obtain a remedy under a SFC through compulsory arbitration in an overseas location, such as Singapore, may be characterised as an UCT, particularly where the contract value is relatively low. This is particularly the case where the term seeks to exclude all other legal avenues and makes binding arbitration in a foreign country the sole and exclusive dispute resolution process available to the small business consumer under the contract.

Class action exclusion clauses

It is also arguable that contractual terms which prevent small business consumers from participating in class action litigation against large business suppliers may be characterised as a UCT. Such terms may be seen as unfairly excluding a small business’s legitimate legal rights to seek redress under the contract by joining a class action.

Conclusions

With the introduction of the new UCT laws for small business SFCs on 12 November 2016 it is vitally important for businesses to carefully review all of their SFCs to ensure that they do not contain any UCTs. This is particularly important given both the ACCC and ASIC have signalled that they will be moving from the education phase to the enforcement phase in relation to the new UCT laws. While the process of reviewing each SFC can be quite a laborious process (particularly for businesses with a large number of SFCs) the costs and inconvenience of undertaking this process are greatly outweighed by the clear and present danger of failing to identify and remove all UCTs from your small business SFCs.


[1] Dr Michael Shaper, ACCC Deputy Chair, Competition & Consumer Issues for SME’s, presentation to SME Committee, Law Council of Australia and Law Society of NSW Conference, ‘Small Business: Still the Centre of Attention”, 25 August 2016.
[2] Section 27(2) ACL
[3] ACCC, Unfair terms in small business contracts: A review of selected industries, November 2016 at http://www.accc.gov.au/system/files/B2B%20UCT%20-%20Final%20-%20Unfair%20terms%20in%20small%20business%20contracts%20%20A%20review%20of%20selected%20industries_0.PDF