Chapter 5
The scope of the bill: business-to-consumer unfair contract terms
5.1
One of the key areas of conjecture in this legislation is the exemption
of business-to-business unfair contract terms. This chapter details the
arguments for and against this exclusion.
The scope of the bill
5.2
The scope of the bill's unfair contract terms provisions is restricted
to business-to-consumer transactions. The bill applies only to consumer
contracts in which at least one of the parties is an individual. Contracts
between businesses are therefore excluded from the provisions, except in
respect of 'sole traders'.[1]
5.3
The Minister for Competition Policy and Consumer Affairs, the
Hon. Dr Craig Emerson, explained in the Second Reading Speech that
the government is currently reviewing both the unconscionable conduct
provisions of the Trade Practices Act and the Franchising Code of
Conduct. This follows the tabling of two parliamentary committee reports in
December 2008: one by this committee into the 'need, scope and content' of a
statutory definition of unconscionable conduct in section 51AC of the TPA; the
other by the Parliamentary Joint Committee on Corporations and Financial
Services into the Franchising Code of Conduct.[2]
Opposition to the exemption of
business-to-business contracts
5.4
Several submitters expressed their disappointment at the bill's omission
of business-to-business contracts from the unfair contract terms provisions.
5.5
The Association of Consulting Engineers Australia asked that this
committee recommend that the government reinstate the bill's application to
business-to-business contracts.[3]
The Pharmacy Guild of Australia also recommended that business-to-business
contracts be covered in the ACL as proposed in the government's May 2009
Discussion Paper.[4]
5.6
The Queensland Newsagents' Federation and the Newsagents Association of
New South Wales and the ACT expressed in separate submissions to this inquiry
their disappointment that business-to-business contracts were excluded from the
legislation. They both noted that small business has long campaigned for action
on the use of standard form contracts which may be unfair to small business.
They asked the committee to recommend that business-to-business contracts 'be
put back into the bill or an associated bill'.[5]
The Australian Newsagents' Federation was a little more circumspect:
Whilst the ANF was initially disappointed with the removal of
the business-to-business provisions from the amendment, we are greatly
encouraged by the Government’s announcement to consider the unfair contract
terms business-to-business provisions pending current inquiries into the Franchising
Code of Conduct and Unconscionable Conduct provisions of the TPA.[6]
5.7
The Motor Trades Association of Australia (MTAA) has noted that the
majority of retail motor traders operate under agreements which contain
'certain assignment clauses', such as are listed in section 4 of the bill (see
below).[7]
The MTAA's Executive Director, Mr Michael Delaney, told the committee that the
Association has:
...for years has argued that legislation should intervene to
set a minimum standard of conduct to protect parties to franchise agreements.
The inclusion of a business-to-business unfair contract terms of provision
would go some way to introducing a behavioural standard. In many of their
business relationships retail motor traders have fewer rights of redress
against larger stakeholders, such as franchisors, acquirers of goods and
services, other suppliers and so on for harsh and unfair behaviour than do
consumers against retailers and manufacturers. That is, contracts are presented
as take it or leave it standard form agreements. There is often little or no
negotiation on the terms of the contract without which the business can often
not operate and many contain terms which are detrimental to the small business
and which are in excess of what is required to protect the normal commercial
rights of the larger party.[8]
5.8
The Council of Small Business of Australia (COSBOA) accepted the removal
of business-to-business contracts from the bill provided that section 50 of the
TPA is amended to include these contracts. COSBOA also recommended that all
government procurement and general contracting should allow their suppliers to
negotiate contract terms without this being viewed as a non-conforming
contract.[9]
5.9
Associate Professor Frank Zumbo also expressed disappointment with the
bill's exclusion of small businesses from the unfair contracts proposals. He
gave in his submission a brief chronology of the government's position in the
lead-up to the bill's introduction. The draft legislation had included
protections for small businesses. As late as June 2009, the then Minister for
Competition Policy, the Hon. Chris Bowen, announced that there would be a
upfront price cap of $2 million on the size of transactions that would be
subject to the unfair contract terms ban. Later that month, however, the new
Minister narrowed the provisions to business-to-consumer contracts.[10]
Support for the exemption of
business-to-business contracts
5.10
Other submitters argued that the government had got it right by omitting
business-to-business contracts from the bill. The Shopping Centre Council of
Australia (SCCA) gave several reasons why the bill should not include
business-to-business contracts in the regulation of unfair contract terms:
-
the Joint Communiqué of the Ministerial Council on Consumer
Affairs Meeting of 15 August 2008 and COAG's Communiqué of 2 October 2008 made
no suggestion that the national consumer law would be extended to
business-to-business contracts;
-
although the bill purports to be based on the United Kingdom's Unfair
Terms in Consumer Contracts Regulations 1999, these Regulations
specifically exclude terms in business-to-business agreements;
-
no Australian State or Territory regulates business-to-business contracts
in the manner proposed by the draft legislation;
-
extending the scope of the bill to regulate business-to-business
contracts would directly contradict the Government's commitment to reduce unnecessary
business red tape and adopt best-practice regulation;
-
an expanded bill would 'confer immense power' on the ACCC and is
likely to require a significant increase in the resources available to the ACCC
and, in consequence be a significant cost to the taxpayer;
-
an expanded bill would impose 'significant costs' on Australian businesses,
making it likely that the courts would be 'choked with claims by business litigants...seeking
to be relieved of their contractual commitments';
-
an expanded bill would be 'a direct assault' on long established
commercial principles such as freedom of contracts;
-
businesses, unlike consumers, have sufficient knowledge of the
contracting subject matter, have access to legal and other specialist advice and
have sufficient bargaining power to resolve these matters without intervention by
government;
-
if expanded to include business-to-business transactions, the
bill would not take into account 'the context of the contract negotiations between
businesses' and 'the circumstances where a business compromises and consciously
accepts less favourable terms in one area in exchange for more favourable terms
in another area'; and
-
standard form contracts in business-to-business transactions
should be encouraged, not discouraged.[11]
5.11
The Trade Practices Committee of the Law Council of Australia wrote in
its submission that it:
...welcomes the Government's recent decision to restrict the
regime to consumers. The result is consistent with the recommendations of the
Productivity Commission, which focussed on using the regime to address the
unfair disadvantage suffered by consumers when they are unable to bargain
effectively in relation to "take it or leave it" arrangements.[12]
5.12
The Business Council of Australia (BCA) lent its support to the bill's
exclusion of business-to-business contracts in the following terms:
It is also important to recognise that small businesses would
also be adversely affected if business-to-business standard form contractual
arrangements were included in this regime. Many large businesses deal with
hundreds of small businesses and use standard form contracts to minimise the
cost of those transactions. Should business to business standard form contracts
be included it will likely require contracts to be individually negotiated, and
in many cases the cost of such negotiations will not be justified for some
smaller contracts. This will effectively eliminate some smaller
business-to-business standard form contracts from the market.[13]
5.13
GE has argued that while the bill exempts business-to-business
contracts, any future attempt to include them would be 'inappropriate'. It
argued that there is no evidence to suggest that unfair contract terms are
prevalent in business-to-business contracts to warrant the application of
similar legislation.[14]
What is a consumer contract?
5.14
Subsection 2(3) of the bill defines a consumer contract as a contract
for the supply of goods or services or a sale or grant of an interest in land
to an individual whose acquisition of the goods, services or interest is wholly
or predominantly for personal, domestic or household use or consumption.[15]
Views
5.15
The committee received some views critical of the bill's definition of a
'consumer contract'. The National Australia Bank (NAB) argued in its submission
that the definition would benefit from a presumption to ensure certainty of
whether a standard form contract is regulated or not at the time of
contracting. By way of example, it noted that if the subject matter of the
agreement was of a commercial nature or the party taking the contract is a
business entity, there should be a presumption that it is a business contract
and therefore not regulated.[16]
5.16
The Australian Bankers' Association (ABA) has criticised section 2(3) of
the bill for defining a consumer contract by focussing on the purpose of the
actual acquisition. It argues that the focus on 'personal, domestic or
household use or consumption' is 'subjective in nature and will be difficult to
implement'.[17]
The ABA noted that it will often be difficult for a financial institution to be
aware of the purpose for which a customer has acquired a product or service.
Accordingly, it recommended that the definition of consumer contract should be
similar to that used in Victoria, requiring that both the purpose of the
acquisition and the nature of the product be taken into account.[18]
5.17
The Law Council of Australia argued that the definition of 'consumer' in
section 4B of the TPA would offer a more objective test of a 'consumer
contract' than the approach adopted in the bill. Section 4B of the TPA focuses
on the nature of the good or service being supplied and asking whether it is
'of a kind ordinarily acquired for personal, domestic or household use or
consumption'.[19]
The bill, on the other hand, inquires into 'the subjective purpose for which an
individual acquired the good or service'.[20]
The Law Council reasoned that:
In dealing with standard form contracts and many consumers,
businesses are not going to know the subjective intent of the customer in acquiring
the goods. We think that the 4B definition is a better one. It has been around
a long time, businesses are used to it and it will then be consistent.[21]
Committee view
5.18
The Minister for Competition Policy and Consumer Affairs flagged in the
Second Reading Speech of the bill that the issue of business-to-business unfair
contract terms 'will—no doubt—be further considered as part of [this
committee's] process'.[22]
This inquiry has indeed gathered considerable evidence supporting the
application of unfair contract terms laws to protect small businesses in their
dealings with businesses with greater bargaining power and market power. The
committee believes it is important that the government responds to these
concerns after completing its reviews of this committee's December 2008 inquiry
into section 51AC of the Trade Practices Act and the Joint Committee on
Corporations and Financial Services' inquiry into the Franchising Code of
Conduct.
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