As mentioned in the previous edition of Credit Management in Australia, we recently presented an interactive seminar with members of the AICM at the NSW Credit Symposium. There was a great amount of discussion regarding a number of practical issues that are expected to arise as a result of the legislative changes to the Competition and Consumer Act 2010 (Cth) (CCA) and the Australian Securities and Investment Commission Act 2001 (Cth) (ASIC Act). The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth) (Act) will bring about those changes, which principally have the effect of extending the protection for unfair consumer contracts to small business contracts. The Act will commence on 12 November 2016 and will apply to contracts entered into, or varied, after that date.

For credit managers the Act is expected to create the following issues.

Is each new order from a customer going to create a new contract?

For each order that is placed (and accepted by the supplier) a new contract is usually created between the customer and supplier.

Each contract for the supply of particular goods or services, the subject of the order/invoice, will be for the "upfront price" specified on the invoice and subject to the supplier's Terms of Trade (where applicable).

As the Court explained in Central Cleaning Supplies (Aust) Pty Ltd v Elkerton [2015] VSCA 92 (12 May 2015) at [15]: Plainly enough, each contract between Central and Swan for the sale and supply of particular equipment was 'an agreement to sell subject to retention to title'.

If the "upfront price" (invoice price) is up to $300,000 then the Act will apply to that contract for supply, unless the contract duration is more than 12 months – in which case the greater threshold of $1,000,000 will apply.

Why doesn't each new order create a new security interest under the Personal Property Securities Register if each new order/supply creates a new contract?

Whether a supplier's security interest in their goods needs to be registered each time a contract for supply is entered into (an order is placed and accepted) depends on the supplier's Terms of Trade. A security interest needs to be registered each time it is provided for or created.

The Personal Property Securities Act 2009 (Cth) (PPSA) draws a distinction between an agreement that creates a security interest and an agreement that provides for a security interest.

Section 12 of the PPSA defines a security interest. A security interest includes an interest in personal property provided by a number of different transactions, comprising, amongst other things, a conditional sale agreement (including an agreement to sell subject to retention of title).

If a supplier's Terms of Trade provide for security in all supplies, present and future, then, despite the fact that there is a contract between the supplier and customer for each supply, the security interest is provided once (for all supplies including future supplies) and only needs to be registered once.

The Court, in Central Cleaning Supplies, gave a helpful example to draw the distinction between an agreement that creates a security interest and an agreement that provides for a security interest.

In Central Cleaning Supplies (Aust) Pty Ltd v Elkerton [2015] VSCA 92 (12 May 2015) the Court of Appeal noted that:

19. In the first of these, the genesis of the security interest is to be found in the agreement or act itself. The entering of the agreement, or the doing of the act, 'creates' the security interest. An example of this would be a contract for the sale of the goods which itself includes a retention of title clause. That is an agreement which creates the security interest in the vendor of the goods. By contrast, an agreement or act will 'provide for' a security interest if it makes provision for the creation of a security interest in the future and/or by some other agreement or act.

Will the new laws apply as soon as the customer places an order? What if there are already Terms of Trade in place with that customer?

The Act will not apply to a contract entered into before 12 November 2016. However, because each order and
invoice will constitute a new contract, any order placed from 12 November 2016 will give rise to a contract to which the Act will apply.

As readers will know, many standard Terms of Trade are designed to apply to all future supplies to customers. As a result, even where a supplier's Terms of Trade or Credit Application was accepted by the customer before 12 November 2016, those Terms of Trade will often apply to supplies to the customer after 12 November 2016, and therefore will be caught by the Act.

How can the sales team be expected to negotiate every contract with a customer?

This issue was of great concern for attendees of our seminar. The Act protects small businesses from standard form contracts that contain unfair terms. An unfair term of a standard form contract will be void. A contract will continue to bind the parties to it if it is capable of operating without the unfair term. In assessing whether a contract is a standard form contract a Court must take into account the following:
(a) whether one of the parties has all or most of the bargaining power relating to the transaction;
(b) whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
(c) whether another party was, in effect, required either to accept or reject the terms of the contract (other than the terms referred to in section 26(1)) in the form in which they were presented;
(d) whether another party was given an effective opportunity to negotiate the terms of the contract that were not the terms referred to in section 26(1);
(e) whether the terms of the contract (other than the terms referred to in section 26(1)) take into account the specific characteristics of another party or the particular transaction;
(f) any other matter prescribed by the regulations.

There is little to no doubt that, if a supplier provides its standard Terms of Trade to a customer and does not provide that customer with the opportunity to negotiate those Terms, that document will be a standard form contract.

If it is accepted that a supplier's Terms of Trade are the terms of a standard form contract, then it is a matter of either negotiating those Terms of Trade with the customer, or ensuring that the Terms of Trade are not unfair. At the NSW Credit Symposium, the thought of a sales person being required to negotiate and then vary the Terms of Trade was not well received.

We suggest that, rather than negotiating the terms with each customer, it is easier to ensure, that a supplier's Terms of Trade are fair. It is important to keep in mind, when assessing whether a term is unfair, that the Court must consider the extent to which the term is transparent and the contract as a whole.

What should I do to minimise the risk that my terms are unfair?

One thing that can be done quite easily is to increase the "transparency" of terms that are at risk of being found to be unfair. Suppliers should increase the font size of these terms and possibly bold certain terms where possible. A transparent term must be expressed in reasonably plain language, be legible, presented clearly and readily available to the customer. It is suggested that the more significant the term (e.g. a charging clause within a director's personal guarantee), the more transparent it must be.

How will suppliers know if the customer is a "small business" – are we expected to monitor the number of employees of each customer?

The Act applies to small business contracts. A contract is a small business contract if, at the time the contract was entered into, at least one party to the contract is a business that employs fewer than 20 persons.

The popular consensus at our Symposium was that it is just too difficult to monitor the number of employees of each customer.

In order to assess whether their customer is a small business, the supplier would have to know the number of employees at the time the contract was entered into (which, as discussed above, is not necessarily the time when the Terms of Trade are accepted) and whether the customer's employees are employed on a full time or a casual basis. For purposes of the Act, a casual employee is not to be counted unless he or she is employed by the business on a regular and systematic basis.

Suppliers should err on the side of caution and, where in doubt, assume that the customer is a small business, that the Act will apply, and consider whether their Terms of Trade could be held to be unfair.

What sort of terms will be unfair?

The CCA provides examples of terms that may be unfair. As mentioned above, a term must be considered in its context, so as a result, it cannot be said that any term would definitely be found to be unfair.
(a) a term that permits, or has the effect of permitting, one party (but not another party) to avoid or limit performance of the contract;
(b) a term that permits, or has the effect of permitting, one party (but not another party) to terminate the contract;
(c) a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract;
(d) a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract;
(e) a term that permits, or has the effect of permitting, one party (but not another party) to renew or not renew the contract; (f) a term that permits, or has the effect of permitting, one party to vary the upfront price payable under the contract without the right of another party to terminate the contract;
(g) a term that permits, or has the effect of permitting, one party unilaterally to vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract;
(h) a term that permits, or has the effect of permitting, one party unilaterally to determine whether the contract has been breached or to interpret its meaning;
(i) a term that limits, or has the effect of limiting, one party's vicarious liability for its agents;
(j) a term that permits, or has the effect of permitting, one party to assign the contract to the detriment of another party without that other party's consent;
(k) a term that limits, or has the effect of limiting, one party's right to sue another party;
(l) a term that limits, or has the effect of limiting, the evidence one party can adduce in proceedings relating to the contract; (m) a term that imposes, or has the effect of imposing, the evidential burden on one party in proceedings relating to the contract;
(n) a term of a kind, or a term that has an effect of a kind, prescribed by the regulations.

Is the Act going to mean I can't vary my Terms of Trade and/ or publish variations on the Internet?

Given the abovementioned examples of unfair terms, any term that allows a supplier to unilaterally vary their Terms of Trade will likely be unfair.

This is a difficult point of law, given the varied nature of agreements between trade suppliers and customers, as it may be reasonably necessary for a supplier to vary its Terms of Trade in order to protect its legitimate interests. In this context, such terms allowing a variation may be permissible. However, any term that is unilaterally varied by the supplier (relying on a unilateral variation clause) could itself nonetheless be deemed to be unfair. The principal reason that we take this view is that any term that is unilaterally varied by a supplier will not have been negotiated by the customer and will (in many circumstances) be to the detriment of the customer. Again, if the varied term is reasonably necessary to protect the legitimate interests of the supplier it may be considered fair.

A good example of a necessary variation would be the variation of a retention of title term to bring it into compliance with the PPSA.

Any term that allows a supplier to unilaterally vary their Terms of Trade, by simply publishing those terms on the Internet, is highly likely to be unfair because that term would reduce the transparency of any variation. The customer may not visit the supplier's website and may place a further order with the supplier without realising the variation has occurred. The issue comes back to the term which the supplier seeks to impose on the customer; is it unfair?

Revisiting your Terms of Trade

The reform to unfair contract laws is significant. The effects won't be known for some years when a customer cross claims against the supplier alleging a breach of the law.

We acknowledge that it will be difficult to balance the inclusion of unfair terms within the Terms of Trade against protecting a supplier's legitimate and reasonable business interests. Where at all concerned, it is best to seek legal advice.

To conclude, we provide the following peculiar example of a term that the Federal Court of Australia has recently found to be unfair in the context of consumer to business contracts.

The case below relates to the terms of supply of Christmas hampers. Chrisco Hampers had included a term in its contract that allowed Chrisco Hampers to continue to withdraw funds from its customers' bank accounts after the customers had completed payment for their hamper, on the basis that the amounts withdrawn would be held as a prepayment for any future hamper purchased. The term would apply unless the customer opted out of it.

We expect that, as a result of the Act, a similar term would be found to be unfair if it existed in small business to business contracts; such as a supplier's Terms of Trade.

This case may also be of assistance to suppliers in considering the use of terms that the customer may opt out of and how to otherwise present their Terms of Trade so that they are transparent for purposes of the Act. In paragraphs 71 to 97 of the Judgment, the Court considered the transparency of the HeadStart term by reference to the placement of the term, the placement of the opt out box, the language of the term (was it confusing), and the size, colour and style of the font of the term in comparison to other terms in the contract.

In Australian Competition and Consumer Commission v Chrisco Hampers Australia Limited [2015] FCA 1204 (10 November 2015), his Honour Justice Edelman stated:

3. Chrisco's contracts with its customers contained a term (called the HeadStart term) that required the customers to allow Chrisco to continue withdrawing funds from the customer's bank account even after the customer had made full payment for the goods. The term would apply unless the customer opted out of it. The money withdrawn from the customer's bank account would be used for any future order made by the customer but the customer would not obtain any discount on a future order and if the customer did not place an order, but requested a refund of the money paid, the money
would be refunded without interest.
4. The first issue concerns whether the HeadStart term is an "unfair term" within the meaning of s 24 of the ACL. The essential issue in this case is whether the HeadStart term caused a significant imbalance in the parties' rights and obligations arising under the contract. One of Chrisco's submissions was that the demographic of its customers, some of whom were described as "unsophisticated", was such that it was an advantage for them to have money removed from their accounts prior to placing another order unless they elected to the contrary or sought a refund. Chrisco submitted that the removal of the money from the customers' accounts without interest, and without any discount on a prospective order, conferred a benefit on the customers. Chrisco said that the benefit was that the customers were given the ability to pay for prospective orders by smaller instalments over a longer period of time (albeit at a higher cost taking into account the time value of money). As I explain in the body of these reasons, such a "benefit" is not substantial. I consider that in all of the circumstances of the HeadStart term and Chrisco's contract the term was unfair.

* Geoff Mc Donald is Barrister at 9th Floor Windeyer Chambers.

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