Panel - Katherine Forrest, Emma Curtis, Amanda Nikolaou & Daniel Tirado - The extension of unfair...
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Transcript of Panel - Katherine Forrest, Emma Curtis, Amanda Nikolaou & Daniel Tirado - The extension of unfair...
Unfair Contract Terms
and
Small Business
21152430_2 Unfair Contract Terms for Small Business
King & Wood Mallesons / www.kwm.com 2
Katherine Forrest
Katherine Forrest is a
partner at King & Wood
Mallesons in the Banking &
Finance team
Amanda Nikolaou
Amanda Nikolaou is a
lawyer in the Retail and
Business Banking legal team
at Westpac
Emma Curtis
Emma Curtis is a senior
manager in ASIC’s Deposit
Takers, Credit and Insurers
team, and leads a team in
ASIC’s Sydney office
Daniel Tirado
Daniel Tirado is Senior
Corporate Counsel for Toyota
Finance
Photo
King & Wood Mallesons / www.kwm.com
How did the Bill come about?
3
• Unfair contract terms for consumers in place since 2011
• The Government committed to extending the consumer unfair contract term protections to the small business sector as part of the Real Solutions Small Business Policy.
• Draft legislation released 28 April 2015
King & Wood Mallesons / www.kwm.com
Status of the Bill
4
• Treasury Legislation Amendment (Small Business and Unfair
Contract Terms) Bill 2015
• Third reading agreed in House of Representatives 18 August 2015
• Third reading agreed in Senate 14 September after amendments to
(i) increase threshold application amounts and (ii) extend the period
between Royal Assent and coming into effect to 12 months
• Back in the House of Representatives to vote on those
amendments
• If amendments are approved, commences effect 12 months after
the Act receives Royal Assent
King & Wood Mallesons / www.kwm.com
ASIC’s Approach
5
ASIC will initially take a facilitative approach
• Release guidelines, engage with industry, update existing publications
• Expect industry to commence review of standard form contracts
• Liaising with ACCC on educational and compliance strategy
Compliance phase
• During and after transition – if potentially unfair terms identified with no
legitimate reason for them, ASIC will encourage business to amend
• If business is unco-operative – enforcement action considered
King & Wood Mallesons / www.kwm.com
When will the UCT regime apply?
6
• Act applies to “Small Business Contracts”
• A Small Business Contract is one where:
• At least one party to the contract is a business that
employs fewer than 20 persons; AND
• Upfront price ≤ $300,000 ($1,000,000 if contract>12
months duration)
• Those figures are the result of amendments moved by
the Greens in the Senate. Previously $100,000 and
$250,000 respectively
King & Wood Mallesons / www.kwm.com
Case study
7
Placebo Pty Ltd (PPL) is a sophisticated pharmaceutical company
specialising in the manufacture and sale of drugs to pharmacies.
PPL employs 18 full time staff and 12 casual employees. It
outsources much of its research and development and
manufacturing to a subsidiary, Placebo (Manilla) Pty Ltd, which
employs 180 people.
PPL banks with Mega Bank and currently has:
• A 25 year Term Loan facility for $8 million
• A $500,000 overdraft
• Business credit cards
King & Wood Mallesons / www.kwm.com 8
A few months later, PPL is taken over and becomes a wholly owned subsidiary of
Big Fizzer. Big Fizzer is a large, global pharmaceutical company that is based
offshore.
Following the acquisition by Big Fizzer, PPL has to employ 6 more full time staff and
needs to increase its term loan to extend its warehouse, and its overdraft to fund
working capital.
The Term Loan is increased from $8m to $12m, with the financial covenants re-
negotiated and an override clause to various default events. The term is not
extended.
The overdraft is increased from $500,000 to $1.2m, and the term extended from 3 to
5 years. Big Fizzer provides a guarantee.
PPL decides they also want to start managing their interest rate exposure and
enters into an ISDA with Mega Bank with a reference value of $1,000,000.
PPL also takes a finance lease from Auto Finance Solutions.
Case study
King & Wood Mallesons / www.kwm.com 9
• 18 Full Time Employees
• 12 Casual Employees
• 25 year Term Loan
facility for $8 million
(increased to $12m)
• A $500,000 overdraft
(increased to $1.2m)
• Business credit cards
• ISDA
• Following take over PPL
requires the addition of 6
Full Time Employees
Placebo Pty Ltd (PPL)
Big Fizzer (Global
Pharmaceutical –
Based Offshore)
Mega Bank
AFS
• 6 new Toyota
Corolla Ascent at
$25,000 =
$150,000
King & Wood Mallesons / www.kwm.com
Is PPL a “small business”?
10
• Includes a corporation
• Casual employees not counted
• No carve-outs or exceptions for:
• Corporate groups with a specific employer
entity
• Special purpose vehicles that are owned or
managed by larger business
King & Wood Mallesons / www.kwm.com
Are the variations to the Term Loan and Overdraft caught?
11
• The Act does not apply to contracts entered into before the Act commences
• But:
• If the contract is renewed after the Act
commences, the Act applies to the contract
• If a term is varied after the Act commences,
the Act applies to the term as varied
King & Wood Mallesons / www.kwm.com
What is the “Upfront Price” of the Term Loan and the Overdraft?
12
• The consideration provided for the supply and disclosed at or before the contract is entered into
• Does not include contingent consideration
• If credit is provided under the contract, include principal, disregard interest.
• If one letter of offer sets out the two facilities, do we consider them separately or on a combined basis?
King & Wood Mallesons / www.kwm.com
Are PPL’s contracts Standard Form Contracts?
13
The Act only applies to standard form contracts
• Not defined. Court makes its own assessment.
• Court may take into account such matters as it thinks relevant
• Court must take into account:
▪ If one party has most of the bargaining power
▪ If one party prepared the contract before any discussion
▪ Was it “take it or leave it”
▪ Was there opportunity to negotiate
▪ Did the contract take into account specific characteristics of a party or the
transaction
King & Wood Mallesons / www.kwm.com
Standard Defences in Small Business Context
14
The Act does not apply to terms that define the main subject matter, the
“upfront price” or to terms that are required/permitted by law
• These exceptions are likely to operate the same way in both consumer and small
business contracts
Significant Imbalance in parties’ right and obligations
• A term is only unfair if it causes this imbalance
• Is the imbalance calculation the same for a small business as for a consumer?
• Should small businesses be subject to a higher threshold?
Reasonably Necessary / Legitimate Interests
• A term is not unfair if it is reasonably necessary to protect the legitimate interests
of the party relying on it
• Is the reasonably necessary / legitimate interest calculation the same for a small
business as for a consumer?
• Should small businesses be subject to a higher threshold?
King & Wood Mallesons / www.kwm.com
Case study – contract terms
15
1. In the Term Loan variation, Mega Bank renegotiates the pricing so that if the
interest cover ratio drops by 25%, then the loan margin increases from 2% to
5%.
2. Mega Bank has also included these variation provisions:
PPL must not, without Mega Bank’s consent, rescind, cancel or vary this
agreement.
Mega Bank may vary any term or condition of this agreement, including any
interest rate, fee or change or payment arrangements, by giving PPL notice
in writing.
King & Wood Mallesons / www.kwm.com
Case study – contract terms
16
3. The Overdraft is payable on demand.
4. The Overdraft also includes the following clause:
“You agree that transactions may be delayed, blocked or refused where we
have reasonable grounds to believe that they breach Australian law or
sanctions (or the law or sanctions of any other country). Where
transactions are delayed, blocked or refused, we are not liable for any loss
you suffer (including consequential loss) howsoever caused in connection
with any account.”
King & Wood Mallesons / www.kwm.com
Case study – contract terms
17
5. AFS has included a cross-default provision in the Finance Lease:
PPL must comply with its obligations under this lease.
In addition, PPL must not cause or permit any event or circumstance to arise
which would entitle a Financier to terminate any Finance Agreement which it
has entered into with PPL or PPL’s related body corporates.
If PPL does not comply with these obligations then PPL will be taken to have
repudiated this lease.
King & Wood Mallesons / www.kwm.com
Case study – contract terms
18
6. The Finance Lease has a term of 3 years and provides that if PPL wants to
terminate the lease early, PPL must pay 75% of the Net Present Value to Auto
Finance Solutions.
7. The Finance Lease also includes the following seizure of goods clause:
Auto Finance Solutions may enter the place where any item of goods is
kept to:
a) at any time on reasonable notice, inspect it or see whether PPL is
complying with its obligations under the lease; or
b) At any time, take possession of it when exercising its rights under this
lease
King & Wood Mallesons / www.kwm.com 19
The UCT rules do not identify who they protect – they simply apply to a Small
Business Contract. So in theory:
• A big business dealing with a small business on the small business’s standard
terms could raise UCT
• One small business dealing with another small business could raise UCT
• A small business could argue UCT against its own terms, if it wanted to avoid
them for some reason
Some of these possibilities arise in the consumer space as well, but far less
likely to be practical issues in the consumer space
Some paradoxes
King & Wood Mallesons / www.kwm.com 20
The UCT rules themselves do not impose EDR Requirements
Financial Services Providers will usually have signed up for EDR if they
provide:
• Chapter 7 Financial Services
• Consumer Credit
EDR Jurisdiction is claims with a value of $500,000 or less. But EDR Terms of
Reference go further than Corps Act / NCCC. In particular, include disputes
with:
• Small Business (slightly different test from UCT)
• Focuses more on consumers
EDR schemes can consider:
• Legal principles – so UCT terms are clearly in
• “good industry practice”
EDR schemes
King & Wood Mallesons / www.kwm.com 21
• Identify small business customers and contracts
• Contract management• Categories of contracts: consumer, “small business” for UCT purposes,
other small businesses (remember that the definitions vary)
• One non-consumer standard, or a separate small business standard and
“large business” standard
• If you have one standard only, how will you deal with variations between
customer types?
• Standard approval may not work for all contracts – your interests may vary
depending on the risk, the security etc
• Extent of review of individual clauses
• Obtain legal advice when renewing or varying contracts
Managing the reforms