New unfair terms laws biting farmgate supply arrangements

The agricultural industry is now a key sector of focus for the Australian Competition and Consumer Commission (ACCC), since the ACCC established its Agricultural Unit and Agriculture Commissioner Mick Keogh was appointed.

The ACCC has recently taken action against Mitolo Group Pty Ltd and a related entity as well as against a major dairy processor – the first unfair contract terms actions the ACCC has taken in the agriculture industry.

In particular, it has announced that enforcing the Competition and Consumer Act 2010 (Cth) (CCA) and the Australian Consumer Law (ACL) in the agricultural industry as a priority. This includes enforcing the recently revised Horticulture Code¸ which sets out mandatory requirements for traders and agents operating in Australian fresh fruit and vegetable markets to provide more coherent and transparent agreements for suppliers.

Following the ACCC's recent inquiry in the Beef and Cattle Market in Australia, the ACCC intends to address concerns relating to "information flow through the sector", specifically in relation to cattle and beef prices.

This follows a broader trend of the ACCC in the area of unfair contract terms. It has recently taken a number of cases in relation to unfair contract terms in other sectors and has flagged that it will continue to pursue unfair contract terms in business-to-business standard form contracts.

How the unfair contract terms law affects farmgate supply contracts

The unfair contract term provisions in the ACL were extended on 12 November 2016 to cover terms of standard form contracts to which small businesses are parties (as well as consumers); this now includes many farmers.

In a farmgate context, a term of a standard form supply contract will be "unfair" if it is one-sided and excessive, that is, it creates a "significant imbalance" between the parties, is not reasonably necessary to protect the buyer's legitimate interests and would cause detriment to the farmer if relied on. Such a term may be declared void and unenforceable.

However, there are no penalties if a term is declared to be unfair (although the ACCC has recently announced it wants the law strengthened so that it can seek penalties for unfair terms).

Contracts for the purchase or supply of goods and/or services will amount to a "small business contract" which can be reviewed as 'unfair' if, at the time of entering into the contract:

• the farmer /counterparty is a business employing fewer than 20 people; and
• the total upfront price payable under the contract is no more than $300,000 or $1 million if the contract is for more than 12 months.

No Price Review - It should be noted however that prices offered for farmgate produce cannot be unchallenged as "unfair" under the law. The law specifically excludes the prices offered from any challenge that the terms offered are unfair.

The focus of the unfair terms law is on non price terms and the use of so-called standard form contracts that are one sided, risky for farmers, not negotiated and offered on a "take it or leave it" basis.

The alleged unfair terms for potato growers

The ACCC alleges Mitolo's standard form contract with potato farmers contain several unfair contract terms:

• allowing Mitolo to unilaterally determine or vary the price Mitolo pays farmers for potatoes;
• unilaterally vary other contractual terms;
• declare potatoes as "wastage" without a mechanism for proper review; and
• prevent farmers from selling potatoes to alternative purchasers.

The ACCC is seeking declarations from the Federal Court that the terms are unfair and thus void, and that Mitolo breached the Horticulture Code.

This is also the first action that the ACCC has taken under the revised Horticulture Code. Pecuniary penalties and infringement notices can be given for breaches of the Horticulture Code, including failing to:

• deal in good faith;
• publish and make publicly available a document that sets out the terms and conditions on which the trader is prepared to trade in horticulture produce with a grower;
• comply with the Code;
• trade without an agreement that complies with the code; and
• provide 24 hours' notice as to why produce was rejected.

The ACCC vs dairy industry supply terms

In April 2018 the ACCC published a report on the dairy industry following an inquiry into the competitiveness, trading practices, and transparency of the Australian dairy industry.

One of the key recommendations of the ACCC's report was that a mandatory industry code of conduct should be established governing contract arrangements with dairy farmers. The mandatory code of conduct would replace the existing voluntary code and would apply to dairy processors in an attempt to address what the ACCC sees as a power imbalance between processors and dairy farmers.

While the Commonwealth Government has not yet proceeded with the implementation of a mandatory code (which would likely include penalties for non-compliance), the ACCC has been active in the dairy industry. In July 2018 the ACCC announced that it had raised concerns in relation to unfair contract terms with a major dairy processor. As a result of the ACCC's inquiry, the dairy processor addressed the ACCC's concerns and agreed it would not:

• enforce previously agreed "pay out" penalties on certain farmers who had signed up long term supply agreements with the processor (where the farmers had received various sign on benefits at the start of the agreement). The pay out clauses had been designed to apply, if the farmers elected to terminate their milk supply agreements early before the agreed expiration date;
• enforce any pay out clause in the event that a farmer switched dairy processors. During the term of these multi-year supply agreements, the processor typically will announce its new milk price each year, a farmer could elect to opt of the supply agreement and switch to another processor but this might have triggered the pay out clause;
• unreasonably withhold consent to an assignment of the milk supply agreements for a farmer wishing to sell their property.

It also agreed to narrow the scope of the indemnity required from farmers who breach their supply agreements to make it clear that the processor could not recover any losses which the processor could have mitigated as a result of the farmer's breach of the agreement.

Key takeaway for agribusiness

With the agricultural industry on notice, agricultural business should take particular care to review the terms of their standard contracts and assess whether the terms can be justified as reasonable before imposing them on farmers (and other small business suppliers).