ACCC seeks ban on unfair trading practices

On 10 December 2020 the Australian Competition and Consumer Commission (the ACCC) released its Perishable Agricultural Goods Inquiry Report (the Report).

Purpose of the inquiry

The ACCC’s inquiry into markets for the supply of perishable agricultural goods was conducted at the direction of the Commonwealth Treasurer, the Hon. Josh Frydenberg MP. The ACCC conducted a three month investigation into the markets for the supply of goods including meat, eggs, seafood, dairy products and horticultural products.

The purpose of the inquiry was to examine the relationships between suppliers at different levels of the supply chains for relevant products and the effect of these relationships on bargaining power. The inquiry then considered the economic effects of bargaining power imbalances and the adequacy (or otherwise) of the enforcement measures available to the ACCC to deal with these issues.

Key findings of the Report

The ACCC found that all perishable agricultural goods markets have characteristics likely to lead to bargaining power imbalances. A producer has a weaker bargaining position to negotiate with buyers, the more perishable their goods. Further there tend to be many producers but a concentration of market power amongst a few processors and major retailers.

The Report identified a number of harmful outcomes, including:

• lack of transparency amongst some producers, who have no visibility over prices paid by supermarkets to wholesalers or over how products are graded (which affects prices);
• contract terms that inefficiently allocate risk or that are one-sided in favour of processors;
• lack of forward price or contract certainty amongst some producers;
• commercial retribution such as a supermarket de-listing the products of a supplier who sought to increase prices; and
• supermarkets requiring suppliers to disclose confidential financial information or intellectual property.

These outcomes in turn affect the efficacy of the market, undermining confidence and limiting investment by producers.

Existing legislative limits on harmful market behaviour

The Competition and Consumer Act 2010 (Cth) (the Act) and the Australian Consumer Law (the ACL) which forms a schedule to that Act contain various provisions that might ameliorate some of the above issues.

The Act includes provisions that prohibit cartel conduct and misuse of market power.

The ACL contains restrictions on misleading or unconscionable conduct, and on the use of unfair contract terms where one of the parties is a small business. The Report expresses a preliminary view that some contracts for perishable agricultural goods identified by the ACCC may raise unfair contract terms concerns.

Reforms already in progress – unfair contract terms and collective bargaining by small businesses

Commonwealth and state/territory consumer affairs ministers have already agreed to bolster significantly the unfair contract term provisions of the ACL. The changes will include making unfair contract terms unlawful and giving courts the power to impose a civil penalty. The definition of small business will also be expanded.

The ACCC has recently made a class exemption for small businesses who wish to form bargaining groups to engage in collective bargaining with their customers (or their suppliers). The class exemption will also allow franchisees to collectively bargain with their franchisor. The exemption will commence early in 2021 (the precise date will depend on Parliamentary sitting dates) and will remove the risk that the collective bargaining will breach the Act. Bargaining groups will need to lodge a notice with the ACCC and each business they bargain with, to fall under the exemption.

The role of industry codes

The ACCC considers that industry codes, such as the Dairy Code and the Horticulture Code, can help address the effects of bargaining power imbalances. However, if a code is not enforceable and does not carry significant penalties, as is the case for the Food and Grocery Code, it may not assist much. The Report recommends making this Code mandatory and introducing civil penalties and infringement notices for breaches.

Perceived regulatory gap – unfair trading practices

The ACCC takes the view that existing regulatory tools, such as those mentioned above, are insufficient to regulate some of the harmful behaviours identified by the Report and will likely remain insufficient even after the reforms outlined above are implemented.

The ACCC considers that the best option to improve regulation is to introduce an economy-wide prohibition on unfair trading practices.

This is an idea that has been mooted previously. As far back as 1997, the Commonwealth House of Representatives Standing Committee on Industry, Science and Resources recommended that the predecessor to the Act be amended to include the following provision:

A corporation shall not, in trade or commerce, engage in conduct that is, in all the circumstances, unfair.

More recently the ACCC has recommended amendment of the ACL to include a prohibition on certain unfair trading practices, noting that similar prohibitions have been introduced in the USA and the European Union – see the ACCC’s reports on its Digital Platforms Inquiry (July 2019) and on Customer Loyalty Schemes (December 2019).

The Report notes that as of November 2020, discussions were already underway through the Legislative and Governance Forum on Consumer Affairs between ministers and agencies of the Australian federal and state/territory governments about what form a prohibition on unfair trading practices could take. In that Forum, concerns have been expressed that there are some unfair business practices that may not be covered by the existing protections in the ACL, such as business models that are exploitative or contrary to standards of fair dealing. The Forum proposes to consider these issues further through a regulation impact assessment process, including further investigating the nature of the problem and considering the extent of consumer harm.

While perishable agricultural goods are the focus of the Report, the ACCC strongly supports the economy-wide implementation of a prohibition on unfair trading practices. As noted above, the ACCC considers that the regulatory gap is also being felt in other areas such as customer loyalty schemes and the digital platforms sector.

The Report stops short of proposing specific wording for the prohibition, although in the Customer Loyalty Schemes report the ACCC suggested that the prohibition should be directed at unfair conduct that has caused, or has the potential to cause, substantial detriment to consumers.

The Report notes that if implemented the prohibition on unfair trading practices would carry substantial penalties under the ACL, which the ACCC considers would help drive behavioural change.

Watch this space

It is clear that the ACCC is mounting a concerted effort to push for legislative change to introduce a broad and flexible new prohibition on unfair trading practices that the ACCC will be able to wield, if required, in a variety of situations. Businesses, especially those with a degree of market power, should keep a close eye on developments.

Businesses should already be reviewing their commercial practices in light of the coming changes to the unfair contract terms regime, mentioned above. If legislators support the prohibition on unfair trading practices then businesses will need to take an even closer look at their operations to check if changes are required in order to mitigate risk.

If your business requires assistance in navigating this area, please contact our team.

Authored by:

David Smith, Partner
Stephanie Manatakis, Lawyer