“To trade or not to trade”: ACCC guidelines for small businesses and franchises responding to the impact of COVID-19

By Alicia Hill, Principal and Evangeline Yong, Law Clerk

The COVID-19 pandemic has created a climate of vulnerability for small businesses impacted by trading restrictions and unfair business practices.  Throughout 2020, small businesses have faced a host of challenges, including threats of eviction, the failure of large companies to pay invoices, requirements for franchisees to pay franchise fees despite trading restrictions, unfair contract terms and anti-competitive conduct. In response, the ACCC has released simplified and accessible guidelines to support small business and franchises impacted by COVID-19.

Unfair contract terms

Small businesses are protected from unfair terms in standard form contracts under the Australian Consumer Law. The ACCC has provided practical examples of unfair contract terms through the following questions, which businesses can ask when considering their rights under a contract:

During the COVID-19 pandemic:

• Has a business relied on a contract term to cancel a service or supply of a product without refunding you?
• Has a business changed the terms of your contract without your permission?
• Did the price under a contract increase without you being told?
• Have you been supplied a different product that you didn’t agree to?
• Did a provider fail to deliver services at scheduled times or cancel that supply and tell you that it was not responsible?
• Did you cancel a contract because you didn’t like the changes, but the provider charged you for cancelling?
• Did your contract automatically renew even though due to COVID-19 you no longer needed or wanted the product or service?

Small businesses have a range of options to respond to unfair contract terms. They may negotiate with the contract provider to amend or remove the term. They can contact a regulatory body, including the ACCC, a local state or territory consumer protection agency, the Australian Small Business and Family Enterprise Ombudsman, a local state Small Business Commissioner, or ASIC (if the issue relates to financial products and services). They are advised to seek independent legal advice on the issue.

Anti-competitive behaviour

Small businesses are also protected under the Competition and Consumer Act from business practices that lessen or harm competition.

The ACCC has identified several examples of anti-competitive behaviour during COVID-19, including competitors asking small businesses to share information, agree on prices on goods and services, and divide up markets and customers in order to manage supply and demand issues. Although the ACCC can authorise businesses to cooperate, such as to ensure medical or food supply in an emergency, such behaviour is generally prohibited.

Small businesses affected by anti-competitive behaviour are encouraged to report issues to the ACCC, which can investigate allegations and take certain actions where there is widespread impact on competition.

Specific guidelines for franchises

The ACCC has also published guidance specific to the franchising sector which reinforces franchisor obligations to act in good faith and to refrain from misleading and unconscionable conduct.

In particular, the ACCC warns franchisors that unfair terms in standard form contracts which cause a significant imbalance in parties’ rights and obligations and are not reasonably necessary to protect the franchisor’s legitimate interests, may be declared void by courts.

The ACCC also defines acceptable conduct by the franchisor towards the franchisee in the COVID-19 context. Franchisors are expected to:

• Reduce fees charged to franchisees if customer services have been reduced.
• Adjust fees and payments charged to franchisees if franchisor services provided to franchisees have been reduced.
• Pass on the benefits derived from negotiations with suppliers and landlords, to franchisees, including rent reductions.
• Proactively and continuously review franchisee obligations, processes and supply arrangements and adopt a flexible approach to making adjustments.

The ACCC makes the following recommendations for franchisees experiencing difficulty complying with contractual obligations:

• Franchisees should seek to negotiate with franchisors the delay, suspension or reduction of marketing and service fees.
• Franchisees can also negotiate changes in business practices such as relaxed supply restrictions or adjusted opening hours to allow trading where possible.
• Any agreements or contractual variations between franchisees and franchisors should be put in writing.
• Independent legal advice should be obtained prior to signing to ensure that the terms of any agreement or variation are lawful and fair.

Implications

The new guidelines are designed to give small businesses a better understanding of rights, obligations and available complaint mechanisms when responding to unfair business practices. Ultimately, they provide clear and contextualised definitions of what constitutes acceptable and unacceptable conduct for businesses and franchises navigating the unique challenges posed by COVID-19. 

If you have any questions about the ACCC guidelines discussed in this article or the rights and obligations of small businesses, franchisees and franchisors more generally, please contact Alicia Hill on 8540-0200 or alicia.hill@mst.com.au.