Legal Insight Issue 13
Federal Court decision regarding Franchising & Competition and Consumer Act
The recent decision in SPAR Licensing Pty Ltd –v- MIS QLD Pty Ltd (No. 2)  FCA 1116 saw the Federal Court of Australia consider various claims made, inter alia, pursuant to the Competition and Consumer Act and Trade Practices Act.
SPAR and Metcash (and its subsidiary IGA) are fierce competitors who are wholesale suppliers of groceries to supermarkets. In July 2010, SPAR provided various documents to MIS ("the Supermarket") pursuant to the Franchising Code (a mandatory industry code). SPAR and the Supermarket subsequently entered into an agreement in December 2010 for the supply of groceries and then a franchise agreement in February 2011.
In mid 2011, relying on representations said to have been made by SPAR, the Supermarket sought to terminate the two agreements and enter into an Alliance Agreement with Metcash/IGA. In August 2011, SPAR obtained an interlocutory injunction restraining the Supermarket from terminating the franchise agreement or purchasing goods from any other person.
SPAR made claims for breach of contract and alleged that the Alliance Agreement breached the anti–competitive provisions of the Competition and Consumer Act. The Supermarket cross-claimed alleging SPAR engaged in misleading or deceptive conduct and breached the Franchising Code.
The Supermarket was largely successful. The Court asked the parties to prepare orders giving effect to the reasons, which:
- rejected SPAR's claims in respect of anti-competitive conduct;
- found SPAR had engaged in misleading and deceptive conduct in making representations as to the Supermarket's rights to terminate the two agreements (which provisions were not in fact incorporated into the agreements);
- would vary the two agreements to incorporate express terms giving effect to the representations, rather than terminate the two agreements. The Court noted that upon the Supermarket terminating the agreements it would be liable to pay SPAR the "termination and related fees" which were part of the representations made by SPAR;
- found that SPAR had not provided "current" financial documents, in breach of the Franchising Code, in failing to provide updated documents prior to entry into the franchise agreement; and
- contemplated a declaration as to SPAR's misleading and deceptive conduct and breach of the Franchising Code.
John Vohralik (our Consultant Director) is a mediator on the Panel of Mediators of the Office of the Franchising Mediation Adviser and is a Nationally Accredited Mediator and has expertise in consumer law and franchising disputes.
ACCC issues small business, franchising and industry codes six monthly report
The ACCC recently published its half-yearly report summarising its work/activities in the small business sector. Some interesting information can be gleamed from that report, which we summarise as follows:
- The ACCC information centre received approximately 14 complaints daily from small businesses/franchisees/franchisors.
- In the franchising sector, the ACCC received about 3 complaints per day, an increase of about 70% compared with the previous 6 month period.
- Of the States and Territories, NSW receives the highest number of complaints in relation to small businesses and franchising.
- The great majority of complaints relate to misleading conduct/false representations and consumer guarantees. A number of the complaints were considered to be outside the ambit of the Australian Consumer Law and did not appear to evidence any breaches of that law, being in the nature of general contractual problems.
- In the franchising sector, complaints mostly dealt with disclosure issues and terminations.
The ACCC's publication highlights its publications regarding refunds, product returns, proof of sale transactions, advertising and promotion, fair competition and unconscionable conduct. It also reminds businesses of the very serious civil and criminal sanctions which apply to cartel conduct (e.g. price fixing/customer allocation/bid rigging/controlling the quantity of goods and services available to buyers), including up to 10 years in jail.
In relation to misleading and deceptive conduct, the publication deals with carbon price claims and examples of offensive advertising and selling promotions involving "was/now" pricing.
In terms of the franchising industry, the ACCC has carried out a number of audits and has found general compliance with the Franchising Code.
Further information regarding the publication is available on the ACCC's website: www.accc.gov.au
Proposed new tribunal for New South Wales
The NSW Government is proposing to establish a new tribunal which will consolidate approximately 23 existing tribunals and integrating them into the one body, the NSW Civil and Administrative Tribunal ("NCAT").
The stated purpose is to improve the quality of tribunal services for NSW consumers, with consistent standards, broader geographical reach and a consistent set of standards, rules and processes.
The following NSW tribunals are intended to be incorporated into NCAT:
Consumer, Trader and Tenancy Tribunal
Victims Compensation Tribunal.
A number of bodies will not be incorporated into NCAT, although it is expected the Government may consider consolidating them into NCAT in the future, including:
Independent Liquor and Gaming Authority
Industrial Relations Commission
Motor Accident Authority
Racing Appeals Tribunal
Workers Compensation Commission
It is proposed that NCAT will preserve existing areas of speciality to ensure that sufficient expertise is maintained in relation to specific sectors. To this end, it is expected that 5 separate divisions will be established, namely: Consumer and Commercial, Administrative and Equal Opportunity, Occupation and Regulatory, Guardianship and Victims Support. The President of NCAT will be a NSW Supreme Court judge, ideally a judge with administrative law and commercial dispute resolution experience.
The types of matters that will be dealt with by the Consumer and Commercial Division include, but are not limited to: Consumer Claims, Small Commercial Claims, Home Building, Motor Vehicles, Strata and Community Schemes, Residential and Retail Leases disputes.
It is expected that the new processes to be adopted by NCAT will allow internal merits appeals, providing consumers with a more equitable appeal framework, rather than the current system which often provides for appeal rights directly to the State Courts. However, some existing appeal rights to such courts are likely to be preserved for particular matters.
It is expected that NCAT will commence operations in approximately January 2014.
2013 review of the Franchising Code of Conduct
As our readers would be aware, the Franchising Code of Conduct ("Code") is a mandatory industry Code outlining the rights and obligations of franchisees and franchisors. The Code has the force of law pursuant to the Competition and Consumer Act, 2010 (Cth) (previously the Trade Practices Act).
In January 2013, the Federal Government announced a review of the Code. The purpose of the review is to consider:
- The proposed addition of a "good faith" obligation on all parties;
- The rights of franchisees at the conclusion of franchise agreements and whether the Code adequately protects and recognises a franchisee's contribution; and
- Whether it is appropriate to insert provisions allowing the ACCC to enforce/penalise breaches of the Code, for example by seeking monetary penalties.
ACCC focus for 2013
The ACCC recently published its Compliance & Enforcement Policy. The Policy suggests that the key focus areas for the ACCC in 2013 will be:
Fuel suppliers and supermarkets practices including discount fuel docket schemes, sharing of retail price information and their dealings with suppliers;
- False, misleading and anti-competitive behaviour in digital online markets;
- Anti-competitive conduct generally, including in particular cartels and continued scrutiny of proposed merges; and
- Continued focus and, where appropriate enforcement action in respect of consumer protection.
Post contractual restraints and the Independent Contractors Act 2006
Many people may be surprised to learn that a services contract negotiated at arms length between a principal and independent contractor can be declared void by a Court and have its terms varied where the terms of the contract are found to be unfair or harsh.
The Independent Contractors Act 2006 ("Independent Contractors Act") provides legal remedies for independent contractors in relation to unfair and/or harsh contracts. An independent contractor is a person (not limited to a natural person) who provides services pursuant to a contract for services, either in his or her own name or through an incorporated entity. If a services contract is found to be unfair or harsh a Court may set aside the whole or part of the contract or make an order varying a term of the contract.
Services contracts will often contain post-contractual restraints that prevent an independent contractor from engaging in certain behaviour following the termination of the contract, such as contracting to perform work directly for customers of the principal. However, a recent case illustrates that such restraint clauses may be susceptible to an application for relief under the Independent Contractors Act.
Informax International Pty Ltd v Clarius Group Limited – The Facts
In the recent decision of Informax International Pty Ltd v Clarius Group Limited  FCAFC 165, the Full Court of the Federal Court of Australia, hearing an appeal, found that a services contract was unfair and harsh because of the operation and effect of a post-contractual restraint.
The case involved a specialist IT project manager, Mrs Menano-Pires, who provided IT services through her company Informax International Pty Ltd ("Informax") to a specialist labour hire company called Clarius Group Limited ("Clarius"), which in turn contracted to provide those services to its various clients. During the period Mrs Menano-Pires provided services through Informax she was placed into various projects and extensions of projects with Woolworths, a Clarius client. The last of these assignments concluded on 30 June 2008.
It was a term of the services contract between Informax and Clarius that for a period of 6 months following the termination of the contract, Informax and Mrs Menano-Pires must not work for or be engaged by a Clarius client ("Restraint Term"). Mrs Menano-Pires claimed in in the ensuing court proceedings that the person from Clarius who recruited her told her that the Restraint Term did not mean anything (the judge did not accept this evidence to be true).
It was also a term of the services agreement between Clarius and Woolworths that Woolworths would not solicit the employees or contractors of Clarius who had provided the services, for a period of 12 months after that person had ceased to provide the services ("Non-Solicitation Term"). However, Clarius did not tell Mrs Menano-Pires or Informax about the Non-Solicitation Term.
Shortly after the last contract extension with Clarius expired in July 2008, Informax entered into a services contract directly with Woolworths; this contract was for a fixed period that expired on 30 September 2008. On 15 September 2008, Clarius discovered, apparently by chance, that Mrs Menano-Pires was performing work for Woolworths. It appears that Clarius then pressed Woolworths in correspondence to abide by the Non-Solicitation Term, and subsequently, Woolworths declined to renew Informax's contract beyond 30 September 2008.
Informax then applied to the Federal Court of Australia seeking orders to have the services contract declared unfair or harsh, arguing that the Restraint Term was an invalid restraint of trade and therefore unfair within the meaning of the Independent Contractors Act.
At first instance, the Court found that the Restraint Term was invalid. However, the Court refused to vary the terms of the services contract so as to insert a term to the effect that Clarius could not enforce any term of its services agreement with Woolworths (such as the Non-Solicitation Term) if it would mean that Informax could not be engaged by Woolworths – if granted, this would have formed the basis for a compensation order. Informax then appealed to the Full Court.
The Full Court's decision
Whilst the Full Court recognised the long accepted and legitimate interest that a business has in maintaining its connection with its customers and clients, and safeguarding against misappropriation by employees and contractors, the Full Court held that the contract between Clarius and Informax was harsh and unfair as the restraint went beyond what was reasonable to protect Clarius' reasonable commercial interests. It was also held that Clarius did not have a legitimate interest in restraining its clients from 'cutting out the middleman' by directly hiring its contractors after termination.
The Full Court held that a restraint of 4 weeks was reasonable and would have achieved the proper balance between the protection to which Clarius was entitled and the right of Mrs Menano-Pires to practice her trade and profession.
Relevant matters in the Full Court's decision included:
- Clarius' contract with Woolworths was not an exclusive contract;
- at the time of each contract extension it was Mrs Menano-Pires who secured the further work with Woolworths;
- Informax held no confidential information that belonged to Clarius;
- Clarius had not expended any resources in training Mrs Menano-Pires;
- the Court's assessment of the time it would take for Clarius to organise the introduction of a competent replacement worker that could be effective and who could develop a rapport with the client, which was held to be a period of only 4 weeks.
The Full Court allowed Informax to amend its claim so as to allow it to obtain compensation for loss or damage suffered because of Clarius preventing it from providing services to Woolworths beyond the varied restraint period of 4 weeks.
The Informax decision demonstrates that the Independent Contractors Act can provide a valuable and effective source of redress for contractors hampered by post-contractual restraints in services contracts.
The Informax decision also reaffirms the importance of principals and labour hire companies identifying the legitimate commercial interest their restraints seeks to protect, and taking care to ensure that the restraint is no longer than is necessary to protect those interests.