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ACCC identifies unfair contract terms in chicken industry

01 June 2022

5 min read

#Competition & Consumer Law, #Agribusiness

ACCC identifies unfair contract terms in chicken industry

A court can declare a contractual term to be unfair and therefore void and unenforceable, but currently, the law does not provide for penalties to be imposed on companies that use and rely on unfair contract terms in agreements with small businesses or consumers.

ACCC identifies unfair contract terms in the chicken meat industry

Following an investigation by the Australian Competition & Consumer Commission (ACCC) into unfair contract terms in the chicken meat industry, several of Australia's largest processors have agreed to change certain terms of their contracts with chicken growers.

A number of potentially unfair contract terms were identified during the investigation, including some terms that allowed processors to change growers' supply arrangements or impose additional costs on growers. Also, some terms required growers to make significant capital investments or contained imbalanced termination clauses.

Immediate action from the industry

Processors will now engage with growers and grower representative groups directly about amendments to their agreements.

As a result of the changes that the processors have agreed to, the ACCC believes that growers will have some additional certainty and transparency, including clarifications about when processors can require a grower to upgrade their farm facilities and when processors can make changes to the grower manuals.

In addition, processors have agreed on further changes to clarify the circumstances under which processors can charge additional fees to growers and balance the notice periods for termination clauses.

ACCC concerns

“We were concerned that broad terms, such as allowing processors to vary supply arrangements during the term of the agreement, could potentially lead to significant financial harm to growers,” ACCC Deputy Chair Mick Keogh said. “Several processors have agreed to amend certain contract terms to address some of the ACCC’s concerns.”

Action following Perishable Agricultural Goods Inquiry Final report

In 2020, the ACCC was directed by the Australian Government to conduct an inquiry into bargaining power imbalances in supply chains for perishable agricultural goods in Australia.

The inquiry examined trading practices throughout supply chains, including the relationships between farmers, processors, and retailers, and the extent to which any potential bargaining power imbalances in these relationships adversely impacted the efficient operation of these markets. The inquiry also examined the ability of current laws and regulations to address the harmful effects of bargaining power imbalances.

Findings from the investigation were published in the Perishable Agriculture Goods Inquiry Final Report (Report) on 10 December 2020. The ACCC’s recent review of the chicken meat industry focused on the types of potentially unfair contract terms that were identified in the Report.

Implications for the chicken meat industry

As a general rule, the chicken meat industry differs from most other livestock industries in that the processor provides chicks, feed, and medication to the grower and retains ownership of the birds at all times. Generally, growers provide the land, sheds, fitout and equipment, labour, water, utilities, and insurance, and the contract specifies which methods growers must use to take care of the birds.

In the Report, the ACCC listed a number of contract terms it considered may be harmful to those operating in the chicken meat industry, these included:

  • terms that allow processors to unilaterally vary growers’ income. For example, a term may allow a processor to vary the grower’s batch density or rate. As growers are paid a fee per bird, such a term would allow the processor to change the grower’s agreed income. This may be unfair as it requires the grower to carry the risk of processor volume and supply adjustments
  • terms that require growers to make significant capital investments. For example, terms that require growers to make capital investments during the contract term. While capital upgrades are important for the safe and efficient operation of chicken meat growing facilities, such a term places significant risk on the grower that they may be required to make unplanned investments, potentially at their own cost and without contractual certainty
  • imbalanced termination terms. For example, a term may allow a processor to terminate a grower’s contract with a shorter notice period than if the grower seeks to terminate the contract. It is unclear why the processor is permitted to provide shorter notice than the grower, which demonstrates an imbalance in rights that could cause detriment
  • terms that allow the processor to unilaterally vary the contract. For example, terms that will enable the processor to update policy manuals mid-contract. This could subject growers to additional terms in the processor’s favour
  • terms that allow processors to impose additional costs on growers due to the processors’ decision.

An impetus for change

The ACCC has set out its current concerns in clear terms.

“The thresholds and the lack of penalties in the current unfair contract term laws create challenges for investigations involving agricultural contracts. The proposed changes to these laws tabled during the last federal parliamentary sitting will, if enacted, better protect Australian small businesses against unfair contract terms, and will enable the ACCC to seek pecuniary penalties for breaches,” Mr Keogh said.

“We expect all chicken meat processors to continue working with growers and grower groups until the contracts they have in place are clear and balanced. We’ll be monitoring the industry to see that it happens and will re-examine these and other contracts if unfair contract term laws are reformed.”

Watch this space

On 9 February 2022, the Australian Government introduced the Treasury Laws Amendment (Enhancing Tax Integrity and Supporting Business Investment) Bill 2022 (Bill) to enhance protections against unfair contract terms in the Australian Consumer Law.

The Bill proposes to strengthen and expand the unfair contract term regime. This will the include the introduction of penalties where a contracting party seeks to propose, apply or rely upon an unfair term in applicable contracts and expansion of the scope of the unfair contract term regime.

If you have any questions or need assistance with your contracts, please contact us below or send in your enquiry here.

Author: Trent Taylor

The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

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