Direct Selling/Multi-Level Marketing Australian Consumer Law

Application to Consumer Arrangements¹

Introduction

On 18 November 2010, the Australian Government released the Trade Practices (Australian Consumer Law) Amendment Regulations 2010 (No. 1) (ACL Regulations). This forms part of the legal regime applying to the direct selling industry that will be implemented under the Australian Consumer Law (ACL). This comes into effect on various dates on and after 1 January 2011.

Efforts will continue to be made by various parties, including the Direct Selling Association of Australia (DSAA) to clarify the manner in which the ACL will impact on direct selling organisations (DSOs) but it would be prudent for all DSOs to make themselves aware of the obligations in the ACL which apply.

Executive Summary

The key concept that will need to be considered by DSOs is whether their supply arrangements with customers constitute "unsolicited consumer agreements" (UCAs)².

The remainder of this FocusPaper is drafted on the premise that the ACL will come into effect. DSOs should seek legal advice to determine the extent to which the UCA provisions have come into effect and apply to their business activities.

Where goods or services are supplied by a DSO to a consumer as a result of an UCA (and an exemption does not apply), the DSO will be required to:

meet specified disclosure requirements; and
include specific termination rights in the UCA.

In these circumstances and on the basis that the transitional provisions referred to below do not apply, DSOs will be prohibited from:

supplying goods and services; and
accepting payment in respect of goods and services,

for a minimum of 10 business days after the UCA is made.

Our Recommendations

DSOs should review their selling practices to understand the extent to which the UCA provisions may apply. This will require consideration of the various exemptions (including those set out in the ACL Regulations) and the transitional provisions to determine whether they are applicable.

It is particularly important for any new DSO commencing business in Australia, as well as those DSOs conducting business currently to whom the UCA provisions apply, to review the ACL to:

understand your obligations;
understand how it applies to your practices and procedures;
train your personnel and agents; and
amend your documentation, as required.

Will the restrictions in the ACL apply to all DSOs?

The short answer is No. However, this conclusion can only be reached once the relevant provisions have been reviewed.

Whether the Australian business of a DSO is likely to be regulated by the UCA provisions depends on the following:

do you have selling arrangements which constitute an UCA; and
if so, is there an exemption in the ACL Regulations which applies?

If your selling arrangement constitutes an UCA and none of the exemptions apply, your business is regulated and a number of disclosure and termination requirements need to be complied with when dealing with consumers. Initially, at least, the transitional provisions have the effect that compliance with corresponding obligations in state/territory laws will be treated as compliance with certain of these requirements.

What is an "Unsolicited Consumer Agreement"?

For there to be an UCA, four essential elements must be established:

the agreement must be for the supply of goods or services to a consumer; and
the agreement must be made as a result of negotiations (i.e. discussions) between a dealer (which includes any sales representative, sales agent or independent contractor of a supplier³) and the consumer:
- in each other's presence at a place other than trade premises; or
- by telephone⁴; and
the consumer must not have invited the dealer to approach or telephone them; and
the total price of the sale is over $100 or cannot be determined at the time of the sale.

In other words, a selling arrangement will not constitute a UCA where:

the sale is made to a distributor or another person for the purposes of resale;
all discussions preceding the sale take place wholly at the DSO's premises or online;
the approach from the dealer to the consumer resulted from an invitation from the consumer; or
the value of the transaction is less than $100. .

Further, the ACL Regulations provide that any of the following categories of agreement will not constitute an UCA:

Business contract: an agreement for the supply of goods or services not ordinarily acquired for personal, domestic or household use or consumption;
Discontinued negotiations agreement: an agreement for the supply of goods and services after a consumer discontinues negotiations with a supplier, but initiates negotiations subsequently with the supplier;
Party plan event agreement: an agreement for the supply of goods and services following an invitation to an event for the identified purpose of negotiating the sale of goods and/or services;
Renewable agreement: an agreement for the further supply of goods and services in circumstances where an agreement is in force for the supply of goods or services of the same kind; and
Subsequent agreement of the same kind: an agreement under which goods and services have been supplied and, within 3 months of the supply of the goods or services, one or more further agreements are entered into for the supply of goods or services of the same kind as those supplied under the earlier agreement and the total value of the further agreements is $500 or less.

The party plan exemption is likely to be relevant to some DSOs. It applies where:

there is an event for the purpose of negotiating the supply of goods or services to one or more persons;
before the event, a person (the "inviter") invites three or more people to the event; and
during the event, the inviter and those invited are in the same premises as the inviter or the inviter's representative.

In addition, unsolicited consumer arrangements relating to financial services and products are excluded from the ACL (as they are regulated by the Corporations Act). Exemptions are also available for contracts for the supply of electricity and gas and emergency repair contracts in certain situations.

We consider that our selling arrangements are UCAs. What are our obligations?

You should ensure first that none of the exemptions apply. Save to the extent that the transitional arrangements apply, the key obligations for any dealer (which includes its representatives) where goods or services are sold by way of an UCA are:

(restricted calling hours) the dealer must not call on a consumer for the purposes of negotiating an UCA on Sundays and public holidays or outside the hours of 9:00am and 6:00pm (on weekdays) and 9:00am and 5:00 pm (on Saturdays)⁵;
(disclosure requirements at the time of contact) the dealer must:
- prior to the commencement of negotiations with the consumer, disclose their identity, including their address⁶, and the purpose of the call, being to negotiate the supply of goods or services; and
- leave the premises immediately on request;
(disclosure requirements prior to execution of an UCA) prior to reaching any agreement, the dealer must:
- disclose information about the cooling off period. This information must be attached to the UCA in reasonably plain language, be legible and presented clearly. In addition, the text must be the most prominent text in the document (other than the text of the dealer's name or logo);
- ensure the front page of the UCA includes certain prescribed statements.
The dealer must provide a written copy of the agreement to the consumer immediately after the consumer has signed the agreement (or within 5 business (or longer, if agreed) days for a telephone-negotiated UCA); and
(prohibitions on supply and payment) for a period of at least 10 business days (depending on the manner in which the UCA is reached) after entry to the UCA:
- no goods or services can be supplied to a consumer under the UCA; and
- payment must not be accepted or demanded.
Supplying goods to or accepting payment from a consumer during the cooling off period will extend the cooling off period to 6 months from the formation of the UCA and allow the consumer to terminate the UCA during that period.

All amendments to a UCA must be agreed and signed by both the supplier and the customer.

In addition to having the benefit of the obligations on the dealer set out above, the consumer will have a right to terminate the UCA during the relevant cooling off period. This may be done by written notice or orally.

Transitional Application of the ACL

The obligations for dealers to disclose information at the time of contact and prior to the execution of an UCA are regulated currently, to varying degrees, by State and Territory laws dealing with unsolicited selling. In an attempt to give businesses adequate time to prepare and, on the basis that DSOs continue to comply with the corresponding existing state and territory restrictions:

the disclosure requirements under the ACL will not come into effect until 1 July 2011; and
the restrictions on dealers accepting payment or supplying goods or services during the cooling off period will not commence until 1 January 2012.

Consequences of non-compliance

Where the ACL provisions apply and there is a breach of a dealer's obligation by the DSO:

the DSO cannot enforce the UCA against a consumer;
criminal liability may attach, with a maximum fine of $50,000 (for a body corporate) and $10,000 (for any other person); and
the ACCC has the right to take a range of enforcement actions for breaches, including issuing infringement notices for amounts up to $6,600.

Vicarious Liability

DSOs will be liable for the acts and omissions of their dealers with respect to the pre-contract disclosure obligations under the UCA provisions. Certain defences are available, for example, where a breach:

is an honest and reasonable mistake of fact; or.
occurred beyond the person's control and the person took reasonable precautions and exercised due diligence to avoid the breach.

Remember – Other Obligations under the ACL

As indicated in Addisons' FocusPaper No. 153, there are other provisions of the ACL that apply to DSOs. These include provisions dealing with:

obligations to notify of death and serious illness/injury associated with consumer goods;
pyramid selling;
unfair contract terms;
misleading and deceptive terms; and
standard form warranties.

Conclusion

We recommend DSOs take immediate steps to make themselves familiar with the ACL provisions and determine the extent to which they apply to their consumer agreements and selling practices.

We anticipate that the ACCC and consumer organisations will be vigilant in ensuring that the obligations under the ACL relating to UCAs are met. Accordingly, we would recommend that DSOs review their practices and consumer agreements to ascertain the extent to which these restrictions are applicable and, to the extent that a view is taken that the UCA provisions may affect their business, inform the DSAA or other relevant parties to ensure that those concerns are taken into account when clarification is sought concerning the impact of the UCA provisions.

DSOs conducting business in Australia should review the UCA provisions and take steps to ensure they are familiar with the ACL provisions and that, to the extent applicable, they are reflected in their policies, practices and documentation.

1 This FocusPaper is an update of Addisons' FocusPaper No. 153 "Direct Selling/Multi-Level Marketing - How will Phase 2 of the Proposed Australian Consumer Law Reforms Affect Your Business?"

2 The provisions of the ACL which regulate UCA's are set out in Division 2 and are referred to in this FocusPaper as the "UCA provisions".

3 Where a DSOs business is a buy-resell model, it is quite possible that the ACL provisions will not apply. However, they may apply to the distributor.

4 The concept of telephone negotiations is unclear but probably does not cover negotiations which take place online (e.g. e-commerce transactions).

5 Consent may be given by the consumer to allow calls outside these hours, but only to a limited extent

6 Where the dealer is a sales agent/distributor, it is not sufficient for a PO Box address to be given.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.