New Commonwealth Act threatens trail agreements

Which brokers can claim protection?

Any business with less than 20 employees can claim the protection of the new law. This includes full-time, part-time and regular casual staff. Brokers who run one-man-band operations or who work as independent contractors also fit the definition.

Which contracts?

A protected small business contract is one which:

1. is for the supply of services (which a deed of aggregation is);
2. the upfront price payable on the contract does not exceed $100,000 (which a deed of aggregation is); and
3. the contract is standard form.

A standard form contract does not literally need to be identical to other contracts the aggregator uses in order to be caught. In determining whether a contract is standard form, the court considers:

a) whether one of the parties has all or most of the bargaining power relating to the transaction;
b) whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
c) whether another party was, in effect, required either to accept or reject the terms of the contract;
d) whether another party was given an effective opportunity to negotiate the terms of the contract;
e) whether the terms of the contract take into account the specific characteristics of another party.

Aggregators by definition aggregate multiple brokers trail through a standardised process. It is not feasible for aggregators to reinvent the wheel for each new broker. It is conceivable that sub-aggregation agreements and smaller franchise agreements will involve genuine discussion and crafting of contracts to fit the circumstances. For the most part however, aggregators need to create systems and procedures that are uniform and therefore require uniform contracts with their brokers.

What about franchise law?

The new legislation will apply in addition to existing franchising protections such as the Franchising Code of Conduct 2015.

When is a term of a contract unfair?

A term in an aggregation contract will be found to be unfair if:

1. it would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
2. it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
3. it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

Examples of such clauses would be those which provide for:

1. Trail to be withheld if monthly volumes are not reached, particularly if such clauses have been ignored (waived) for a period of time.
2. Seizure of trail in the event of the submission of a fraudulent loan application, particularly if such clauses did not provide for the withheld trail to be held in escrow pending claims by third parties.
3. Trail to be forfeited if the broker leaves the aggregator.
4. Trail to all sub-brokers to be stopped where one sub-broker has misbehaved, particularly if such clauses did not provide for the withheld trail to be held in escrow pending claims by third parties.
5. The aggregator to unilaterally determine whether the contract has been breached (ousting the courts ability to make that determination).
6. The aggregator to unilaterally change the deductions made from trail.
7. Preventing a broker from suing for trail.
8. Limiting the evidence a broker can present or imposes the evidentiary burden on a broker in relation to court proceedings over the aggregation agreement.

When does it come into force?

The new law will come into effect 12 months after it receives the royal assent. This gives aggregators a one-year grace period to review and amend their standard aggregation deeds in order to comply. Aggregators should seize the opportunity presented by the new law to create contractual arrangements with their brokers that are both fair, far-sighted and uniform. Many trail arrangements involve antiquated, disjointed and sometimes lost contractual documents, particularly where there have been mergers or loan books changing hands. Aggregators should also consider a structured consultation process with their brokers over the next 12 months in order to solidify goodwill and loyalty.

Brokers should note that the new law will not apply to aggregation deeds entered into prior to the new law coming into force. Accordingly, if you are trapped in an unfair contract then you will need to use other means to extricate yourself. This includes resort to the Independent Contractors Act 2006, the Franchising Code of Conduct 2015 or the Contracts Review Act 1980 (NSW), or the common law rules against penalties and forfeiture. Brokers should be wary of aggregators pushing them to renew their aggregation deeds in the next 12 months, particularly if these renewals are for lengthy periods of time. Brokers in this position should seek independent legal advice before signing on the dotted line.

Matthew Bransgrove

Matthew Bransgrove is a solicitor and partner at Bransgroves Lawyers, a firm specialising in serving the mortgage industry. Bransgroves act for brokers, aggregators and funders on trail-related drafting and disputes. Matthew is a co-author of the LexisNexis textbook, The Essential Guide to Mortgage Law in Australia (2nd Ed). His latest book, Avoiding Mortgage Fraud in Australia (LexisNexis), went on sale in June 2015.