The current dairy crisis has led to Government intervention in milk contracts – unfortunately, for the time being, that’s the case in Australia, not the UK.
NFU chief dairy adviser Sian Davies writes:
On November 12 2016 the unfair contracts law in Australia will extend consumer protection to small businesses who deal with large businesses. Think dairy farmer versus milk buyer.
The Australian dairy sector has rarely left global dairy news in recent months with the issues facing milk buyers Murray Goulburn and Fonterra widely known to those in the sector. Both have slashed milk prices retrospectively to supplying farmers amongst other things.
Under the new law, a Court will be able to strike out any unfair contract terms in new contracts written and offered after November this year. The Australian Competition and Consumer Commission (ACCC), their equivalent of the CMA, state there are three main points to consider:
- Is there a term in the contract that is not really necessary to protect the legitimate commercial interests of the big firm?
- Does the term, under point 1 cause a loss to the small business?
- Is there a major imbalance in the rights and responsibilities between the two sides?
This change in the law will cover all business-to-business contracts including financial services, phones, leases, franchises and agriculture. Businesses will have the opportunity to improve contracts before the law comes into force after which a judge will be able to strike out unfair contract terms and allow the rest of the contract to operate.
This will apply to annual contracts worth up to $300,000 (just over £174,000) or multiyear contracts covering up to $1m. Importantly for dairy, the ACCC says that if the price is not specified the contract (as is the case with milk contracts) the contract is deemed to be under the threshold. In Australia, like the UK, most milk contracts are worth well over $300,000 but supply agreements often don’t state a clear price because processors change price over the life of the agreements.
The unfair contract law could also stop the long held practice where most large processors insist that dairy farmers supply them exclusively as this could be considered a restriction of trade. Some Australian farmers want to supply some of their milk to new buyers but don’t want to risk changing over their whole milk contract.
So what does this mean for the UK?
To be fair Government has intervened in milk contracts already, bringing the farming unions and processors together to set in place the Voluntary Code of Conduct on Milk Contracts. This has brought in fairer, more balanced contract terms for some farmers – and the majority of milk volume – although unfortunately a large number of milk buyers have chosen to ignore the best practice provided in the Code.
Contractual relations in the dairy sector are currently governed by the European Commission, under the single CMO regulation but Brexit now allows us to look at milk contracts with a fresh light. If we had a clean sheet, how would we design milk contracts that are fair on both parties?
The NFU will be following developments in Australia with a keen interest and encouraging our own Government to look at how our own milk contracts can be improved.