News

Not cleared for take-off – High Court redefines agency relationships

10.05.2017

The High Court of Australia recently handed down its highly anticipated decision in Australian Competition and Consumer Commission v Flight Centre Travel Group Ltd [2016] HCA 49. A key finding by the Court, in reaching its decision that Flight Centre had breached section 45 of the Trade Practices Act 1974 (“the Act”) (now, section 45 of the Competition and Consumer Act 2010), was that Flight Centre was in competition with the airlines it was contracted to sell airline tickets on behalf of. This case significantly resets the parameters for agency relationships in Australia. Rod Sims – Chairman of the Australian Competition and Consumer Commission (ACCC) – summarised the case by saying:

If you or another organisation are selling something to consumers on the basis that if one of you makes a sale, the other one does not, it doesn’t matter what you call yourself – you are competitors.

This has wide reaching implications for any business in Australia that either acts as, or engages, an agent for the purpose of conducting its business. It also impacts businesses that engage in dual distribution, selling their products alongside authorised agents.

In this update, Moulis Legal senior lawyer Emily Murphy, and lawyer Alexandra Geelan explain the Flight Centre judgment, its impact on businesses operating in Australia under agency agreements, and what businesses can do to manage their risk.

The traditional principal-agent relationship imposes strict obligations

A principal-agent relationship generally arises where one party – the agent – has the authority or capacity to create a legal relationship between the principal and third parties. In this case, Flight Centre was an agent of certain airlines – the principals – including Emirates, Singapore Airlines and Malaysia Airlines. It was authorised to contract with passengers on behalf of the principals, selling airfares on a commission basis.

Traditionally, a key feature of a principal-agent relationship has been that agents cannot act in competition with the principal.  In addition, agents ordinarily have duties to avoid conflicts of interest and should not profit or benefit from their position without the prior approval of the principal. The consequences of an agent breaching its obligations can be significant. The agent may have to pay the principal the amount of profit or any benefit they received as a result of their breach of duty.

Flight Centre responded to undercutting by the principals

While Flight Centre acted as an agent for the principals, in this case the principals also sold airfares directly through their own websites. Sometimes the principals even sold airfares at a cheaper price than the fares they provided to Flight Centre, so it was often more attractive for travellers to book directly with them rather than through Flight Centre.

Flight Centre responded to this conduct by repeatedly demanding that the principals stop offering lower prices through their websites. In addition, Flight Centre threatened to stop acting as the principals’ agent. The Australian Competition and Consumer Commission (“ACCC”) alleged that this conduct constituted an attempt by Flight Centre to enter into arrangements with the principals that had the effect of lessening competition contrary to section 45 of the Act. Essentially, this allegation raised the issue of whether Flight Centre was in competition with the airlines.

When is an agent in competition with its principal?

In short, the Court concluded that Flight Centre was in competition with each airline it acted as an agent for in the market for the sale of international airline tickets.

Critically, the Court found that an agent may be in competition with a principal if:

(a) the agent can exercise their discretion in relation to the terms of the sale of the principal’s products, such as the price; and

(b) the agent is not obligated to act in the best interests of the principal.

In this case, Flight Centre had discretion to set the price at which they sold airfares to their customers, provided they paid the principals the price that they set (less its commission).

Additionally, Flight Centre was not obligated to act in the best interests of the principals. Flight Centre “acted” as an “agent” for many airlines and, through its price setting, it was able to act in a way that was in its own best interests or even in the interests of another airline.

This meant that Flight Centre’s attempts to stop the principals from offering lower priced airfares through their websites constituted an attempt by Flight Centre to control the price of a product offered by a competitor. This would be likely to have the effect of substantially lessening competition in Australia and was in contravention of the Act.

The case has now been sent back to the Full Court of the Federal Court for a determination on penalties which is due to be heard in May 2017. It is anticipated that penalties could exceed $11 million.

Protecting parties to agency agreements is now essential

In the ACCC’s own words:

This decision will provide important guidance for the future application of competition laws in Australia to other situations where competing offers are made directly to consumers by both agents and their principals. It is likely to be particularly relevant when businesses make online sales in competition with their agents.

Sims has already flagged that the ACCC will be “getting in touch with those companies where we feel it does apply”.  At this stage, there is still uncertainty about when and how redefined agency relationships will be governed in Australia, however this decision by the High Court should not be ignored.

As a result of this decision, parties to agency agreements should now carefully review and consider their agency agreements, particularly where the agent and principal both sell directly to customers in a dual distribution model. In particular, where an agency agreement contains clauses that allow an agent to set prices, or otherwise control the terms of supply, it is likely that they will be considered to be in competition with the principal. This means that any attempts to control or fix prices, or otherwise limit supply, may be considered anti-competitive. Agreements where an agent is largely autonomous present the highest risk to those parties involved.

It is likely that agency agreements will now attract more attention from the ACCC and there will be more cases and decisions flowing from this decision. Until further clarification is received, parties should ensure that they carefully consider, and if necessary seek legal advice, on the likely effect of their proposed agency arrangements and whether they are likely to be considered anti-competitive. This will help companies to avoid lengthy and costly action against them by the ACCC.

 

Moulis Legal guides businesses across Australia and Asia in the management and resolution of cross-border and domestic commercial and property disputes in a way that is commercially focused and business-centric. We represent Australian and international organisations in various domestic and international jurisdictions on matters including competition law issues, managing and responding to regulatory investigations, contractual disputes, cross-border intellectual property dispute and real property disputes.

For more information, please contact Emily Murphy or Alexandra Geelan on +61 7 3367 6900 (emily.murphy@moulislegal.com or alexandra.geelan@moulislegal.com).

This memo presents an overview and commentary of the subject matter. It is not provided in the context of a solicitor-client relationship and no duty of care is assumed or accepted. It does not constitute legal advice.