New protection for small businesses against unfair contract terms

After months of debate in both the House of Representatives and the Senate the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 has passed both Houses. But what does this actually mean when it comes to everyday business?

Current Legislation

Currently Schedule 2 of the Competition and Consumer Act (2010) “ACL” and the Australian Securities and Investments Commission Act (2001) “ASIC Act” contain mirroring terms that provide consumer protections against unfair contract terms in standard form contracts. The ACL grants protections in relation to the supply and sale of goods and the ASIC Act protections in relation to the supply of financial services.

Scope of the Act

The purpose of this Act is to extend these consumer protections against unfair contract terms to small businesses. These amendments will come into force 13 November 2016 and make unfair terms in a standard form small business contract void and unenforceable.

In small business to small business transactions these amendments will affect small businesses on both sides of the contract as either the buyer or seller of goods or services.

For businesses that do not fall within the definition of small business, additional care will need to be taken in standard terms and conditions used. Especially in the context that these amendments were enacted largely to counteract the perceived power imbalance most small businesses face in the commercial context.

Application

This Act is not retrospective and so it will not apply to contracts that were entered into prior to the commencement of the provisions 13 November 2016. However, it will apply to contracts that are entered, renegotiated or renewed and terms that are varied after this date.

Small Business

For the purpose of the amendments a small business is a business with 20 or less employees. This number includes employees working part time and casual staff with regular and systematic hours. This is the definition adopted by the Australian Bureau of Statistics (ABS).

Small business contract

A small business contract is defined as one in which one party classifies as a small business for the purposes of this legislation and the upfront contract prices is no more than:

  • $300,000 for contracts of less than 12 months; or
  • $1,000,000 for contracts of more than 12 months

The upfront cost is defined in the both Acts (ACL s26(2) and ASIC s12BI(2)) but in practice will in most cases be the entire price under the contract.

Standard form contract

If a party alleges that a contract is a standard form contract, the onus is on the other party to prove otherwise.

In making a decision on this matter the court must consider the following:

  • relative bargaining power or the parties;
  • whether the contract was prepared by one party prior to any discussion with the other;
  • whether one party was in effect required to either accept or reject  the contract terms;
  • whether a party was given effective opportunity to negotiate; and
  • whether terms take into account specific characteristics of the other party/business.

What terms are affected?

To be unfair a term must:

  • cause a significant imbalance in the parties’ rights and obligations;
  • not be reasonably necessary to protect the legitimate interests of the party advantage by the term; and
  • cause financial or other detriment (such as delay) to a small business if it were relied on.

Importantly, the fairness of a particular term must be assessed in light of the contract as a whole, including any other terms that may offset the unfairness of the term.

There remains some uncertainty as to what provisions may be considered unfair. The following terms are examples of terms which we consider unfair:

  • a term that permits, or has the effect of permitting, one party (but not another party) to avoid or limit performance of the contract;
  • a term that permits, or has the effect of permitting, one party (but not another party) to terminate the contract;
  • a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract.

Key provisions exempt from unfair term conditions

A number of key provisions within a contract are expressly exempt from these provisions including:

  • terms which define the main subject matter of the contract, to the extent they do define;
  • terms which set out upfront price under the contract; and
  • terms required or expressly permitted by State or Commonwealth law.

Additionally, the unfair terms provisions will not apply to the constitution of a company or generally contracts in relation to insurance.

Ramifications

Unfair terms will be void. However the contract will continue to bind the parties if it is capable of operating without the unfair term.

What you should do

Businesses have been granted until November 2016 in which to review their business to business contracts in relation to unfair terms. Any standard contracts or terms and conditions used in sale or supply of goods and services should be reviewed.

Small businesses need to be aware that they may be both the victim and the perpetrator of an unfair term. Review of a small business’ contracts with other businesses is important to ensure that they do not fall foul of the new provisions in either capacity.

For larger businesses it is important to establish which contracts they have on foot that will fall within the scope of these provisions when they are renewed or renegotiated. As well as ensuring any new contracts comply with the provisions.

Ultimately, assessing current and potential business relationships and ascertaining that other party’s size is crucial for all businesses. In relation to these amendments size really does matter.

With Genevieve Lakey