Australia: Taking care of small businesses: Laws of ‘unfair' contracts to extend to small business contracts

Last Updated: 17 May 2015
Article by Darren Pereira and Sarah Cunynghame

Most Read Contributor in Australia, September 2016

The Federal Government recently released an exposure draft of legislation to amend both the Australian Consumer Law (ACL) and the Australian Securities and Investment Commission Act 2001 (Cth) (ASIC Act) to extend unfair contract term protections to small businesses.

The reforms will have a significant practical impact on the way in which businesses contract with each other when one or more of the contracting parties is, or might be considered to be, a 'small business'.

Key features of the proposed protections

The extension of the unfair contract term protections to cover small businesses will primarily be found in section 12BF in Part 2 of the ASIC Act and section 23 in Part 2-3 of the ACL.

The draft legislation proposes to extend the existing unfair terms regime in the ACL (and mirror provisions covering contracts for financial services or products in the ASIC Act) to standard form contracts where:

  • at least one party is a 'small business'; and
  • the upfront price payable under the contract does not exceed $100,000 or, if the contract has a duration of more than 12 months, $250,000.

The draft legislation defines 'small business' as a business that employs fewer than 20 people, with the number of employees to be determined using a 'head count approach'. Casual employees are not counted unless they are employed on a regular and systematic basis.

In terms of the monetary threshold, the 'upfront price' refers to 'the consideration that is disclosed at or before the time the contract is entered into', but excludes 'any other consideration that is contingent upon the occurrence or non-occurrence of a particular event'. For example, any contingent fees or amounts and any interest payable will be excluded from calculations.

If the contract is caught by the protections, the court will have the power to strike out 'unfair' terms in a contract. In this circumstance, the contract can still continue to bind the parties, but only if it can operate without the unfair term.

What is an 'unfair' contract term?

Under the ACL, a term is considered 'unfair' if it:

  • causes a significant imbalance in the parties' rights and obligations under the contract;
  • would cause detriment (whether financial or otherwise) to a party if it were to be relied on; and
  • is not reasonably necessary to protect the legitimate interest of the party who would be advantaged by the term.

For example, a contract that includes a term that gives one party (but not the other party) the right to change key terms during the course of the contract would be considered unfair. However, a term that defines the main subject matter or sets out the upfront price of a contract, or a term that is required or expressly permitted by law, cannot be declared unfair.

What is a 'standard form contract'?

A contract is presumed to be standard form unless a party to the proceedings alleges otherwise. The Court will determine it as a question of fact as there is no specific definition of a "standard form contract". The ACL sets out a number of characteristics of a standard from contract, including whether:

  • one party prepared the contract before discussions between the parties;
  • one party was required to either accept or reject the contract as presented;
  • there was not effective opportunity to negotiate the terms of the contract; or
  • the terms of the contract are not specific to one party or to the particular transaction.

The proposed extensions of these laws to small business standard form contracts are based on the assumption that some small businesses, like consumers, lack the resources or skills to fully understand the implications of contract terms. As such, and in the absence of adequate protections, there is currently an incentive for businesses to include unfair terms in standard form contracts offered to small businesses. The policy aim is to achieve a more appropriate balance between protecting 'vulnerable' small businesses whilst allowing businesses to contract freely with each other.

Will any sectors be exempt from the new protections?

The Minister will have the power to exempt the application of the unfair contract term protections for small businesses, where an industry-specific legislation or regulation is deemed enforceable and equivalent. This will ensure there is no duplication with protections contained in another law.

What does this mean for your business?

The expansion of these laws to cover part of the 'business to business' sector will require a range of entities to review and consider the terms of their standard form contracts and consider any contract terms which may be considered unfair.

It is important to note that there is no requirement for a small business to notify the other party during negotiations that it is likely to be a small business for the purposes of the ASIC Act or the ACL. In light of this, businesses will need to ensure that their standard form contracts do not contain onerous terms for small businesses (recognising that terms that are unfair for one small business may not be onerous for another). This means that every contract under the relevant value thresholds should be reviewed in order to determine whether: (a) they are contracted with a small business; and (b) any of the terms are likely to be deemed 'unfair' as set out above. This includes contracts entered into before the legislation commences that have either been varied or renewed after this time.

When will the reforms start?

Following the conclusion of a consultation process, the legislation will be finalised and introduced into Parliament. If the legislation is passed, a six month transition period will be allowed form the date of Royal Assent. It is anticipated that the protections will come into effect in early 2016.

These amendments will apply to contractual terms that are varied and contracts that are entered into or renewed on or after the commencement date of the substantive provisions of the legislation.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

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