Australia: Alert not alarmed… unfair contract term protections to be extended to small businesses

Clayton Utz Insights

Key Points:

With small business to be protected under unfair terms laws in 2016, all businesses will need to consider the enforceability of their B2B standard term contracts.

The Commonwealth Government is developing a Bill which, if enacted, will extend to small businesses the unfair contract term protections currently afforded to consumers in standard form contracts, and have significant implications for business-to-business transactions.

The proposed change in the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 is intended to address the potential for unfair detriment where unfair contract terms are enforced against small businesses. It will amend the Australian Securities and Investments Commission Act 2001 (ASIC Act) and the Competition and Consumer Act 2010 (CCA), and is planned to come into effect in early 2016 after a six-month transition period.

Application of "unfair terms" laws to small business has been under consideration since 2009 and the extension was a pre-election commitment of the current Federal Government.

What is an unfair contract term?

An unfair term is a term that:

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

A court will read the term(s) in the context of the entire contract and will also take into consideration the transparency of the contract, that is, how upfront, easy to read and clearly presented the contract is to the affected party.

Importantly, a term that defines the main subject matter or sets out the upfront price of a contract, or a term that is required by law, cannot be declared unfair.

Business will need review of standard terms

If the Bill becomes law, all businesses will need to consider the enforceability of their B2B standard term contracts to minimise the risks that various terms might be declared to be void. A similar review was necessary for standard consumer contracts, when unfair terms laws were introduced in 2010.

The law will not come into force this year. Once the consultation process has concluded, the Bill is intended to come into effect after a six-month transition period, which may be in early or mid-2016, depending on the Bill passing Parliament later this year. When the Bill becomes law, all B2B contracts that are entered into or renewed with "small business", or terms of existing contracts that are varied, must comply with the new protections.

The protections will work in the same way as those that currently exist under the Australian Consumer Law and ASIC Act for standard contract forms, whereby a provision may be declared void by a court. In these circumstances, the voided term is "removed" from the contract, while the remainder of the contract continues to bind the parties.

However there are no fines or penalties for having a term declared unfair.

What does this change mean for you?

It is recognised that standard form contracts are commonly used in business and are an efficient and cost-effective option. However public consultation submissions have suggested that small businesses, like consumers, are vulnerable to the inclusion of unfair terms in standard form contracts. Therefore, caution should be exercised when they are offered on a "take it or leave it" basis and have one sided terms, that are not clearly disclosed, eg. embedded in fine print.

Examples of unfair contract terms

Contract terms have been cited as unfair where they:

  • require one party to bear the risk of a high cost, low probability event;
  • create an automatic rollover extension of the contract;
  • allow one party to unilaterally vary the contract;
  • affect or remove the ability of the other party to vary the contract terms, limit their obligations, terminate or renew the contract;
  • levy excessive fees;
  • impose excessive interest rates on outstanding moneys; or
  • affect or limit a party's ability of redress or remedies for breach by the other party.

However these examples serve only as illustrations.

Particular attention should be paid to entering into contracts with small businesses that may lack the resources or skills to fully understand the implications of contract terms or where it appears that one party has all the bargaining power in the contractual relationship.

In the consumer area the courts have emphasised that terms may not be unfair if they are clearly drawn to the other party's attention prior to the agreement (eg. Jetstar Airways Pty Ltd v Free [2008] VSC 539). Putting one's cards on the table is a good way to reduce risks of terms being considered later as unfair.

Who is small business under the Bill?

The protections will apply to terms in a contract that, at the time it is agreed to, at least one party employs fewer than 20 people and where the value of the contract does not exceed $100,000, or $250,000 where the contract is for more than one year. The Bill will apply to small-business-to-small-business contracts.

This means that under the Bill small businesses can in varying circumstances be both a victim of unfair terms under one contract and yet itself be a perpetrator of unfair terms with its own terms for another contract. The Bill can apply if the small business is involved in the acquisition or supply of goods or services.

The number of employees is determined by the total number of full-time, part-time and casual employees who work on a regular and systematic basis.

The contract value is defined to be the "up-front price", which is the consideration provided at, or before the contract, and does not include contingent costs or amounts incurred for the non-occurrence of a particular event. For example, any interest payable under a credit contract is not included in the up-front price.

When is a contract a standard form contract?

The protections to small business apply only when the contract between the parties is a standard form contract. Standard form contracts are those which employ standardised, non-negotiated terms and are prepared by one party to the contract. Factors that are relevant to determining whether the contract is standard form include:

  • whether one party has all or most of the bargaining power relating to the transaction;
  • whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
  • whether another party, in effect, was required either to accept or reject the terms of the contract in the form in which they were presented;
  • whether another party was given an effective opportunity to negotiate the terms of the contract; and
  • whether the terms of the contract were tailored to the specific circumstances of the agreement between the parties.

Industry-specific measures

Several industry-specific measures have been introduced that protect against unfair contract terms. These specific measures are considered exemptions to the current proposed legislation, but still protect small businesses against unfair contract terms.

For example a number of requirements are currently provided in the telecommunications sector which can apply to small businesses that aim to provide customers of telecommunications businesses with information they need to make an informed decision, as opposed to providing protection against unfair contract terms (this is more complementary to the proposed legislation rather than an exemption). These may be found under the Telecommunications Act 1997 (Cth) or the Telecommunications Consumer Protection Code 2012.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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