Australia: Federal Government passes new laws extending unfair contract terms protections to small business contracts

Last Updated: 13 November 2015
Article by Darren Pereira and Sarah Cunynghame

Most Read Contributor in Australia, September 2017

On 20 October 2015, the Federal Government passed the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 (Bill). The Bill amends 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'.

Background and amendments to the Bill

We have previously published an article summarising the key provisions of the Bill, which can be accessed here. Since then, there have been two key updates made to the Bill, being:

  1. Definition of small business contract: the upfront price threshold for a 'small business contract' was increased. The definition of 'small business contract' means contracts where one of the parties employs fewer than 20 persons and the upfront price payable under the contract does not exceed $300,000 for contracts shorter than 1 year (which was previously $100,000) or $1,000,000 for contracts longer than 12 months (which was previously $250,000); and
  2. Transitional Period: originally, it was proposed that the Bill would commence 6 months after Royal Assent. The amended Bill which passed the Senate will commence 12 months after Royal Assent.

These amendments to the definition of 'small business contract' mean that more contracts will be subject to the extended unfair term protections. It is estimated that these amendments will increase the coverage of the unfair contract term legislation from 80% of small businesses to 95% of small businesses.

With a 12 month transition period, businesses will have an additional 6 months to review and, if necessary, amend its standard-form contracts that may breach the unfair contract protections under the ACL.

What does the passing of the Bill mean for businesses?

Under the Bill, unfair terms in standard form small business contracts will be void. This means that the term will be unenforceable and treated as if it did not exist. If the contract can operate without the unfair term, it will continue to bind the parties.

An important distinction is that it is not an offence to include an unfair term in a small business contract and there are no pecuniary penalties for doing so, however if a person attempts to enforce a provision of a contract that is declared unfair then remedies can apply, including court-awarded compensation.

A court will be able to declare that a term of a standard form small business contract is an unfair term (and therefore void) on the application of the small business, the Australian Competition and Consumer Commission (ACCC), a state or territory regulator or the Australian Securities and Investment Commission (ASIC).

Which contract terms could be void under the new law?

The unfair contract term protections apply to contracts apply to contracts for the supply of goods or services, contracts for the sale or grant of an interest in land (including sale or leasing of land), financial products and contracts for the (possible) supply of financial services.

The may affect a range of contracts, including contracts for supply of services (such as IT services, advertising services and banking services); purchase of motor vehicles; equipment finance; loans to small businesses; financial services distribution agreements; technology licences; contracts between big retailers and small suppliers; contracts for the transport of goods (by land not ship); storage of goods and customers clearance; contracts for online purchases; and contracts with independent contractors.

Unfair terms will be void if they are part of a contract which meets all or the following criteria:

  • The contract must be a small business contract, meaning that:
    1. at the time the contract is made, one (or more) parties to the contract is a business that employs fewer than 20 persons (including full-time employees, part-time employees and casual employees who work on a casual or systematic basis, using a headcount approach, regardless of an employee's hours or workload); and
    2. the upfront price of the contract does not exceed a certain amount, which is $300,000 (for contracts lasting up to one year), or $1 million (for contracts lasting more than one year).
  • The contracts is a standard form contract, meaning (generally) the contract is pre-prepared by one party and provided to the other party on a "take it or leave it", "one size fits all" basis with no effective opportunity to negotiate its terms.
  • The contract is entered, renewed or varied after commencement of the substantive provisions of the Bill, being 12 months after Royal Asset. The amendments in the Bill will apply to the contract as renewed or the terms as varied on and from the renewal day or the variation day (as applicable), in relation to conduct that occurs on or after that day.
  • The contract is a contract for the supply of goods, services, land, financial products or financial services. In the case of the ACL, a small business contract must be a contract for a supply of goods or services, or a sale or grant of an interest in land. The unfair contract terms provisions in the ASIC Act apply to contracts that are financial products or contracts for the supply, possible supply, of financial services, although though this is not part of the definition of "small business contract".
  • The contract is not an excluded contract, meaning that it is not:
    1. contract of marine salvage or towage
    2. charterparty of a ship
    3. contract for the carriage of goods by ship
    4. constitution of a company, managed investment scheme or other kind of body
    5. small business contract that is covered by Commonwealth, state or territory law that is prescribed by the regulations. (This allows exemptions where small business contracts are covered by an industry-specific law that is enforceable and equivalent)

The unfair contract term protections will cover contracts where the small business is the supplier of goods or services, as well as where the small business is the acquirer. This is in contrast to the unfair contract term protections for consumer contracts, which only apply when an individual acquires the goods, services, an interest in land, financial products or financial services.

What should you be doing to comply with the new law?

All businesses (including small businesses and not-for-profit businesses) should consider reviewing any of their low-value standard form B2B contracts (whether these are contracts with suppliers, customers or independent contractors) which potentially might be used in transactions involving businesses that employs fewer than 20 persons.

Some of the steps which businesses can take over the 12 month transitional period to ensure they comply with provisions of the Bill include:

  • Review contracts which might be used in transactions involving businesses with less than 20 employees
  • Review new contracts and existing contracts which it intends to renew or vary
  • Consider creating a separate set of contracts for big businesses (and small businesses)
  • Consider structuring the price to exceed the financial threshold
  • Consider asking the other party how many people it employees
  • If its own business employs fewer than 20 employees, use the new regime as a bargaining tool
  • If you are in the transport industry, consider creating a separate set of contracts for shipping contracts (due to the exception for carriage of goods by ship from the unfair contracts regime).

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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