Key Points:
Businesses have 12 months to review their standard form contracts.
The current protections for consumers against unfair contract terms in standard form contracts have now been extended to small businesses, following the Royal Assent on 12 November 2015 to the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015.
While the Bill is substantially the same as the first version we looked at in May, two important changes were made in the Senate:
- the original six month grace period after Royal Assent was extended to 12 months, which means the law takes effect on 12 November 2016;
- the monetary thresholds increased from $100,000 to $300,000 for contracts up to 12 months long, and $250,000 to $1 million for contracts longer than 12 months.
The ACCC has already urged businesses to take action now to review their standard form contracts to ensure compliance with the new regime before it takes effect.
With the clock now ticking, it is important that businesses take the necessary steps to understand if and how they might be affected by the extension of the law to small business contracts, and what they now need to do to comply.
Policy reason for unfair contract protections for small businesses
The Government was concerned that small businesses, like consumers, can be vulnerable to unfair terms in standard form contracts if they are offered contracts on a "take it or leave it" basis, or lack the resources to understand and negotiate contract terms. There is potential for small business detriment where these unfair contract terms are enforced. The new law will allow a court to declare void a term within a standard form contract that is "unfair".
Limiting the extension of the unfair contract term protection to low-value, standard form small business contracts is intended to support time-poor small businesses entering into contracts for day-to-day transactions, while maintaining the onus on small businesses to undertake due diligence when entering into high-value contracts. The amended provisions will be enforced by the ACCC, ASIC and State/Territory Fair Trade offices.
More contracts are now caught after Senate amendments
Following the Senate amendments, the new provisions will operate where a business with fewer than 20 employees agrees to a standard form contract, and the upfront contract value does not exceed:
- $300,000; or
- $1 million where the contract has a duration of 12 months or more.
The contract value is defined to be the "upfront 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 upfront price.
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 grace period
The new laws will apply to any contracts that are entered into, renewed or varied after that 12 November 2016.
This gives businesses 12 months to review and update any existing contracts that may be affected (if renewed or varied after 12 November 2016) and to prepare new standard form contracts.
Existing contracts that are not renewed or varied on or after 12 November 2016 (including contracts that are entered into between now and 11 November 2016) will not be affected by the new laws.
Business will need to review their standard terms
Standard form contracts are commonly used in business and are an efficient and cost-effective option. However, all businesses will need to consider the enforceability of their B2B standard term contracts with small business to minimise the risk that various terms might be declared to be void.
The protections will work in the same way as those that currently exist under the Australian Consumer Law and the ASIC Act for standard contract forms.
Thus while there are no fines or penalties for having a unfair term in a standard form contract with a small business, that term may be declared void by a court. This removes the voided term from the contract, while the remainder of the contract continues to bind the parties.
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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.
