Australia: ASIC issues reminder for businesses to check for unfair contract terms

Last Updated: 5 February 2016
Article by Narelle Smythe

The release this week of the Australian Securities and Investments Commission's (ASIC's) Media Release 16-018MR and Information Sheet 221 provides a timely reminder for businesses to review their progress towards ensuring that their standard form contracts comply with the new provisions prior to 12 November 2016. Information Sheet 221 also contains ASIC's guidance on the new protections for small businesses, including guidance on which contracts will be covered by the new provisions and examples of terms a Court may declare to be unfair under the regime.

This reminder follows the release of the Australian Competition and Consumer Commission's (ACCC's) Media Release 223/15 on 17 November 2015. ASIC has set out its expectation that the transition period should be used by businesses to review relevant standard form contracts.

The new protections

The unfair contract terms regime currently provides protections for consumers. Under the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 these protections are extended to apply to small business contracts from 12 November 2016, when the upfront price payable does not exceed $300,000 or $1,000,000 if the contract period is more than one year. For contracts under which credit is or is to be provided, any interest payable under the contract is excluded from the assessment of the upfront price payable (in addition to any amounts excluded from the assessment under section 12BI(2)). A small business for the purposes of the regime is a business that employs fewer than 20 people at the time the contract is entered into (including casual staff employed on a regular or systemic basis).

Under the regime a Court may find that a term in a contract is unfair and therefore void. Upon such a finding, the Court may also make a range of orders, including:

  • declaring all or part of a contract to be void;
  • varying a contract;
  • refusing to enforce some or all of the terms of a contract or arrangement;
  • directing a party to refund money or return property to the small business affected; or
  • directing a party to provide services to the small business affected at the party's expense.

ASIC's examples

Information Sheet 221 provides three examples of small business contract terms that ASIC believes may raise concerns. These examples are set out below:

  • Lender's legitimate interests: A term of a loan contract under which a default by the small business borrower results in the small business being liable to pay large and excessive default fees (imposing an unfair cost on the small business that exceeds the amount required to protect the lender's legitimate interests).
  • Automatic rollover: A term of a fixed-term lease under which the small business is automatically entered into another fixed-term lease upon the end of the lease term unless it elects to purchase the goods or it has made arrangements to return the goods, where the small business is subject to early termination fees to exit the new lease contract. ASIC provides that the term would be less likely to raise concerns if there was not a consequence to the small business if it decided to immediately end the new lease.
  • Right to unilaterally vary the contract: A term of a loan contract under which the lender has the right to vary any term or condition of the contract if notice is given in writing, including terms relating to interest or fees, and the small business does not have the right to end the contract even if the lender increases its fees significantly (ASIC then provides an example percentage of 20%). ASIC provides that the term would be less likely to raise concerns if there was an additional term in the contract that provided a right for the small business to immediately cancel the contract without consequence if the price or services change.

What you need to do

The new provisions take effect in just over 9 months' time on 12 November 2016. Businesses should ensure that they identify and review all of their standard form contracts which could potentially be entered into with a small business and have an upfront price payable which is less than $300,000 or $1,000,000 if the contract period is more than one year (accounting for any exclusions).

The new provisions apply to standard form contracts entered into on or after 12 November 2016, however also apply to any contract that is renewed on or after that date. Existing contracts that may be renewed on or after 12 November 2016, as well as contracts which are scheduled for rollover after that date, should therefore also be reviewed. Terms that are varied on or after that date will also be subject to the regime.

Where ASIC identifies a potentially unfair contract term during the transition period it will bring the term to the attention of the relevant business and work with them to remove the term from the standard form contract/s. While only a Court can decide whether or not a term is unfair, ASIC may consider enforcement action when businesses using such terms are uncooperative or refuse to make ASIC's recommended changes.

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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