Australia: Small business and unfair contract terms: changes on the horizon

Last Updated: 12 April 2016
Article by Jonathan Casson

Standard form contracts have long been under a cloud and have troubled contract theory because they may arise even though there may have been no 'meeting of minds' between the parties. Even so, merchants have found them very useful, probably for as long as there have been merchants. In Schroeder Music Publishing Co Ltd v Macaulay [1974] 1 WLR 1308 Lord Diplock noted the 'ancient' history of standard form contracts and approved those between merchants facilitating terms of trade, but criticised the growth of one-sided contracts between parties of unequal bargaining power.

Non-negotiable standard terms are said to be useful where marketplace efficiency is improved by avoiding the waste of time and money in negotiating details of ordinary transactions and the efficient delivery of products (Burke, J. Reinventing Contract 10 (2) MUJEL (2003), paragraph 3). Here the object of standard form contracts is not to overbear the customer but rather to serve the market and hold down prices which would otherwise be inflated by negotiating each contract, and to treat all customers alike.

The contrary argument is that, far from promoting an efficient marketplace, standard form contracts distort the relationship between seller and buyer and allow the imposition of one-sided contracts leaving little or no recourse to the weaker party, raising unfairness concerns (Productivity Commission, Review of Australia's Consumer Policy Framework, 45. 30 April 2008, 6). State and Federal legislation has sought to ameliorate the imbalance and the Australian Consumer Law, pt 2-3 provides a court may determine that a term of a standard form consumer contract is unfair and therefore void.

Both the Australian Consumer Law 2010 (ACL) and the Australian Securities and Investment Commission Act 2001 (ASIC Act) have broadly equivalent terms relating to consumer unfair contracts, however they did not deal with small business. A Treasury review in 2014, Extending unfair contract protections to small business - consultation, recognised the dual role of small business as suppliers and consumers in their own right, and their lack of resources leading to instances of unequal bargaining power.

In response to the 2014 Treasury consultation, the Queensland Law Society submitted that 'it is self-evident that the majority of small businesses do not have the same level of bargaining power as larger businesses ... extending the unfair contract terms protections to small businesses merely improves access to justice for another group that has been identified as being at risk, or alternatively marginalised as a result of diminished access to justice'. The enquiry resulted in the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (the Act).

Contracts involving credit, housing and construction, utilities, hire of goods, direct selling, motor trades, retail leases and communications as well as, for example, franchising, accommodation, professional and technical services, publishing, entertainment, health care, and education might well be challenged.

The Act

The Act amends the ASIC Act 2001 and the ACL to extend the unfair contract term protections that are currently available to consumers, to small businesses, defined as businesses with less than 20 employees. The protections relate to the terms of standard form contracts valued at less than a prescribed threshold.

The Act commences on 12 November 2016. It is not retrospective, except to the extent that existing contracts that are renewed or varied after that date will be caught by the legislation.

Key features

Standard form contracts

There is no specific definition of a standard form contract. Contracts of marine salvage or towage, a charterparty of a ship or contract for the carriage of goods by ship are specifically excluded, as is a small business contract covered by Commonwealth, state or territory law that is prescribed by the regulations (ACL s 12BA).

In determining whether a contract is a standard form contract a court must take into account whether:

  • one of the parties has all or most of the bargaining power relating to the transaction;
  • the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
  • another party was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented;
  • another party was given an effective opportunity to negotiate the terms of the contract;
  • the terms of the contract take into account the specific characteristics of another party or the particular transaction; and
  • any other matter prescribed by regulations.

Despite this, terms that: define the main subject matter of the contract; set the upfront price payable; or are required or expressly permitted by law of the Commonwealth or state or territory, may not be treated as unfair (ACL pt 12 BI and s 26).

A term of the contract must be 'unfair'

This arises where:

  • it would cause a significant imbalance in the parties' rights and obligations arising under the contract;
  • it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
  • it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on (ACL s 24 and sub-s 12BG(1)).

Section 25 of the ACL gives examples of unfair terms. In considering this, the court must take into account the transparency of the term – whether it is expressed in plain language, is legible, clearly presented and readily available.

The Act is restricted to small business contracts

These are contracts where, at the time the contract is entered into, at least one party is a business that employs fewer than 20 people and the upfront price payable under the contract does not exceed $300,000 or, if the contract is for more than 12 months, $1,000,000.

The legislation uses a 'headcount' method in determining how many people are employed in a business. It does not refer to 'full-time equivalents' nor does it count casual employees unless they are employed on a regular and systematic basis.

For the purposes of defining acquisition by a consumer, the ASIC Act also provides that a small business is one employing fewer than 100 people if it manufactures goods, and otherwise fewer than 20 people (s 121BC). The amendments do not displace this. The Corporations Act 2001 is in similar terms.

The Constitution of the company or managed investment scheme is specifically excluded, as are any prescribed laws of the Commonwealth, state or territory.

'Up-front price'

The Act introduces ASIC Act sub-s 12BI(2); ACL sub-cl 26(2) and defines the 'up-front price' as:

  • the amount that is provided for the supply or sale under the contract; and
  • disclosed at, or before, the contract is entered into; but
  • not including any other consideration that is contingent on the occurrence or non-occurrence of a particular event.

Practitioners familiar with the Australian Consumer Credit Law will have experience with this term, which may be useful in interpretation.

Remedies

A small business which is a party to the contract, or the ACCC or ASIC in respect of financial products (ACL s 250, ASIC Act 12GBC), may seek orders that a term is unfair. The unfair term may be severed from the balance of the contract to the extent it can operate without the unfair term (ACL s 23, ASIC Act 12BF(2)).

The Court may issue an injunction, a pecuniary penalty or make a compensation order (ACL pt 5-2, ACL 12GBC, 12GDN). As yet, it is not clear whether a compensation claim may be brought prior to a declaration that a term is unfair.

Other orders available to a Court include an order:

  • that the whole or any part of a contract is void ab initio;
  • varying the contract from a specified date;
  • refusing to enforce any or all provisions of the contract;
  • to return the property or refund its value;
  • for payment equal to the loss or damage (but see s 239(1));
  • the repair or providing parts for goods supplied;
  • the resupply of services; or
  • to reconvey or amend a transfer of an interest in land (ACL s 243).

Orders may apportion liability for economic loss or damage to property (ACL s 12GP).

Proceedings may generally be brought in the Federal Court, but then may be referred to a state or territory court or tribunal.

Onus of proof

Both the ACL and the ASIC Act contain the rebuttable presumption that a contract is a standard form contract; that is, they place the onus on the supplier to show that a contract is not a standard form contract.

Repercussions for different sectors

There will be a clear impact on the transport and carriage sector where standard form contracts have traditionally prevailed. Operators in these industries will need to review their terms to identify whether any clauses are at risk of being 'unfair terms' and therefore unenforceable.

The provisions of s 15 of the Insurance Contracts Act 1984 immunise certain contracts of insurance from the unfair terms provisions. Care must be taken with the interaction between this Act and the Marine Insurance Act 1909.

The ACCC is currently discussing the implications of the changes with major shopping centres, major franchisors and other known users of standard form contracts. It will be conducting public education, including by way of webinars.

It emphasises terms that may raise concerns include: the right to unilaterally vary the contract; automatic rollovers; limited liability; the right to terminate a franchise agreement with no cause; liquidated damages clauses and the provision of wide indemnities.

Implications

Practitioners will readily see that a substantial number of standard form contracts with and between small businesses will be directly impacted by these amendments. Adopting a 'fairness' test in business contracts will provide an easier pathway for small businesses to challenge contracts proffered to them by stronger interests. Up until now their remedy was generally restricted to claims for unconscionable conduct under the ACL.

Unfairness and unconscionability are not synonymous (Australian Competition and Consumer Commission v ACN 117 372 915 Pty Ltd (in Liq) (formerly Advanced Medical Institute Pty Ltd) [2015] FCA 368 at [39]). Unfairness is better understood, and the evidentiary burden for unfairness is lower. Whether or not the introduction of the new standard for small business will add uncertainty to business relationships is to be seen.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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