Are you prepared for the new regime commencing on 12 November 2016?
If you buy from, sell to, enter into a contract with or are a small business then you need to be aware of the changes to the Unfair Contract Terms laws which commence on 12 November 2016.
The current law
Unfair terms in standard form consumer contracts were made unlawful and void through the Australian Consumer Law (ACL) in 2010. This has now have been extended to "small businesses" as the federal government is concerned that small businesses, like consumers, are vulnerable in cases where standard form contracts are offered on a "take it or leave it" basis, or where small business lacks resources to understand and negotiate contract terms.
The law from 12 November 2016
The new legislation states that a term in a small business contract is void (treated as if it never existed, leaving the contract to stand without it if it can) if all three of the following are present:
- the term is in a "small business contract";
- the term is "unfair"; and
- the contract is a "standard form contract".
"Small business contract"
A contract is a small business contract if: (1) the contract is for a supply of goods, services (including financial services and products), or sale of land; and (2) at the time the contract is entered into, at least one party to the contract is a business (including not for profit) that employs fewer than 20 persons (not including, for example, non-regular casuals); and (3) the "upfront price" payable is equal to or less than $300,000 (or $1,000,000 if the duration of the contract is more than 12 months). The "upfront price" is the amount payable as disclosed by the vendor at or before the time the contract was entered into. Interestingly, this will mean that, for contracts where there is no "upfront price", the new laws will not apply. These may include contracts based on schedules of rates, time and materials or those using a reimbursable cost pricing methodology.
A term of a consumer contract is unfair if all of the three following tests are satisfied: (1) it would cause a significant imbalance in the parties' rights and obligations arising under the contract; (2) it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term, unless that party can prove that that the term is necessary to protect their interests; and (3) it would cause detriment, whether financial or otherwise, to a party if it were to be applied or relied on.
In determining whether a term of a consumer contract is unfair, a court may take into account such matters as it thinks relevant, but must take into account the following: (1) the extent to which the term is transparent; and (2) the contract as a whole (that is, the terms cannot be considered in isolation, but must be assessed in light of the contract as a whole).
A term is transparent if all three of the following exist: (1) it is expressed in reasonably plain language; (2) it is presented clearly; and (3) it is readily available to any party affected by the term.
Examples of terms which will be subject to scrutiny are those that enable only one party to:
- avoid or limit performance of the contract;
- vary or terminate the contract;
- renew or not renew the contract;
- vary the price or characteristics of what is to be supplied without the other party being able to terminate the contract;
- unilaterally price a variation, determine time, determine satisfactory completion (or any other aspect detrimentally affecting the other party);
- suspend without compensation;
- assign the contract without consent;
- exclude the supplier's liability (for example, a release of liability for negligence on the part of the supplier);
- penalise the other for non-performance/breach of the contract; or
- limit rights to sue the other party.
To be able to keep and rely on these clauses the party wanting to keep them will need to be a able to demonstrate there is a legitimate business need for the clause, as well as there being a reasonable balance struck between the parties. It will also help if the clauses are made clear and transparent. The recent case of Australian Competition and Consumer Commission v Chrisco Hampers Australia Limited  FCA 1204 illustrates the need for transparency. In that case Chrisco was found to have breached the law because it required consumers to opt out of a right to continue to take payments from them; even after their lay-by goods had been fully paid for.
"Standard form contract"
When there is inequality in contractual bargaining power then the contract is often offered by the stronger party to the weaker on a "take it or leave it basis" and often called a "standard form contract". The ACL does not contain a definition of a standard form contract. If a party to a proceeding alleges that a contract is a standard form contract, it is presumed to be a standard form contract unless another party to the proceeding proves otherwise. In determining whether a contract is a standard form contract, a court may take into account such matters as it thinks relevant.
Contract renewals and variations
The new legislation applies to small business contracts entered into on or after the 12 November 2016 (the commencement date). However, the legislation also applies to renewals of prior contracts, and also any varied provisions of prior contracts entered into after this date. Accordingly care will need to be taken with some existing contracts which continue post commencement of the new legislation.
The Australian Securities and Investments Commission Act 2001 (Cth) includes an unfair contract terms regime which applies to financial services and financial products (including credit), which is similar to the Australian Consumer Law regime discussed in this paper.
As with all Commonwealth Legislation there is a constitutional question mark over its application to government entities with it only being likely to apply where that entity is either 'carrying on a business' or is engaged in trade and commerce. Future amendments to the Competition and Consumer Act 2010 (Cth) are likely to further clarify this vexed and complex issue.
The decision as to whether a contract term is void for unfairness needs to be made by a court, and small businesses will not be able to declare unilaterally that a contract is unfair. Upon receiving an unfair contractual term declaration from the court, the remedies available to the small business include:
- an injunction preventing the other party from attempting to enforce the term or terms that have been declared unfair; and,
- an injured party can seek compensation against the party that attempts to, or who has attempted to, enforce the term(s).
Whilst there are no penalties, a party who seeks to impose, negotiate, or enforce an unfair term may be held to have acted unconscionably (fines up to $1.1 million for corporations or $220,000 for individuals) or may be found to be have engaged in misleading and deceptive conduct. In addition, the court may also order compensation for other consumers who have suffered but are not parties to the enforcement proceedings.
Other laws that protect small business
The unfair contracts regime should not be considered in isolation. Companies should actively consider the broader application of the laws of unconscionability and misuse of market power to their small business dealings.
Examples of contracts that will be caught by this new regime include:
- Industries that rely heavily on standard form contracts: telecommunications, transport, franchising, retail leasing, construction, IT, property, government, energy and gas etc.
- Financial services-type contracts: credit contracts, mortgages, deposit account and other business banking contracts, broker contracts, all service contracts.
- IP licensing arrangements.
- Standard online and traditional contracts.
What can you do now?
Whether you are a buyer or a seller consider the following steps:
- Audit business activities and arrangements or clients which may be caught by this legislation.
- Create a compliance program to systematically prepare for and comply with the new regime.
- Determine how thorough you wish to be. Do you only consider the most blatant examples?
- Start with the most blatant examples of terms that create significant imbalance in the rights of the parties and determine whether they are reasonably necessary to protect the legitimate interests of the party seeking to rely upon the term.
- Confirm whether the new rules apply to particular contracts by determining if:
- the contract is a "small business contract"; and
- the contract would be regarded as a "standard form contract".
- If the term may be "unfair" then try reduce to the risk of it being declared "unfair" by:
- Amending unbalanced or unreasonable clauses to make them more "mutual";
- Narrowing broadly drafted clauses;
- Drafting terms in plain language, avoiding ambiguities and omissions of relevant information;
- Clarifying the intention behind a clause so a third party can see the reason for it; and
- Drafting borderline clauses with severability in mind so that the contract is capable of operating without the term. Remember that the new legislation allows the contract to remain on foot without the offending unfair term.
- Consider having two similar sets of standard form contracts: an edited "small business" version and an unedited version for all other businesses.
- Have a process to deal any existing contracts which could be renewed or varied.
The effect of this new regime is that you may have a court find that a term in your contract with a small business is "unfair" resulting in financial and reputational injury as well as having the contract continue but with the unfair term excluded. A key 2016 ACCC enforcement action priority will be how large companies interact with small business and consumers. Thus, companies should ensure that compliance with the new small business unfair contracts terms regime is very high on the 2016 corporate risk register. Have you started your preparation for the new 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.