Australia: The new small business Unfair Contract Terms laws – Your key 2016 commercial risk?

Last Updated: 18 August 2016
Article by Scott Alden and Cyril Jankoff

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

Overview

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:

  1. the term is in a "small business contract";
  2. the term is "unfair"; and
  3. 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.

"Unfair"

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 [2015] 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.

Financial services

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.

Government Contracts

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.

Remedies available

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:

  1. an injunction preventing the other party from attempting to enforce the term or terms that have been declared unfair; and,
  2. 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:

  1. Audit business activities and arrangements or clients which may be caught by this legislation.
  2. Create a compliance program to systematically prepare for and comply with the new regime.
  3. Determine how thorough you wish to be. Do you only consider the most blatant examples?
  4. 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.
  5. Confirm whether the new rules apply to particular contracts by determining if:
    1. the contract is a "small business contract"; and
    2. the contract would be regarded as a "standard form contract".
  1. If the term may be "unfair" then try reduce to the risk of it being declared "unfair" by:
    1. Amending unbalanced or unreasonable clauses to make them more "mutual";
    2. Narrowing broadly drafted clauses;
    3. Drafting terms in plain language, avoiding ambiguities and omissions of relevant information;
    4. Clarifying the intention behind a clause so a third party can see the reason for it; and
    5. 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.
  1. Consider having two similar sets of standard form contracts: an edited "small business" version and an unedited version for all other businesses.
  2. Have a process to deal any existing contracts which could be renewed or varied.

Conclusion

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Scott Alden
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.