In brief - Australian Consumer Law modifications will affect contractors of all sizes
The federal government has passed modifications to the Australian Consumer Law, which will come into effect on 12 November 2016, aimed at protecting small businesses from unfair contract terms. Principals and contractors of all sizes should carefully take note of this new legislation as it may affect contracts they enter into with small businesses (including subcontractors).
Some of the features of the new legislation are set out below.
To what contracts does the new legislation apply?
The law will apply to "standard form contacts" entered into or renewed on or after 12 November 2016 where:
- the contract is for the supply of goods or services or the sale or grant of interest in land
- at least one of the parties is a small business, that is, a business that employs less than 20 people, including casual employees employed on a regular basis
- the upfront price payable is no more than $300,000, or $1 million if the term of the contract is for more than 12 months, not including any interest, fees or charges that may be incurred
Standard form contract provides other party little or no
opportunity to negotiate terms
In determining whether a contract is a "standard form contract", the court may take into account any relevant matter including, but not limited to, 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
- the other party was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented
- the other party was given an opportunity to negotiate the terms of the contract
- the terms of the contract are tailored to the specific characteristics of the transaction
Transparency of terms and contract as a whole will be considered by court in determining whether a term is unfair
A term is transparent if it is clearly presented and expressed in reasonably plain language. For this reason, it is less likely that a court may consider a term that is hidden in fine print or schedules, or that is phrased in legal, complex or technical language, to be transparent. However, a transparent term may still be found to be unfair when considered in light of the contract as a whole, particularly if there are other terms that offset the fairness of that term.
In general, a term in a standard form contract is unfair if the term:
- would cause a significant imbalance in the parties' rights and obligations arising under the contract
- is not reasonably necessary to protect the legitimate interests of the party that would benefit from its inclusion
- would cause financial or other detriment (e.g. delay) to a small business if it were to be applied or relied on
Some examples of unfair terms include terms that:
- enable one party but not another to avoid or limit their obligations under the contract
- enable one party but not another to terminate the contract
- penalise one party but not another for breaching or terminating the contract
- enable one party but not another to vary the terms of the contract
It is also important to note that some terms are excluded from being unfair, namely, those that:
- define the main subject matter of the contract
- set the upfront price payable, or
- are required or expressly permitted by a state or federal law
Term in a standard form contact found to be unfair will render the term void
A term that is void is unenforceable. It is as if the term was never part of the contract. The rest of the contract continues to bind the parties to the extent that it is capable of operating without the unfair term. It is not an offence to include an unfair term in a standard form contract and there are no pecuniary penalties for doing so. Only competent courts and tribunals can make a finding that a standard form contract is unfair for the purposes of the legislation.
Contractors need to pay particular attention to their back-to-back contracts
Contractors of all sizes must pay attention to this legislation as it may affect contracts that they enter into with small businesses. This is particularly the case when contractors seek to back down terms imposed on them by an upstream party. Indeed, it may be that certain terms dealing with time bars, variations and termination may not be enforceable if passed down without amendment.
"Small business" criteria, financial threshold and contract terms among issues to consider
When entering into contracts, principals and contractors should consider:
- whether they are contracting with a "small business" for the purposes of the legislation
- the value of the contract and whether it exceeds the financial threshold to which the legislation applies
- modifying potentially unfair terms
- permitting the other party to suggest amendments to the contract and avoiding the use of language such as "take it or leave it" in the negotiation of the contract
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.