On 12 November 2016 new legislation came into effect that will provide greater protection for small businesses against unfair contract terms.
In brief: On 12 November 2016 new legislation came into effect that will provide greater protection for small businesses against unfair contract terms. This legislation applies to all standard form contracts entered into after this date, and will be governed by the Competition and Consumer Act 2010 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth).
What you need to know:
- This new legislation applies to standard form contracts made on or after 12 November 2016.
- It will also apply, in certain circumstance, to existing standard form contracts if they renewed or varied after 12 November 2016.
- The ACCC has identified seven particular industry sectors with common terms of concern including advertising, retail leasing, franchising, agriculture, independent contracting, telecommunications, and waste management.
Previously, the regime under the Australian Consumer Law (ACL) set out in Schedule 2 of the Competition and Consumer Act 2010 (Cth) (CC Act) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) applied only to consumer contracts. The new legislation now extends the regime to small business contracts.
But beware, the new laws will also apply to existing standard form contracts if they are renewed or varied after 12 November 2016. If a contract is varied, the regime will apply only to the varied terms. If the contract is automatically renewed or rolled over, the regime will apply to the renewed contract from the date of the renewal or new rollover period.
Does your business use standard form contracts?
Under the new regime it is presumed that a small business contract is a standard form contract unless the other party proves otherwise.
The ACL and the ASIC Act set out a comprehensive list of matters to be considered in determining whether a contract is a standard form contract.
A key feature of a standard form contract is that it is presented on a "take-it-or-leave-it" basis. Other features of a standard form contract include if:
- one of the parties has all or most of the bargaining power in the transaction;
- it is prepared by one party before any discussion of the transaction occurs between the parties;
- one party is required either to accept or reject the terms of the contract in the form in which it is presented; and
- one party is not given an effective opportunity to negotiate the terms of the contract, other than the exempt terms.
When is a contract a small business contract?
There are new definitions that apply to those contracts that fall under the ACL and those that fall under the ASIC Act. A contract is a small business contract if:
- at least one party to the contract is business that employs fewer than 20 persons; and
- either of the following applies:
- the upfront price payable does not exceed $300,000; or
- if the contract has a duration of more than 12 months, the upfront price payable does not exceed $1,000,000.
The ACL applies to small business contracts that are for a supply of goods or services, or for a sale or grant of an interest in land.
The regime under the ASIC Act does not apply unless the contract is a standard form contract that is:
- a financial product; or
- a contract for the supply, or possible supply, of services that are financial services.
Some terms in a contract are excluded from the regime – for example, terms relating to the upfront price or the subject matter of the contract.
What makes a term "unfair"?
A term will be deemed unfair if it:
- causes 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 is relying on the term; and
- will cause detriment to the other party if it is relied on.
The ACL presumes that a term is not reasonably necessary to protect a party's legitimate interests unless it is proved otherwise.
Enforcing a standard form small business contract that contains unfair terms may be challenging if there is difficulty overcoming the statutory presumptions discussed above.
A new ACCC report focuses on a review of common "terms of concern" identified in seven particular industry sectors: advertising; retail leasing; franchising; agriculture; independent contracting; telecommunications; and waste management.
Carefully review your contracts before entering into new arrangements, or before varying or renewing existing contracts to assess whether any terms may be considered unfair under the new regime.
If you are unsure about the terms of your current contracts and want to ensure they are compliant, do not hesitate to contact us for legal advice to help avoid costly mistakes going forward.
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. Madgwicks is a member of Meritas, one of the world's largest law firm alliances.