The Federal Government has committed to extending the unfair contract terms legislation to cover small businesses which is intended to come into force in 2016.

The Bill proposes to change the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 and aims to address the potential for unfair detriment where unfair contract terms are enforced against small businesses. It will also amend the Australian Securities and Investments Commission Act 2001 (ASIC Act) and the Competition and Consumer Act 2010 (CCA). The Bill passed both houses in October and was agreed to on 12 November 2015 with the amendments to take affect 12 months later, allowing a period of transition.

A contract will be a small business contract if it is a standard form contract for the supply of goods or services, or the sale or grant of an interest in land, where, at the time the contract is entered into, at least one party to the contract employs less than 20 people, and where the upfront price payable under the contract doesn't exceed $300,000 or, in the case of contracts longer than 12 months, less than $1,000,000.

As with the existing consumer contract provisions a standard form small business contract will apply where:

  • One of the parties has all or most of the bargaining power and the other party is required to either accept or reject the terms of the contract without negotiation or amendment; and
  • A term of a contract will be unfair if it causes a significant imbalance in the parties' rights and obligations under the contract, would cause detriment to a party if it were relied on and is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term.

Examples of unfair terms include:

  • Where one party is permitted to vary, terminate or renew the contract but the other is not
  • Where one party is permitted to vary the price payable under the contract and the other has no right to terminate
  • Where one party is permitted to unilaterally vary the goods or services to be supplied under the contract.

If a term of a standard form small business contract is void, the rest of the contract will continue to bind the parties, to the extent that it is capable of operating without the unfair term.

The existing unfair contract terms provisions will also apply to small business contracts entered into after the amended Act begins.

How this may impact you

During the transitional period it's important to review your contracts to determine if they are standard form small business contracts. If they are, look carefully at the terms of the contract - if there is potential for them to fall foul of the changes to the legislation then amend or delete terms that may be considered unfair where required.

It's also wise to identify any existing contracts that will be caught by the changes.

It is also a good opportunity to review your position in relation to dealing with small businesses and decide whether to have a specific contract applicable only to small businesses.

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.