Protecting the little guy: unfair contract terms to apply to small businesses

In April 2015, the Federal Government released draft legislation titled the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 (Bill), which if enacted, will extend the consumer unfair standard contract term protections to small businesses. 

The legislation proposes to amend the Australian Securities and Investment Commission Act 2001 (Cth) (ASIC Act), and the Competition and Consumer Act 2010 (Cth) (CCA) and is anticipated to commence in early 2016. 

The current laws under the ASIC Act and CCA only apply to protect consumers (usually individuals) from unfair contract terms, and are said to fail to address the vulnerability of small businesses engaging in commercial transactions.  The Explanatory Material to the Bill states that small businesses are not entering into contracts due to a lack of confidence in understanding and negotiating contract terms and the costs of obtaining legal advice, often resulting in the businesses missing out on opportunities.

How the amendments work

The amendments provide a remedy to small businesses by allowing unfair contract terms to be declared void. 

If the contract is capable of operating without the unfair term, the contract will continue to bind the parties with the unfair term being treated as if it never existed.  Contracts that are entered into, renewed, or terms of existing contracts that are varied, on or after the date the legislation comes into effect will be required to comply with the new laws.

A business is considered to be a small business if it employs fewer than 20 persons, excluding casual employees not employed on a regular or systematic basis.  Further, a contract is considered to be a small business contract if, at the time it is entered into, one party is a small business, and the ‘upfront price’ payable under the contract does not exceed either $100,000 or $250,000 if its duration is more than 12 months.

The ‘upfront price’ is defined as the consideration that is provided, or is to be provided, for the supply under the contract, and which is disclosed at or before the time the contract is entered into.  It does not include any amount that is contingent on the occurrence or non-occurrence of a particular event.

It should also be noted that under the amendments there is no onus on a small business to notify the other party that it is a small business.  The new laws can apply where a small business is the supplier under the contract, and also where the contract is between two small businesses.

Unfair contract terms

An unfair contract term is one that:

• causes a significant imbalance in the parties’ rights and obligations under the contract
• would cause detriment (whether financial or otherwise) to a party if it were to be relied on, and
• is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term.

In determining if a contract term is unfair, a court is also required to consider the transparency of the term (i.e. that the term is expressed in reasonably plain language, is legible and presented clearly).  The contract must be considered as a whole.

Standard contracts

The protections are available only for standard form contracts.  Standard form contracts are contracts that use standardised, non-negotiated terms and are prepared by one party to the contract.

In order to assess whether a contract is a ‘standard form’ contract a court will consider 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 effective opportunity to negotiate the terms of the contract, and 
• the terms of the contract take into account the specific characteristics of another party or the particular transaction.

Plan ahead

Businesses (of any size) utilising standard form contracts should review all standard contracts to ensure the terms do not have the potential to be declared void.  This is particularly important when it is difficult to determine the size of the business(es) you are negotiating with. 

Lucy Kennedy, Thomas Ritchie, Guy Humble