Do you deal with small businesses? If so, changes to unfair contract provisions may impact you!

The Australian Consumer Law (under the Competition and Consumer Act (ACL) and the Australian Securities and Investments Commission Act (ASIC Act) deal with the provisions of unfair terms in ‘standard form’ ‘consumer contracts’ across a range of industries including telecommunications, utilities, travel, domestic building, motor vehicle and finance.

Currently the unfair contract provisions do not apply to small business contracts.  However, the Government is in the process of finalising amendments to the ACL and ASIC Act to extend the existing provisions to include protection for small businesses.

To understand how the proposed changes may affect you, you need to consider whether you deal with small businesses by way of standard form contracts and whether those contracts contain any unfair terms.

What is a standard form contract?

While this term is not defined in the unfair contacts law, in simple terms, a standard form contract is a contract prepared by one party to the contract where there is no opportunity for negotiation between the parties.   It is on a ‘take it or leave it’ basis.

For example, a contract is likely to be a standard form contract where:

  • one of the parties has all or most of the bargaining power;
  • the contract was prepared by one party before any discussion between the parties; or
  • another party was, in effect, required to either accept or reject the terms of the contract without negotiation;

What is a Consumer Contract?

The provisions currently only catch consumer contracts.  A consumer contract under the ACL is a contract for:

  • the supply of goods or services; or
  • the sale or grant of an interest in land to an individual who acquires it wholly or predominantly for personal, domestic or household use or consumption.

This definition is extended under the ASIC Act to apply to financial products and services.

What is an unfair contract term?

Under the ACL, a contract term is ‘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

The unfair contract terms provisions do not apply to standard form consumer contract terms that:

  • define the product or service being supplied;
  • set the up-front price payable under the contract; or
  • are required, or expressly permitted, by a law of the Commonwealth or a State or Territory.

There are also other consumer contracts and terms that are exempt.[1]

What will change?

Under the proposed changes, the unfair contract terms will be extended to apply to small business contracts.

A contract will be a small business contract if, at the time it is entered into if:

  • at least one party the contract 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 (excluding interest).

To be a small business for the purposes of the amended provisions, the business will employ less than 20 people (excluding casuals).

What you should do?

Contracts are not just multi page complex documents.  A contract can be written (like terms and conditions on the back of your quotation) or oral and can be entered into in a number of ways including:

  • signing the document;
  • exchanging emails;
  • agreeing in conversation or over the telephone;
  • by handshake; or
  • clicking the ‘I agree’ button on a web page.

Because the draft legislation places no obligation on a small business to identify itself as such during contract negotiations, the onus will be on those entering into a contract with small business to review all of their standard form contracts for unfair terms.  This is important because each small business contract will be different and what may be unfair to one small business may not be to another.

The Australian Competition and Consumer Commission, ASIC or a party to a standard form consumer contract can apply to the court for a declaration that a term of the contract is an unfair term.

The consequences of a Court finding that a term is unfair are significant.  The term will be ‘void’ which means it is treated as if it never existed.  The remainder of the contract however, continues to bind the parties (unless the contract cannot operate without the clause).

The Court also has the power to declare an unfair term void in all of your standard form contracts, not just the contract that has been challenged.

If passed, the amendments to include small business contracts will commence operation in 2016 and will apply to contracts that:

  • vary terms; and
  • are entered into or renewed on or after the day the legislation comes into effect.

There is scope for the Minister to exempt the application of the provisions where there is existing equivalent industry specific legislation covering the same matters.

If you need assistance reviewing your standard form contracts please contact Lynch Meyer Lawyers.

[1] Some shipping contracts, contracts that are constitutions of companies, managed investment schemes or other kinds of bodies, some contracts covered by the Insurance Contracts Act and terms permitted as a matter of public policy.