Unfair Terms in Small Business Contracts

Provisions relating to unfair contract terms in contracts for consumers have been in the Australian Consumer Law [ACL] (in Schedule 2 of the Competition & Consumer Act 2010) since the introduction of the law in 2010.  Similar provisions are contained in the Australian Securities & Investments Commission Act 2001 [ASIC Act] in relation to financial services.

The unfair contract provisions will be extended to contracts with small businesses.  An act amending the ACL and the ASIC Act was passed by Federal Parliament in October, but the amendments will not come into effect until 12 November 2016, 12 months from the day on which the amending Act received assent.

Small Business Contracts

The amendments introduce the concept of a small business contract and, in general, apply the existing unfair contract terms provisions to small business contracts by inserting in relevant sections “or small business contract” after “consumer contract”.

A contract is a small business contract if:

  • at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons; and
  • either the upfront contract price does not exceed $300,000.00 or, if the contract has a duration of more than 12 months, the upfront price does not exceed $1 million.

A contract entered into before 12 November 2016 (unless renewed on or after that date) will be excluded.  Excluded contracts will include some other contracts such as constitutions of companies, certain insurance contracts and shipping contracts.

A small business contract may be one for:

  • supply of goods or services, or
  • sale or grant of an interest in land (in the ACL).

Unfair Terms are Void

An unfair term of a small business contract will be void if:

  • the term is unfair; and
  • the contract is a standard form contract.

The whole contract is not void, and will continue to bind the parties, if it is capable of operating without the unfair term.

Some contract terms will not be affected, and cannot be unfair contract terms.  These include a term that:

  • defines the main subject matter of the contract;
  • sets the upfront price payable under the contract; or
  • is a term required or permitted by a law.

A standard form contract is not defined, and the expression will have its normal meaning, but this is “affected” by section 27 of the ACL and section 12BK of the ASIC Act.  A contract is presumed to be a standard form contract unless a party to proceedings proves otherwise.  A Court, in determining whether a contract is a standard form contract will take into account matters that it thinks relevant, but must take into account whether:

  • one party has all or most of the bargaining power;
  • a contract is prepared by one party before discussions;
  • a party was, in effect, required either to accept or reject the contract in the form presented (other than the main subject matter or upfront price);
  • a party was given an effective opportunity to negotiate terms; and/or
  • the terms take into account specific characteristics of a party or the transaction.

When is a Term Unfair?

A term of a small business contract will be unfair if it:

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

In determining whether a term is unfair, a Court may take into account matters that it thinks relevant, but must take into account the contract as a whole and the extent to which the term is transparent.

Whether a contract term is transparent will depend on whether the term is:

  • expressed in reasonably plain language;
  • legible;
  • presented clearly; and
  • readily available to any party affected by the term.

A contract term will be presumed not to be reasonably necessary to protect legitimate interests of a party who would be advantaged by the term unless that party proves otherwise.

It will be obvious that the legislation places a heavy onus on a party to a small business contract if another party asserts that a term is unfair.  If any party to a contract is a small business (employing fewer than 20 persons) the contract can be a small business contract but the party asserting that the term is void need not be a small business.

Less than 20 Employees

It may not be clear in many cases whether or not a business employs fewer than 20 persons.  A casual employee is not to be counted unless the employee is “employed by the business on a regular and systematic basis” (in the ACL).  Nothing in the ACL assists in determining whether a person is employed on a regular or systematic basis, but indications in the Explanatory Memorandum for the Exposure Draft for the Act indicate that guidance may be found in the Fair Work Act.

Upfront Price

The concept of an upfront price is relevant both to determining whether a contract is a small business contract and whether a term setting the upfront price is excluded from terms which may be unfair.

An upfront price is one which is disclosed at or before the time the contract is entered into.  It does not require that the price be paid “up front” or at commencement.

The upfront price of a contract will include payments for consideration that are disclosed, including interest and fees, but not, for example, interest in the event of a default or a penalty.

Time to Review Contracts

A substantial lead-in time until 12 November 2016 has been allowed to enable businesses to review contracts and terms which may be unfair.  As the contracts which may be affected can include any business to business contract if at least one party is a small business (less than 20 employees), contracts should be reviewed on the basis that the unfair contract terms provisions may apply.  Often it will not be possible to know whether or not a party to a contract does employ fewer than 20 employees.

If standard form contracts are used now both for consumers and business to business, terms which apply to consumers may be void and the review should commence as soon as possible.

When the new laws are in effect, they may provide some bargaining power to small businesses negotiating contracts which may contain terms that could be unfair.

If, when the new provisions are in effect, a term is found to be an unfair contract term, this will not incur a penalty, but may be the subject of compensation if a Court determines that a party has endeavoured to enforce the provision.

All businesses, or entities contracting with businesses, should give consideration to the review of their standard and non-standard operating contracts.

For more information, please contact:
Sandy Donaldson

Sandy Donaldson
Director
p.  +61 8 8124 1954
e.  Email me

This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Should you wish to discuss any matter raised in this report, or what it means for you, your business or your clients' businesses, please feel free to contact us.

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