Unfair Contract Terms and the Protection of Small Businesses

The current unfair contract terms regime applies to standard form "consumer contracts". It is being extended in November 2016 to also cover standard form "small business contracts".

The regime exists under the Australian Consumer Law contained in schedule 2 to the Competition and Consumer Act 2010 (Cth) (“ACL”) and the Australian Securities and Investments Commission Act 2001 (Cth). It applies to standard form consumer contracts.

Section 23(3) of the ACL defines a “consumer contract” as a contract for:

  1. a supply of goods or services; or
  2. a sale or grant of an interest in land,

to an individual whose acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption.

The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth) will extend the existing unfair contract terms regime to a new category of small business contracts (“New Laws”).

When do the New Laws apply?

The New Laws come into effect on 12 November 2016 (“Effective Date”). The New Laws will apply to “unfair terms” in “standard form contracts” that are entered into (or renewed or varied) on or after the Effective Date where, at the time of entering into the contract:

  1. at least one party to the contract is a small business (employs less than 20 people); and
  2. the upfront price payable under the contract does not exceed:
  • $300,000; or
  • $1,000,000 (if the contract is for more than 12 months).

What is a standard form contract?

There is no specific definition of a “standard form contract”. A “standard form contract” will generally be one that has been pre-prepared by one party to the contract and is not subject to negotiations between the parties. Generally, if a party to a proceeding alleges that a contract is a standard form contract, it is presumed to be a standard form contract unless another party to the proceeding proves otherwise. The ACL sets out the factors that the Court must consider when determining whether a contract is a “standard form contract”.

What is an unfair term?

A term of a contract is “unfair” if:

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

Terms that are deemed to be unfair can be declared void, although the contract will continue to bind the parties to the contract if it can operate without the unfair term. The New Laws will reduce the incentive to include and enforce unfair terms in small business contracts, providing a more efficient distribution of risk in these contracts and supporting small business’ confidence in entering contracts.

What should I do?

If your business:

  1. is a small business that uses its own standard form contracts or standard form terms and conditions;
  2. is a small business that enters into standard form contracts provided by other businesses, including large businesses; or
  3. is a “large business” that enters into standard form contracts with small businesses,

then you should have the contracts reviewed to ensure that:

  1. contracts entered into after the Effective Date do not contain unfair terms;
  2. contracts which renew on or after the Effective Date are amended to comply with the New Laws; and
  3. your business is generally well protected.

If your business uses its own standard form contracts, then the unfair contract terms regime obviously presents risk. Some practical steps you might take to reduce risk are:

  1. identify and remove unfair terms;
  2. make sensitive terms “two way” so they can be exercised by both parties;
  3. make sure your contracts are written in plain English and are easy to understand;
  4. perhaps draw the buyer’s attention to headline, sensitive terms, to achieve transparency and support informed consent;
  5. give the buyer adequate time to read the contract;
  6. encourage the buyer to read the contract, and suggest they seek independent legal advice;
  7. do not apply pressure to the buyer to enter into a standard form version – rather, make it clear that you are open to negotiating the terms of the contract;
  8. negotiate terms with the buyer – negotiation should be effective and meaningful to avoid the contract being rendered a “standard form contract”;
  9. ensure that potentially unfair terms protect your legitimate business interests and are reasonably necessary in the circumstances;
  10. include a “severability” clause so that if any terms are later removed by a court, due to being unfair, the rest of the contract can continue to operate (and structure the contract accordingly);
  11. keep a written record of all evidence (emails, telephone file notes etc) that shows that the buyer had “freedom” to contract and negotiate in the transaction.

The above constitutes general guidance only and is not to be relied upon as legal advice. Please contact Fletcher Law for further assistance.