Over the past weeks the Federal Government has been working towards making good on its promise to introduce ‘unfair contract term’ (UCT) protections for small businesses.

Consumers already have protections against ‘unfair terms’ in ‘standard form contracts’, and the Government has committed to extend the protections to a B2B context.

Further details on the current laws can be found in our earlier article.

At the end of April 2015, the Federal Government released for public consultation the exposure draft legislation to amend the Competition and Consumer Act 2010 (Cth) (CCA), to give effect to the extension of UCT to small businesses. The exposure draft can be found here.

The public is able to make submissions in response to the draft legislation, but the very small window for doing so ends on 12 May 2015.

A snapshot of the new legislation

The proposed new laws operate by simply extending the current framework for unfair contract terms in a B2C transaction, to a B2B transaction.

However, they will not apply to all B2B transactions, but rather those involving a ‘small business’ (or between two or more small businesses) where a ‘low value’ and standard form contract is involved.

The concepts of what is an ‘unfair contract term’ and when a contract is in a ‘standard form’ (meaning that the UCT laws will apply) will remain as they are for B2C contracts. The current regime is described in our earlier article.

Under the proposed legislation, a court will be able to strike out a term in a ‘small business contract’ that is considered ‘unfair’, just like it is able to do for B2C contracts.

The key, and most controversial, issues with the legislation are set out below.

WHO WILL BE A ‘SMALL BUSINESS’ (AND GET THE PROTECTION OF THE NEW LAWS) AND WHO WILL NOT BE?

The Government included in its initial discussion paper a range of options as to how to define ‘small business’ for the purpose of the new laws. It has decided the new laws will apply to a contract if:

  • it is in a ‘standard form’ and
  • at the time the contract is entered into, at least one party to the contract employs less than 20 people (excluding casual employees that are not employed on a regular and systematic basis), and is therefore a ‘small business‘ under the legislation and
  • either the upfront price payable under the contract:
    • is not more than $100,000 or
    • where the term of the contract is more than 12 months, is not more than $250,000.

This will obviously capture a large number of contracts, and in most cases, businesses will have difficulty determining whether or not the party they are transacting with is a ‘small business’. The only source of this information will generally be the counterparty itself.

Obviously, a key point will be what constitutes the ‘upfront price’. It would seem that any fee, including for stock, could be included.

WILL SECTORS ALREADY SUBJECT TO EXTENSIVE REGULATION, SUCH AS THE FRANCHISING CODE OF CONDUCT, BE EXEMPTED FROM THE NEW LAWS?

The short answer to this question is no.

It had been hoped certain industries, such as franchising and retail leases, would be exempted from the operation of the new laws, as they are already highly regulated.

Franchising in particular is subject to an extensive disclosure regime under the Franchising Code of Conduct, which itself was recently subject to a holistic review and significant changes that came into effect in January 2015.

However, such requests have not been translated into the draft legislation.

The one remaining glimmer of hope for such industries was the Commonwealth Minister’s power to exempt an industry from the new laws where there were equivalent and enforceable industry-specific legislation or regulation, in order to avoid duplication.

However, the Regulation Impact Statement accompanying the draft new laws has made it clear the Franchising Code of Conduct does not provide an ‘adequate level of protection’ in order to be deemed ‘equivalent’ legislation. There is some legislation that is flagged as possibly already providing sufficient coverage, such as the Independent Contractors Act 2006 (Cth) and the Motor Vehicle Dealers and Repairers Act 2013 (Cth) (MVD Act). However, we will have to wait and see what laws are ultimately prescribed in the Regulations. The Regulation Impact Statement notes that even though the MVD Act replicates the current UCT provisions from the CCA, this may not be sufficient as the remedies available under the MVD Act are very different to the CCA remedies. Accordingly, it seems the Government is intending to take a very technical view on this issue.

Timing

We expect the bill will be finalised and introduced into parliament shortly after the end of the two week consultation period in May 2015. There will then be a six month ‘grace period’, with the new laws not to apply to contracts entered into or varied during this initial six month window, which should end early in 2016.

What to do now

In preparation for the new legislation, businesses should start thinking about how they will be affected by, and will navigate, the provisions.

Being caught by the regime could lead to a great deal of uncertainty for business, especially in what is traditionally a long term relationship such as franchising, where disputes are not uncommon.

Accordingly, steps you may want to take include considering:

  • the circumstances in which you deal with a ‘small business’
  • how your long term agreements could be restructured to fall outside of the regime. There are two key ways – not being a ‘standard form contract’ and/or not being a ‘small business contract’, as the law only applies where a contract falls into both categories.  With this in mind, you may want to consider:
    • the extent of negotiations you could permit regarding the contract, in order to limit the chance of it being deemed a ‘standard form’ contract
    • bundling fit out and upfront costs under a franchise agreement, in order to exceed the $250,000 limit for a ‘small business contract’
    • what terms, should an arrangement be governed by the regime, may be ‘unfair’, and whether or not having them struck out would undermine the purpose of the contract.