This week a law seeking to protect small businesses from unfair contract terms was passed, giving big business 12 months to review and update their standard form business contracts.

On 12th November 2015 the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 was passed by the Senate.  This new law amends both the Australian Securities and Investments Commission Act 2001 and the Competition and Consumer Act 2010 to provide protections for small business in the face of unfair contract terms.

The new laws are designed to protect small businesses from terms which are unfair in the contracts they enter with other businesses.  These new changes are very similar to the protections that are already given to consumers.

The new laws will impact all contract where:

  1. the contract is a standard form contract; and
  2. one party to the contract is a small business (that is a business that employs less than 20 people (casual employees are only counted if they are employed on a regular and systemic basis)); and
  3. the upfront price payable under the contracct does not exceed either $300,000 (for contracts of a duration of one year or less) or $1,000,000 if the contract is for a duration of more than one year.  

When determining the upfront price payable for credit contracts, interest is not included in the upfront price.Standard form contracts provide either no opportunity for negotiation of the terms, or very little opportunity.  They are offered on a ‘take it or leave it’ basis.

In the same way as consumer contracts, a contract term is considered unfair if:

  1. it would cause a significant imbalance in the parties' rights and obligations arising under the contract; and
  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.

When looking at whether a contract term is unfair the court can consider whatever matters it considers relevant, but must look at the transparency of the term and the contract as a whole.

Further, a term is presumed not to be reasonably necessary to protect the legitimate interests of the party who receives the advantage of the term, unless that party can prove that the term is necessary to protect their interests.

What should you do now?

We recommend that you review all contracts with small business, including:

  • credit contracts
  • mortgages
  • deposit account and other business banking agreements
  • broker agreements
  • all service contracts

to determine whether these agreements are of a type impacted by this legislation and if so, whether any amendments are required in order to ensure that the terms are not unfair.