Small businesses, and those that deal with them, will soon have to review all of their standard commercial arrangements to ensure their terms are not unfair.

A Bill amending the Competition and Consumer Act 2010 (Cth) and Australian Securities and Investments Commission Act 2001 (Cth) to extend unfair contract term protection laws to the small business sector passed the House of Representatives on 20 October 2015. These laws are an extension of the existing protections given to consumers since 1 July 2010.

Under the new laws, courts will have the power to declare that a term of a standard form small business contract is void if the term is found to be unfair. If the contract cannot operate without the term, the entire contract can be declared void. Applications to the court can be made by a small business that is a party to a small business contract, by the ACCC or by state regulators.

Small business contract

Under the new definition, 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 (non-casual) employees; and
  • either of the following applies:
    • the upfront price payable under the contract is not more than $300,000 – irrespective of the term of the contract; or
    • the term of the contract is greater than 12 months and the upfront price is more than $300,000 but does not exceed $1,000,000.

A term may be declared unfair if the term:

  • would cause a significant imbalance in the parties’ rights and obligations under the contract;
  • is not reasonably necessary 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 to the contract if the term were applied or relied on.

All three tests must be satisfied.

Standard form contract

There is no express definition of a ‘standard form contract’, however, characteristics of a standard form contract generally include situations where:

  • one party prepared the contract before discussions between the parties;
  • one party was required to either accept or reject the contract as presented;
  • one party was not given an opportunity to negotiate; or
  • the terms of the contract are not specific to one party or to the particular transaction.

After the Bill receives royal assent, there will then be a twelve month grace period, which should end in late 2016.

Immediately following the twelve month transition period, the new legislation will apply to:

  • new small business contracts;
  • pre-existing small business contracts that are renewed; and
  • the terms of pre-existing contracts that are varied.

The new legislation is far reaching and many businesses will have to review their standard form contracts, such as terms of trade and supply and distribution agreements, or risk falling foul of the unfair terms provisions. The new legislation will affect a large number of industries, particularly those that rely heavily on standard form contracts, such as the telecommunications, transport and franchising industries.