Business to business standard form contracts will be illegal where a clause is "unfair" if one of the businesses is a "small business".  This is likely to have implications for franchise agreements, technology licencing agreements, website purchasing terms and conditions and retailers who have a significant number of smaller suppliers.

Background

On 28 April 2015 the Federal Government released an exposure draft of legislation to amend both the Australian Securities and Investment Commission Act (ASIC Act) and the Australian Consumer Law (ACL) protections relating to unfair contract terms. This is the culmination of an extensive consultation process which kicked off in May 2014 and received over 80 detailed submissions.

The extension of the unfair contract terms regime was always likely to happen as it was a key election policy of the Coalition in the 2013 federal election, however, the most recent update shows the likely form that the extension is likely to take.

A standard form contract

The current proposal is that the unfair contract terms regime be extended to cover contracts where one party is a "small business". Reflecting the current consumer protection provisions, the small business protection will only apply to "standard form contracts". There is no specific definition of a "standard form contract", however, the characteristics of a standard form contract include where:

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

Definition of a small business

The major question during the consultation period was the definition of a "small business". The suggestion by the Federal Government in the exposure draft is that these protections will only apply where:

  • the business in question employs fewer than 20 people (on a full time, part time or casual basis); and
    • if the contract is for 12 months or less, the value of the contract does not exceed $100,000; or
    • if the contract is for more than 12 months, the value of the contract does not exceed $250,000.

The price of the contract will be determined by considering the "upfront price payable". Specifically, this means that the relevant regulator or the court will look at the definite price payable for goods and services obtained under the contract, and exclude from calculations any contingent fees or amounts and any interest payable.

It is important to note that there is no requirement for a small business to notify the other party during negotiations that it is likely to be a small business for the purposes of the ASIC Act or the ACL. Because of this, there will be some onus on businesses to ensure that their standard form contracts do not contain onerous terms for small businesses (this would seem to be simpler than attempting to identify if every party a business contracts with is a small business), however, terms that are unfair for one small business may not be onerous for another. This means that every contract under the relevant value thresholds should have to have some level of review prior to conclusion in order to determine whether (a) they are contracted with a small business, and (b) any of the terms are unfair.

What does this mean for your business?

The public consultation period on the exposure draft closes on 12 May 2015, with any submissions by interested parties due to the Federal Government by then. This will allow for the Federal Government to make any necessary alterations and enact the amendments in early 2016.

Importantly, while the unfair contract term provisions do not apply to any standard form small business contract entered into before the legislation comes into force (again, early 2016), they will apply to any contract requiring renewal or renegotiation (even if it just a variation to the term) after this time. As such, your consideration of the unfair contract terms provisions should not be limited to newly formed contracts, but rather it would be beneficial to ensure that all existing contracts which are intended to continue are reviewed and revised where necessary.