On 20 October 2015, the unfair terms laws to protect small business were passed by both Houses of Parliament.

As reported previously, the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 (Bill) extends the unfair terms protections  under the Australian Consumer Law to apply to small business contracts.  There is to be a 12 month transition period.

Please register for upcoming seminars in Sydney and Melbourne to learn more.

What's a small business contract?

The new small business unfair terms laws will apply where:   

  • the contract is a standard form contract (ie, a contract prepared by one party and offered on a 'take it or leave it' basis); and   
  • at least one party to the contract is a small business (20 or fewer employees at the time the contract is made excluding casuals unless employed on a 'regular and systematic basis'); and   
  • the 'upfront price' payable does not exceed the prescribed threshold amounts (being $300,000 for contracts for 12 months or under, and $1,000,000 for contracts exceeding 12 months).

Challenges ahead?

Unfortunately, the new laws are unclear in several areas.  Businesses will likely face some challenges in identifying if the new laws apply to their contracts. For example:  

  • No guidance is offered on the due diligence that a party should undertake when determining whether it is contracting with a small business.  Identifying if a counterparty is a small business may be particularly difficult where the counterparty is part of a corporate group. Further, it is unclear if a party can rely on the unfair terms protections as a small business if it fails to disclose, or misrepresents, its employee numbers.     
  • 'Upfront price' is a potentially confusing name for an uncertain concept. It includes all consideration to be provided under a contract at any time during the contract term, so long as the consideration or the basis on which it is to be determined are disclosed before the contract is entered into. It does not include "other" consideration if it is contingent. How is 'upfront price' to be determined in the case of 'on-demand' contracts, which are commonly used in business transactions? 'On-demand' contracts often require no minimum purchase, and are of indefinite duration. In other words, the total consideration to be provided over the course of the contract will not be known upfront.  It is currently unclear whether such a contract would fall within the scope of the new regime.   
  • Will 'unfairness' be assessed in a business-to-business context differently to a consumer contract?  The test of what is 'unfair' is, on paper, the same under the consumer and small business unfair terms laws.  However, the range of circumstances when the unfair terms laws can be applied are much broader for small business. The consumer unfair terms laws only apply when the consumer is purchasing predominantly for a consumer purpose.  In contrast, the small business unfair terms laws will apply regardless of whether the small business has a purchaser, vendor or other role.  A further distinction is that many small businesses possess a greater level of sophistication and bargaining power than most consumers.  Given these considerations, the approach taken by the courts in applying unfair terms laws in a consumer context may not be a reliable guide to anticipating the approach in applying the small business unfair terms laws. 

What does my business need to do?

The first step is for businesses to assess whether and to what extent the unfair terms law might apply to them. This requires determining whether a counterparty to a standard form contract employs fewer than 20 people, and whether the upfront price of that contract exceeds the relevant threshold. If the small business unfair terms laws might apply, the business should:   

  • Start reviewing contract terms to determine whether they may be open to challenge under the new regime. Examples of such terms may include automatic contract term rollovers, unilateral variation rights, one-sided termination rights, broad indemnities that can make the small business party liable for things outside their control, and liquidated damages provisions that do not reflect actual losses.   
  • Remember that, while the unfair contract terms laws do not apply to standard form contracts entered into before the Bill becomes law, they will apply to any contract renewed after this time.  The transitional provisions also apply the new laws to any term varied after the Bill becomes law.  Businesses should therefore ensure that all contracts that are intended to continue are reviewed and revised where necessary.   
  • Consider if standard form terms at risk of being unfair should be amended or removed. This will involve a risk analysis in relation to the likelihood of the terms being unenforceable, balanced against the protection provided by the term.   
  • Consider if it may be possible to amend pricing structures  to place the contract value above the threshold amounts, and outside the operation of the regime.  

 When does the new regime start?

The Senate amendments also extended the Bill's transition period from 6 months to 12 months, meaning that the laws are expected to come into effect in late 2016.