Following recent legislative changes, from 12 November 2016 unfair terms in standard form small business contracts will be void. Business that deal with small businesses on standard form contracts have until 12 November 2016 to assess the potential impact of the changes on their standard form small business contracts and take appropriate action to minimise the risk of terms being void.
We previously advised of the Federal Government's proposal to extend the unfair contract term protections relating to standard from consumer contracts in the Competition and Consumer Act 2010 (Cth) (CC Act) to small business contracts. You can read our previous article here.
The proposal has now become law, with a few changes to the Federal Government's original proposal. The key changes are as follows:
- Contracts with an upfront price of up to $300,000, or $1,000,000 if the contract has a duration of more than 12 months, could be considered small business contracts. The original proposal limited the protections to contracts with an upfront price of up to $100,000, or $250,000 for contracts with a duration of more than 12 months.
- There is a 12 month transition period, rather than 6 months as originally proposed, with the changes taking effect on 12 November 2016.
What are small business contracts?
From 12 November 2016, under the Australian Consumer Law, a contract will be a small business contract if:
- the contract is for a supply of goods or services, or a sale or grant of an interest in land;
- at least one party to the contract is a business that employs fewer than 20 persons on a regular and systematic basis; and
- the upfront price payable under the contract does not exceed:
- $300,000; or
- $1,000,000 if the contract has a duration of more than 12 months.
What do the new provisions mean?
The new provisions mean that a term of a small business contract is void if the contract is standard form and the term is unfair.
- A contract is likely to be standard form if one of the parties has all or most of the bargaining power and the other party is required to either accept or reject the terms of the contract without negotiation or amendment.
- A term of a contract will be unfair if it causes significant imbalance in the parties' rights and obligations under the contract, would cause detriment to a party if it were relied on, and is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term.
Examples of terms which may be 'unfair' include terms which:
- permit one party, but not another party, to terminate, vary or renew the contract;
- permit one party to vary the price payable under the contract without the right of the other party to terminate; or
- permit one party to unilaterally vary the goods or services to be supplied, or the interest in land to be sold or granted, under the contract.
Where a term of a standard form small business contract is void, the rest of the contract will continue to bind the parties, to the extent that it is capable of operating without the unfair term.
The proposed amendments will apply to standard form small business contracts entered into on or after 12 November 2016. They will also apply to standard form small business contracts which are renewed on or after 12 November 2016 or have terms varied on or after 12 November 2016.
The 12 month transition period gives those who may enter into standard form contracts with small businesses an opportunity to assess the impact the changes will have on them, and more particularly, to:
- clarify whether they enter into contracts which are likely to be standard form contracts;
- assess the extent to which they enter into standard form contracts with businesses which employ less than 20 people;
- identify any existing contracts which may be renewed or 'rolled over' on or after 12 November 2016;
- review their standard form contracts to identify any terms which are at risk of being 'unfair' (and therefore void);
- determine whether to amend or delete any terms at risk of being void; and
- determine whether they will have one contract for small businesses and another contract for other businesses, or whether they will continue to use one contract for all businesses.
If standard form contracts with small businesses are a significant part of your business, it would be prudent to ensure that appropriate action is taken well ahead of 12 November 2016 to minimise the risk of key provisions in such contracts being void.
The public consultation process for these changes indicated that unfair contract terms were seen across a wide range of industries, including but not limited to:
- retail tenancies;
- financial services and credit contracts;
- the waste management sector;
- architecture; and
- online advertising services.
These are just a few examples of the potentially wide reaching effects of the changes.