The Commonwealth Government has released an exposure draft of legislation which, if enacted, would extend the unfair terms regime in the Australian Consumer Law (ACL) to small business contracts.   

The reforms will have a significant practical impact on the way in which businesses contract with each other when one or more of the contracting parties is, or might be considered, a ‘small business’.   

If enacted businesses – big and small – are likely to face increased compliance costs, which are exacerbated by uncertainties in the legislation as currently drafted.   

The draft legislation, which is currently the subject of public consultation, is expected to receive support from the Federal Opposition. Once enacted, there will be a six month transition period before the provisions come into effect, which is anticipated to occur in early 2016.   

Submissions on the draft legislation may be made before 12 May 2015. 

Background to the legislation

The application of the unfair terms regime to standard form business contracts was originally included in draft provisions released for consultation in May 2009. Strong opposition from business ultimately saw the scope of the unfair contract terms regime limited to consumer contracts.   

The existing unfair terms regime in the ACL only applies to 'consumer contracts' that are in 'standard form'. A term in such a contract is void if it is deemed by a court to be 'unfair'. A term will be unfair where the following three criteria are all satisfied – that is, the relevant term must:

  • cause a significant imbalance in the parties' rights and obligations under the contract;
  • not be reasonably necessary to protect the legitimate interests of the party advantaged by the term; and
  • cause detriment to a party if applied or relied on.

A contract is presumed to be in standard form. Where proceedings are commenced seeking a declaration that a term is void, the onus is therefore on the defendant to advance any arguments to the contrary. If the point is contested, a court will determine it as a question of fact, since the ACL does not specify a definition. The ACL does set out a number of factors to which a court may have regard when determining the question, including whether a party was required, in effect, to accept or reject the terms of the contract.   

Certain categories of contract terms are exempt from the application of the regime, including terms that define the main subject matter of a contract and terms in certain shipping contracts.   

Extending the legislation to small business contracts

The draft legislation proposes to extend the existing unfair terms regime in the ACL to standard form contracts:

  •  to which at least one party is a 'small business'; and
  •  under which the 'upfront price' payable does not exceed $100,000 or, if the contract's duration is more than 12 months, $250,000.

A threshold issue is therefore whether one or more of the parties is a 'small business'. The draft legislation defines this phrase as a business that employs fewer than 20 people, with the number of employees to be determined using a 'head count approach' (that is, an approach that disregards hours worked or workload). 'Casual employees not employed on a regular or systematic basis' (a phrase used in the Fair Work Act around which a body of jurisprudence has developed) are excluded from the employee count.   

In terms of the monetary threshold, 'upfront price' refers to 'the consideration that is disclosed at or before the time the contract is entered into', but excludes 'any other consideration that is contingent upon the occurrence or non-occurrence of a particular event'.   

The criteria that must be satisfied before a term will be 'unfair' will not change; nor will the presumption that a contract is in standard form and the exemptions for certain term categories.   

The new provisions will apply to contracts entered into or renewed after the date on which the law comes into force, and to any terms in applicable contracts that are varied after this date.   

Mirror provisions covering contracts for financial services or products will be inserted into the ASIC Act.

Impact on business

The Australian Competition and Consumer Commission (ACCC) has been allocated $1.4 million to monitor compliance with the new provisions. It is likely that the ACCC will focus on particular types of contract or particular sectors, as happened in relation to the consumer contract provisions and their State-based predecessors.   

Notably, the draft legislation will capture standard form contracts under which a small business is the supplier (not only contracts under which a small business is the acquirer). It will also capture a contract between two small businesses provided it meets the monetary thresholds.   

Except when dealing with a counterparty that is well-known large business, it may be difficult in practice for one contracting party to know the number of employees of the other. As a result, businesses will need to review their standard form contracts that are used with any businesses about which there is uncertainty as to the number of employees. Consideration may need to be given to whether different sets of standard form contracts are required– one for contracting with business that may potentially be considered small businesses and one for contracting with larger businesses.   

The uncertainty as to employee numbers is compounded by the use of the term 'business'. The legislation merely states that a 'business' includes a not-for-profit business. It does not specify whether, for example, a parent and subsidiary company operating in the same field are taken to be one 'business' for the purpose of counting employees. The Explanatory Materials state that 'small business' has been defined differently for the purpose of the unfair terms regime to the definition in the ASIC Act, suggesting that caution must be exercised before drawing analogies with other fields of law in an attempt to give meaning to the term 'business'.   

Extending the regime to all standard form contracts falling within the value thresholds to which a small business is a party – including contracts under which a small business is supplying another small business – appears to sit uneasily with the rationale behind the legislation. The Explanatory Materials note, for example, that small businesses are often insufficiently resourced to review contracts internally, and the costs of retaining external help to do so may be prohibitive. Yet small businesses will need to undertake such contractual reviews in order to reduce the risk of non-compliance.   

Use of a monetary threshold defined by reference to the 'upfront price' payable under the contract may also create complications. For example, it may be difficult in some cases to clearly or readily determine the upfront price. In other cases, businesses may seek to avoid the application of the regime by restructuring payment arrangements so that the upfront price exceeds the specified value thresholds.   

Whether the changes have substantial practical impact remains to be seen. Since a term will continue to operate until declared void by a court, the time and expense of bringing proceedings seeking such a declaration may discourage small businesses from doing so. The new provisions may nonetheless provide small businesses with more bargaining power when entering into contracts with larger businesses. Moreover, the ACCC is likely to be active in the area, given the funding allocated for monitoring compliance.

Points to take away

  • If enacted, the draft legislation will increase compliance costs for both small and larger businesses.
  • There is uncertainty as to the scope of the provisions as currently drafted, leading to potential uncertainties in terms of compliance.
  • New contracts, contracts renewed after the legislation commences, and clauses varied after that date will be subject to the new regime, and will need to be reviewed for compliance.