Acting on its 2013 election commitment to provide a ‘fair go’ for small businesses, the Federal Government has introduced The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 (the Bill) into parliament.

The Bill, which follows the Exposure Draft released earlier this year, will amend the  Australian Consumer Law [1] (ACL) and Australian Securities and Investments Commission Act 2001[2] (ASIC Act), to extend the national unfair contract term protections to small businesses. They are currently only available to consumers. 

In this Alert, Partner Ian Hughes, Senior Associate Tim Scanlan, and Solicitor Jessica Carroll provide an outline, and discuss the implications, of the proposed changes.    

The new national protections will cover standard form, small business contracts that are valued less than a prescribed threshold. The effect of these reforms will be that a court will be able to strike out any terms of contracts that it considers unfair.

Around four in five small business standard form contracts are expected to be covered by this reform, which will apply not only to new contracts but any renewals or variations to existing contracts which occur after the legislation is passed. 

The Federal Government expects the legislation to come into force early next year and to take effect within six months.  Once the Bill is passed, traders dealing with small-businesses (including franchisors, lessors, retailers, manufacturers, and other service providers) will need to review their standard terms to ensure they are not at risk of being deemed unfair. 

What is an “unfair” contract term?

Under the current regime, an unfair term is defined as one that:

  • causes an imbalance between the parties;
  • is detrimental to one party; and
  • is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term.

Before deeming a term “unfair”, the court is also required to consider:

  • the extent to which the contract is transparent – that is, if the term is expressed in reasonably plain language, legible and presented clearly to the party affected by it; and
  • the contract as a whole. 

Terms that have previously been found by the courts to be unfair under the current consumer regime include terms that allow one party (but not the other) to terminate, renew or assign the contract.

Whether a court will distinguish unfair terms in consumer and small business contracts will not be known until further guidance is provided by the Federal Government and/or a determination is made by a court. It is likely, however, that consumer contract terms that have been found to be unfair will also be considered unfair in small business contracts.

What is known is that during the Federal Government’s consultation process with stakeholders in 2014 examples of unfair contract terms found in standard form small business contracts included those that:

  • provide for the perpetual renewal of the contract - known as automatic renewal clauses; and
  • permit one party to unilaterally vary terms, limit their obligations, terminate or renew the contract, levy excessive fees or onerous interest rates on outstanding money or affect the availability of access to legal remedies.

No doubt these clauses will be the target of regulators – including the Australian Competition and Consumer Commission (ACCC) – once the new laws come into force.

Which contracts will be affected?

Only “standard form” “small business” contracts will be dealt with by the reforms.

If a contract is a standard form small business contract either a party to that contract, ASIC, ACCC or a State or Territory regulator can apply to a court for a declaration that a term in the contract is an unfair term.

Standard form contracts

Under the current regime, there is a presumption that a contract is a standard form contract and the onus is on the party defending the contract to provide evidence to the contrary.

The facts that may be taken into account in identifying a standard form contract include whether: 

  • one party had all or most of the bargaining power;
  • the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
  • the other party was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented;
  • the other party was given an effective opportunity to negotiate the terms of the contract; and
  • the terms of the contract take into account the specific characteristics of another party or the particular transaction.

Small business contracts

A contract will be 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 persons; and
  • either of the following applies:
    • the upfront price payable under the contract does not exceed $100,000;
    • the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $250,000.

In calculating the number of employees, each full-time, part time and casual employee constitutes one person.  However, a casual employee is not to be counted unless that person is employed on a regular and systemic basis.

What does this reform mean?

Standard form contracts are commonly used in business - providing familiarity, appropriate risk allocation and minimisation of transactions costs – but the Federal Government’s consultation process has recognised that small businesses (like private consumers) are vulnerable to unfair terms in standard form contracts. 

This vulnerability arises as they are often offered contracts on a ‘take it or leave it’ basis and lack the resources to understand and negotiate contract terms.

In light of the pending reforms, traders that use standard form contracts should be cautious of the contracts they are offering on a ‘take it or leave it’ basis and which may contain one sided terms. Should the Bill pass through the Senate, terms of that kind contained in small business standard form contracts are likely to be considered unfair and liable to be struck out. 

Only time will tell the extent of the impact of these reforms. In the meantime, traders should review the terms of their standard form contracts to reduce the risk of uncertainty of terms that may be considered unfair and potential for dispute once the new laws are introduced.