In recent months, the Commonwealth Government followed up its election promise to give small business a 'fair go' by releasing exposure draft legislation which confirms that consumer protections relating to unfair contract terms will be extended to protect small business.

The new laws, which are expected to apply from early 2016, follow a consultation process conducted by Treasury last year, which was commenced in light of growing concerns about the imbalance of negotiating power between large and small business and the consequential impact of that imbalance on the economy.

CURRENT PROVISIONS

Currently, unfair terms in standard 'consumer contracts' are void under the Australian Consumer Law. In other words, the contract will remain 'on foot' (to the extent possible), however, the relevant unfair term is unenforceable.

Generally speaking, a contractual term will be regarded as 'unfair' if it:

  • would cause a significant imbalance in the parties' rights and obligations arising under the contract; and
  • is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
  • would cause detriment (whether financial or otherwise) to either party if it were to be applied or relied on.

These provisions only protect 'consumers' (individuals) who enter into contracts for the supply of goods, services or an interest in land, where the consumer is acquiring the goods, services or interest for wholly or predominantly personal, domestic or household purposes.

EXTENDING THE PROTECTION TO SMALL BUSINESS

The Government's exposure draft legislation extends these protections to small business (and, therefore, commercial 'business to business' contracts). The proposed laws are targeted at improving the negotiating power of small businesses in circumstances where they are offered standard terms with little to no opportunity to vary them (including, for example, in competitive tender bidding processes).

During the consultation phase, there was uncertainty relating to how the new laws will define 'small business' (i.e. which businesses will be protected). This appears to have been 'cleared up' by the Government in the exposure draft which indicates that the provisions will only apply where:

  • at least one party to the contract employs fewer than 20 people; and
  • the 'upfront' price payable' (excluding interest and contingent fees) does not exceed either:

$100,000 for contracts with a term of 12 months or less; or    

$250,000 for contracts with a term of more than 12 months.

The scope of contracts that may fall within these parameters is significant and will include contracts where both parties are 'small businesses' (with fewer than 20 employees). On its face, this approach seems counter-intuitive to the Government's objective of giving small business 'a fair go' and may, in fact, result in higher compliance costs for such businesses. It also appears to be a departure from the Government's consultation phase sentiment which was concerned with the power imbalance between large and small businesses.

The exposure draft does not expressly exclude specific industries which are already heavily regulated, such as franchising and retail leasing. It seems likely that contracts (including, for example, licences and leases) in these industries may also be covered by the new rules.

WHAT TO DO

If you use standard form contracts - it appears inevitable that the new laws will be enacted, so it may be a good time to consider what changes might be required to your contracts (and business operations) when the new laws come into effect. However, you should be wary of taking a 'one size fits all' approach as 'unfairness' is a fluid concept which may apply differently to different small businesses.

If you are a small business - watch this space. On commencement of the new laws, you will enjoy a new level of negotiating power in circumstances where you are presented with unfair 'standard terms'.