Unfair contract term protections for small businesses What is the new law?

On 12 November 2015 the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 received Royal Assent. This legislation gives effect to the extension of the “unfair contract terms” protections to small businesses.

Since 2010, a term of a “standard form contract” with a “consumer” can be declared void if it is “unfair”.  This law seeks to protect consumers and unsophisticated investors who have little or no opportunity to negotiate certain contracts.

The new law amends the Australian Securities and Investments Act 2001 (ASIC Act) and the Australian Consumer Law (ACL) so that these protections apply to “small business” and “small business contracts”. Under the new law, a Court will be able to declare that an “unfair” term in a standard form “small business contract” is void.  Like the existing consumer protections, the contract will continue to bind the parties if it can operate without the unfair term.

When does the new law become effective?

The amended provisions of the ASIC Act and ACL will commence twelve months after Royal Assent, on 12 November 2016.

What is a 'small business contract’?

A “small business contract” is a standard form contract where, at the time it is entered into:

  • at least one party is a “business” that employs less than 20 persons (i.e. a “small business”); and
  • the “upfront price” payable under the contract does not exceed either $300,000, or $1,000,000 if its duration is more than 12 months.

When calculating the number of employees of a business, each full-time and part-time employee should be counted as one person. Casual employees are only to be counted if they are employed on a regular and systematic basis.

Does the new law apply to existing small business contracts? The new law applies to:

  • a contract entered into on or after the commencement date of the amending Act; and
  • a contract that is renewed, or a contract term that is varied, after the commencement date.

Are there any exceptions?

Yes. The Minister has the power to specify exemptions from the unfair contract terms provisions if the law provides enforceable protections for  “small business” that are equivalent to the amended law.

What contractual terms are potentially “unfair”?

Under the ACL, a term is “unfair” if it:

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

Examples of potentially unfair terms include:

  • excessive or punitive consequences for default (e.g. default interest rates, penalty fees);
  • one party being entitled to unilaterally vary essential terms (e.g. price payment terms) without giving the other party a termination right;
  • the exclusion of certain remedies for default;
  • a party being liable for things that are outside of their control or do not arise from a breach of contract (for example, under an indemnity); or
  • one party being entitled to terminate at any time, without cause and on short notice.

What does this mean for your business?

Before the new law becomes effective, businesses will need to:

  • review standard form ‘business to business’ contracts to identify and amend any terms which are at risk of being ‘unfair’ and void under the new law;
  • develop systems to carry out the due diligence required to determine when they are dealing with a “small business” and a “small business contract” (in which case, the new law will apply); and
  • consider whether they should have a variety of standard form contracts, that make a distinction between “small businesses” and “big business” customers or clients.

In practice, it will be difficult for businesses to know whether the business they are contracting with has fewer than 20 employees.  Also, consideration will need to be given to the counting of employees in a group of companies that carries on a particular business where employees work for various “group companies”.