The coalition government has delivered its pre-election promise to extend unfair contract protections to small business. On 20 October 2015, the Treasury Legislation Amendment (Small Business and Unfair Contracts Terms) Bill 2015passed through both houses of Parliament and is awaiting Royal Assent.

The extension is far reaching and will encompass many type of B2B agreements including terms of trade, franchise, dealership, brokerage, supply and distribution agreements. Business will need to review such B2B agreements with small business or risk being the test case for the new law.

The Bill amends the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and the Australian Consumer Law (ACL) (as set out in Schedule 2 to the Competition and Consumer Act 2010 (Cth)) to extend the unfair contract terms regime currently available to consumers to cover small businesses that meet prescribed thresholds.

The Bill originally proposed that the regime would apply where the contract value did not exceed $100,000, or $250,000 where the contract term was greater than 12 months and passed the House of Representatives on this basis. However in an unexpected twist, the Greens introduced significant threshold changes in the Senate, increasing the threshold from $100,000 to $300,000 for single contracts, and from $250,000 to $1,000,000 for contracts of more than 12 months. The Greens were concerned that because of the level of the original thresholds, only an estimated 80% of small businesses would be covered, which they considered would mean a number of potentially vulnerable small businesses were left without protection. They estimated that by increasing the thresholds the regime would cover approximately 95% of small business. These amendments were ultimately accepted by the House of Representatives.

Who will the new regime apply to?

A contract will be a “small business contract” if:

  • at least one party employs less than 20 persons (excluding casual employees unless employed on a regular/systematic basis); and
  • the upfront price payable under the contract does not exceed $300,000, or $1,000,000 where the contract term is greater than 12 months.

As previously blogged, there has been concern about the appropriateness of using the concept of “upfront price” as a mechanism to determine the value of the contract. Currently, “upfront price” is used in the ACL to exclude certain terms in consumer contracts from the operation of the unfair terms regime, not to determine which contracts are included under the regime. The Senate Economics Legislation Committee received a number of submissions on this point, which noted that the term is confusing and may not properly capture the true overall value of the contract, but may inadvertently extend the protection of the regime to high value contracts in excess of the prescribed thresholds despite this not being the intent of the regime. However, the Committee considered that the Explanatory Memorandum is “clear” as it states the upfront price also applies to the ‘totality of the consideration’ that is paid under a contract (and does not include ‘other consideration’ that is contingent on the occurrence or non-occurrence of a particular event). The Bill was adopted without amendment to this term.

What is an “unfair term”?

A term will be deemed unfair if it:

  • causes a significant imbalance in the parties’ rights and obligations;
  • would cause detriment (financial or otherwise) to a party if relied on; and
  • is not reasonably necessary to protect the interests of the party advantaged by the term,

with regard to:

  • the transparency of the contract – if the term is expressed in reasonably plain language, is legible and presented clearly to the affected party; and
  • the contract as a whole.

Although there is some case law that provides guidance on the types of clauses that have been considered to be unfair in a B2C context, in addition to the ACCC’s report on its unfair contract terms reviews reflecting the regulator’s view of unfairness, at least some different considerations are likely to apply to a B2B context. Like the existing consumer regime, we’re unlikely to get clear guidance on this for sometime.

What is a “standard form” contract?

A standard form contract contains standard, non-negotiated terms prepared by one party. Relevant factors include:

  • whether one party has all or most of the bargaining power;
  • whether any discussion occurred between the parties before the contract was prepared;
  • whether there was room for negotiation of the terms, or if the other party was required to accept or reject the terms without negotiation;
  • whether the other party was given the opportunity to negotiate the terms; and
  • whether the contract terms were adapted to the specific circumstances of the transaction.

Transitional arrangements

The expanded unfair terms regime will come into effect 12 months after the Bill receives Royal Assent, giving businesses time to implement system changes and contract amendments to ensure compliance.

The Bill initially anticipated a 6-month transition period, but the Senate proposed a 12-month transition period before the changes come into effect. The debate in the Senate surrounding this 12 month transition amendment noted that the ACCC intends to take a ‘light touch’ to initial enforcement of the regime, by raising issues of concern directly with businesses in the same way it did when the consumer regime was first introduced. The ACCC will work with business and industry groups to identify problematic contract terms and encourage compliance.

What about existing ‘small business contracts’?

The new unfair terms regime will apply to contracts entered into or renewed, or terms of existing contracts that are varied, on or after the specified commencement date (ie. 12 months after Royal Assent). The unfair contract protections will apply on and from the date on which the renewal or variation takes effect, but otherwise do not apply to contracts entered into before the commencement of the new regime.