For years Australian consumers have been protected from unfair contract terms in standard form contracts by the Australian Consumer Law (ACL) and previously the Trade Practices Act. The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 has extended these protections to small businesses, which are 97% of all businesses in Australia, from 12 November 2016.

We have briefly outlined what these changes mean for you.

1. What contracts are covered by the changes?

The protections from unfair contract terms have now been extended to standard form, small business contracts.

After 12 November 2016, any contract that meets the following criteria is a small business contract:

a) at the time the contract was entered into, at least one party to the contract is a business that employs fewer than 20 people; and
b) either:

(i) the upfront price of the contract does not exceed $300,000; or
(ii) the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.

The Australian Competition and Consumer Commission (ACCC) (the entity responsible for enforcing the ACL) defines a standard form contract as a contract that businesses offer to consumers which is the same or similar. While standard form contract is not defined in the ACL, it is presumed that a contract is a standard form contract unless proved otherwise. If required, it will be left to the court to determine whether or not a contract is a standard form contract based upon:

a) the bargaining power of the parties;
b) whether the contract was prepared before the parties discussed the transaction;
c) whether one party was required (in effect) to either accept or reject the terms as presented;
d) whether an opportunity to negotiate the terms was provided; and
e) whether the terms of the contract take into account the specific characteristics of a party or the particular transaction.

2. What is an unfair term?

Section 24 of the ACL defines unfair and this definition has been extended to small business contracts. In that section, a term of a contract is unfair if:

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

3. What do you need to do?

The changes are not retrospective. This means that only contracts dated 12 November 2016 or later will be caught by the changes. Importantly, however, the changes do apply to any variations or renewals of existing contracts after this date.

Businesses are reminded to consider these changes when negotiating with small businesses as simply negotiating on price will not be sufficient to avoid being a standard form contract.

We suggest reviewing your standard form contracts (including leases) for any terms that may be considered unfair.

In particular, the ACL provides the following examples of terms considered to be unfair:

  1. a term that permits, or has the effect of permitting, one party (but not another party) to avoid or limit performance of the contract;
  2. a term that permits, or has the effect of permitting, one party (but not another party) to terminate the contract;
  3. a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract;
  4. a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract;
  5. a term that permits, or has the effect of permitting, one party (but not another party) to renew or not renew the contract;
  6. a term that permits, or has the effect of permitting, one party to vary the upfront price payable under the contract without the right of another party to terminate the contract;
  7. a term that permits, or has the effect of permitting, one party unilaterally to vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract;
  8. a term that permits, or has the effect of permitting, one party unilaterally to determine whether the contract has been breached or to interpret its meaning;
  9. a term that limits, or has the effect of limiting, one party’s vicarious liability for its agents;
  10. a term that permits, or has the effect of permitting, one party to assign the contract to the detriment of another party without that other party’s consent;
  11. a term that limits, or has the effect of limiting, one party’s right to sue another party;
  12. a term that limits, or has the effect of limiting, the evidence one party can adduce in proceedings relating to the contract; and
  13. a term that imposes, or has the effect of imposing, the evidential burden on one party in proceedings relating to the contract;