The Commonwealth Government has introduced the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 (Bill) into Parliament on 24 June 2015. It proposes to extend the unfair contract terms provisions currently governing standard form contracts between businesses and consumers contained within the Competition and Consumer Act (Cth), Sch 2 Australian Consumer Law (ACL) to standard form contracts between businesses and small businesses.

If the Bill is passed, those who utilise standard form contracts for transactions with small businesses will need to reassess that practice and the terms of those contracts to ensure compliance with the law or risk the prospect of future litigation. Some businesses may need to alter legal agreements presently being used or consider whether they have the appropriate documentation in place to support the continuation of the present contracts under the exemptions available.

WHAT IS AN UNFAIR CONTRACT TERM?

An unfair term is a term that:

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

Some examples of terms that have been considered unfair in respect of consumers can be accessed here.

Some examples of terms which may be considered unfair in the small businesses context can be accessed here.

Before deeming a term unfair, a 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 and readily to the party affected by it; and
  • the contract as a whole.

WHO WILL THE EXPANDED UNFAIR CONTRACT TERMS REGIME APPLY TO?

In its present form, the Bill will apply to small-business-to-small-business standard-form contracts.

A contract will be deemed a small business contract if, at the time the contract was entered into:

  • at least one party employs fewer than 20 persons; and
  • where the value of the contract does not exceed either $100,000, or $250,000 for contracts of more than one year in duration.

In calculating persons employed, each full-time, part-time and casual employee constitutes one person. Casual employees are not counted unless they are employed on a regular and systematic basis.

A standard-form contract is one which has standardised, non-negotiated terms and are prepared by one party to the contract.

  • When determining whether a contract is standard-form, a court is required to consider:
  • whether one party has all or most of the bargaining power relating to the transaction;
  • whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
  • whether another party was required either to accept or reject the terms of the contract in the form in which they were presented (“take it or leave it” approach);
  • whether another party was given an effective opportunity to negotiate the terms of the contract; and
  • whether the terms of the contract were tailored to the specific circumstances of the agreement between the parties.

The Bill contains a presumption that a contract is a standard-form contract if a party to a proceeding alleges it to be. The party who says it is not must prove it is not standard form.

EXEMPTION

The Bill contains a very narrow power to exempt small business contracts that are subject to a prescribed law identified by regulation. For a law to be eligible to be prescribed, the Minister must be satisfied that the law provides equivalent protections to the unfair terms laws to a business employing fewer than 20 people. This has been recognised as a fairly narrow scope and it is expected that few laws, if any, are expected to qualify for listing.

The key for businesses when required to respond to allegations that terms in their standard form contracts are unfair will be to show either that those terms are not unfair or alternatively if they are that those terms are reasonably necessary to protect a legitimate business interest that the business has.

IMPACT

An unfair term may be declared void by a court. In most cases, the void term is removed from the contract, and the remainder of the contract continues to operate. There are no fines or penalties for a term being declared unfair, although other relief may be available.

CURRENT STATUS

While the Bill has not yet been passed, if the legislation is enacted in its present form, it is expected to commence in early 2016.

If it passed without change, businesses should consider if any business practices or documents need to be altered or supplemented to minimise risk.

With any business, if changes are required to systems or core documentation used by the business, time will be required to both identify and alter the practices and documents, educate those affected by the changes about the changes and the reasons for them, and also to implement and embed the new practices or use of new documents.

Small businesses and entities that contract with small businesses should keep themselves aware of the status of this legislation.