The Federal Government is getting closer to following through on its pre-election commitment to extend the unfair terms regime to small business, finally revealing what type of small business will be protected.

Draft exposure legislation proposes amendments to the existing unfair terms provisions in the ASIC Act 2001 (Cth) and the Competition and Consumer Act 2010 (Cth) to introduce monetary value and employee thresholds for determining if a business has entered into a standard form ‘small business contract’ – in which case it can seek protection under the unfair terms regime.

A ‘small business contract’ is defined as one where:

  • at least one party at the time the contract is entered into, is a ‘small business’, which is defined as a business employing fewer than 20 persons (but excluding casual employees unless employed on a regular and systemic basis); AND 
  • either the upfront price payable under the contract: • does not exceed $100,000; or
  • does not exceed $250,000, in addition to the contract term being for 12 or more months.

Those familiar with the unfair terms regime will recognise the concept of ‘upfront price’, which is currently used to exclude certain terms in consumer contracts from the operation of the unfair terms provisions (meaning that a term that sets the upfront price cannot be challenged as unfair).  Interestingly, the concept would essentially be used in the reverse in the extension of the regime to small business, setting the threshold for terms to be included for consideration under the regime.

Notably, the type of small business contract the regime will apply to has also been drafted deliberately wide so as to cover both the acquisition and supply of goods or services with small businesses.

Also notable is the ability for the relevant Minister to exempt contracts subject to industry-specific legislation or regulation equivalent to the unfair terms regime.  The exemption is intended to avoid duplication, although at this stage, only two such Acts have been identified as potentially providing an adequate level of protection (the Independent Contractors Act 2006 (Cth) and the Motor Vehicle Dealers & Repairers Act 2013 (NSW)).

Government proposes that the extension will not apply to contracts entered into before the commencement of the amendments, however, if any contract is renewed on or after commencement, then the new regime will apply to the amended or renewed contract in the same way it did when the regime was first introduced for standard form consumer contracts in 2010.

While the Explanatory Material and Regulation Impact Statement indicate the Government’s intention to limit the protections of the unfair contract terms regime to “low-value small business contracts”, the thresholds are broad and could capture a significant range of transactions, including potentially provide protection to businesses that are not necessarily vulnerable.  The draft legislation still raises many concerns and questions, for example:

  • the extent to which a due diligence is needed to ascertain employee numbers of a counter party to ascertain whether they may fall in or out of the regime;
  • whether there will be an increase in the use of options to renew and price change notification clauses to bring contracts outside of the monetary thresholds;
  • what may amount to “unfairness” in a B2B context (and is it any different to the B2C context?).  The meaning of ‘unfair’ and examples of potential unfair terms contained in the existing unfair terms provisions may, by virtue of the extension in the draft legislation, apply to a small business context.  However what in substance has been considered to be unfair by the Federal Court or fair trading tribunals in consumer cases may not  translate so easily to the B2B setting given the level of sophistication and experience, resources and bargaining positions of even small businesses are greater than compared to ordinary consumers; and 
  • whether a transition period will apply given the significant work required by businesses to comply with the extension and educate staff about the change.

The Government has invited interested parties to make submissions on the draft legislation by 12 May 2015.  Notwithstanding, change seems imminent given the Government’s continuous public commitment to an extension (including as a key election platform), the existence of draft legislation, the reservation of $1.4 million in the 2014-15 Federal Budget to support implementation of a legislative extension and possible support from the Opposition who themselves originally sort to include small business in the original unfair terms regime.  The Government has foreshadowed implementation of the extension in early 2016.