The Australian Federal Government is seeking to extend protection for small business against unfair contract terms contained in the Australian Consumer Law (ACL). If the proposed legislation is enacted, a term of a standard form contract offered to small businesses may be declared void if it is unfair.

This move by the Australian Government is based upon the view that small businesses are often in the same position as consumers and presented with “‘take it or leave it’ contracts, with little scope to negotiate just and fair terms”.1

Further background information is available in our March 2015 Focus Paper on this issue.2

What is a “small business contract”?

A small business contract will be one where:

  • at least one of the parties has less than 20 employees, whether full or part-time employees or casual employees (if employed on a regular basis);
  • the upfront price payable for the contract does not exceed either:
    • $100,000; or
    • $250,000, if its duration is more than 12 months.

Provided these two criteria are met, the contract will be a small business contract regardless of whether a small business is supplying or acquiring goods or services.

The draft legislation provides that the Government may make regulations exempting some contracts if they are subject to industry-specific legislation. It is unclear whether this exemption might cover contracts which fall within the ambit of the Independent Contractors Act 2006 (Cth).

Once the legislation receives Royal Assent, there will be a six month transition period before the requirements come into effect.  At the earliest, this will likely occur in early to mid-2016.

Immediately following the six month transition period:

  • new small business contracts which are entered into;
  • pre-existing small business contracts which are renewed; and
  • the terms of pre-existing contracts which are varied,

must comply with the new requirements. This will mean that provisions deemed to be unfair will be void and unenforceable.

What does this mean?

Businesses across all industry sectors will need to be prepared and take steps to comply with the requirements of the proposed legislation. In particular, businesses should conduct a review of their standard form agreements with their customers, suppliers and independent contractors to ensure that the agreements’ terms and conditions do not pose any compliance concerns.

To be considered an unfair term, the term must:

  • cause a significant imbalance in the parties’ rights and obligations under the contract;
  • cause detriment to a party if it is relied upon. The detriment need not just be financial; and
  • not be reasonably necessary to protect the legitimate interests of the party seeking to rely upon the term to their advantage.

For example, terms which may allow a party to vary unilaterally a term of a contract or only permit one party to terminate a contract may be considered unfair. In determining whether a term is unfair, a court will consider the contract as a whole and whether the term is transparent.

If a term is declared void, the contract will continue as if the term never existed and the contract will continue to operate to the extent possible.

Companies falling within the definition of a “small business” will be able to use the protections, to their advantage, as a bargaining tool with contracting parties, for example, suppliers.