What does it mean for the direct selling industry?

The proposed extension of unfair contract term protections to small business appears another step closer to reality following this week’s release of draft legislation for public consultation. Here’s a snapshot of the draft laws and what they could mean for the direct selling industry.

Why has an extension of the unfair contract laws been proposed?

There are existing protections against the use of unfair contract terms in standard form contracts with consumers. The proposed extension of these laws to small business standard form contracts is based on the assumption that some small businesses, like consumers, lack the resources or skills to fully understand the implications of contract terms. This is thought to give businesses that offer standard form contracts the incentive to include “unfair” terms that place them at greater advantage at the expense of the other “weaker” party. The policy aim is to achieve what is considered a more appropriate balance between protecting “vulnerable” small businesses whilst allowing businesses to contract freely with each other.

What are the proposed protections?

The proposed protections will extend existing unfair contract terms laws to “low value” standard form contracts involving “small businesses” with less than 20 employees. A “low value” contract will be a contract requiring an up-front payment not exceeding $100,000, or not exceeding $250,000 for contracts that run for more than one year. Courts will have the power to strike out “unfair” terms in a contract. The question of whether a term is “unfair” will depend on a range of factors, including the extent to which it is reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term.

The proposed laws will apply to the vast majority of "standard form" contracts used by direct selling organisations when engaging independent sales persons or contractors. Clauses that create unfair powers to vary or terminate a contract with an independent sales person, or unfairly limit the rights of an independent sales person under the contract may be scrutinised by consumer affairs authorities, may attract fines and other penalties, and will be a new avenue of attack for legal claims by disaffected sales persons or contractors.

Somewhat paradoxically, many direct selling organisations will be “small businesses” themselves. Those organisations may have also have rights under the new laws in relation to unfair terms in contracts with their suppliers.

Who will the reforms apply to?

The proposed laws will apply to the vast majority of "standard form" contracts used by direct selling organisations when engaging independent sales persons or contractors. Clauses that, for example, create unfair powers to vary or terminate a contract with an independent sales person, or unfairly limit the rights of an independent sales person under the contract may be scrutinised by consumer affairs authorities, may attract fines and other penalties, and will be a new avenue of attack for legal claims by disaffected sales persons or contractors.

Somewhat paradoxically, many direct selling organisations will be “small businesses” themselves. Those organisations may have also have rights under the new laws in relation to unfair terms in contracts with their suppliers - for example, contracts for the supply of goods, services or utilities, premises leases, and financial products and services such as insurance.

The existing laws relating to unfair terms in consumer contracts will, of course, continue to apply.

When will the reforms start?

We won’t know for sure until the exposure draft consultation process is completed and legislation is introduced and passed by the Parliament. But it could be as early as mid-2016.

What should I do now?

If you a direct selling organisation or other business in the industry, be prepared for the reforms.  If you use standard form contracts then it’s probably a good time to have them reviewed. If you legitimately need to use what might be considered an “unfair” term, then you should also be documenting your reasoning in case of potential claims.  As always, best practice risk management will involve an effective process for the resolution of complaints, disputes and potential claims before they escalate.

If you are also a “small business” consumer, get ready to add another string to your bow in the event of any dispute with your suppliers.