Businesses and lenders beware - expansion of unfair contract protection to small business contracts

On 12 November 2015 legislation was passed which extends the unfair contract protections to include small business contracts (see the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015). This will affect provisions of the Australian Consumer Law (ACL) and the Australian Securities and Investments Commission Act 2001. The changes take effect from 12 November 2016.

Will any contract be covered?

No. The changes to the ACL will apply to standard form small business contracts if:

  • the contract is for a supply of goods or services, or a sale or grant of an interest in land; and
  • at the time of entering into the contract, at least one party is a business that employs less than 20 people; and
  • the upfront price payable under the contract is no more than $300,000 or if the contract is for more than 12 months it is for no more than $1 million.

What is a standard form contract?

A standard form contract is one where there is no negotiation between the parties and it is provided on the basis that it is either accepted in whole or not all.

A contract will be presumed to be a standard form contract if a business alleges it is one and it will then be up to the other party to prove otherwise.

What is an unfair term?

A term is unfair if it:

  • "would cause a significant imbalance in the parties' rights and obligations arising under the contract"; and
  • "is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term"; and
  • "would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on". (see section 24 of the ACL)

Terms that may be deemed unfair could include:

  • a term that permits one party (but not another party) to avoid or limit performance of the contract;
  • a term that permits one party (but not another party) to terminate the contract;
  • a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract.

Further examples of potentially unfair terms can be found in section 25 of the ACL but it is by no means an exhaustive list.

What does this all mean?

If a court or tribunal determines that a standard form small business contract includes an unfair term then that term will be void and not binding on the parties. The balance of the contract will continue to operate to the extent that it can without the unfair term.

What you can do to become ready

If you haven't already done so, it is time to start reviewing any standard form contracts you have that may be considered a small business contract and take steps to ensure they comply with the new legislation.