The Federal Government is pushing ahead with its proposal to extend the reach of the current unfair consumer contract terms protections to small business by tabling draft legislation before Parliament. The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 (Bill) was introduced into the House of Representatives on 24 June 2015. If the Bill gets passed, the new law will have significant implications for B2B transactions.

The Explanatory Memorandum for the Bill makes it clear that the new small business protections “will reduce the incentive to include and enforce unfair terms in small business contracts, providing a more efficient allocation of risk in these contracts and supporting small business’ confidence in agreeing to contracts”.1  It goes on to say that “the extension of the unfair contract term protection to low value, standard form small business contracts will support time-poor small businesses entering into contracts for day-to-day transactions, while maintaining the onus on small business to undertake due diligence when entering into high-value contracts”.2

The Bill is substantially similar to the draft legislation that was released back in April during the consultation period.3 The new law proposed in the Bill is very much a reflection of the current unfair consumer contract terms regime in the Australian Consumer Law (ACL) in that the new small business protection will only apply to “standard form” contracts. If passed in its current form, the Bill will mean that an “unfair” contract term in a B2B standard form contract will be void if one of the businesses is a “small business” and the contract value is below the prescribed threshold.

The new small business test

A contract will be deemed to be a “small business contract” if:

  • at the time the contract was entered into, at least 1 party is a business that employs fewer than 20 people (calculated using a head count approach looking at the persons a business employs on a full time, part time and regular casual basis); and
  • where the contract is for 12 months or less, the value of the contract does not exceed $100,000, or, if the contract is for more than 12 months, the value of the contract does not exceed $250,000.

The value of the contract will be determined by considering the “upfront price payable” under the contract. Specifically, this means the definite price payable for goods and services obtained under the contract which is disclosed at or before the time the contract is entered into, and excludes any contingency fees or amounts and any interest payable.

Where the two criteria are met, a contract will be a “small business contract” whether the small business is the party supplying or acquiring the goods or services in question.

There is no obligation on a party to declare themselves a “small business” when negotiating or entering into a commercial contract, so it really rests with the other contracting party to ensure that any standard form contract which it intends to use with a party that is a small business does not contain unnecessarily onerous contract terms for the small business.

Narrow exemption

The Bill exempts from its reach any contract that is subject to an industry-specific law that has been prescribed by the Commonwealth Minister as containing protections that are enforceable and equivalent to those for small business in the new law.

It is unclear at this stage how this exemption will play out in practice but as things currently stand, it would seem that few laws will qualify for any such exemption.

Current key concepts of “standard form contract” and “unfair” unchanged

As the Bill extends the current unfair contract terms regime to a contract where one party is a “small business”, the proposed small business protection will only apply to “standard form contracts” and then will only void a term that is “unfair”. The existing concepts of “unfair” and “standard form contracts” will therefore remain key to the small business unfair contract terms protection.

What is a “standard form contract”? There is a presumption in the ACL that a contract is a standard form contract unless proven otherwise. The ACL also sets out a list of matters relevant to whether a contract may be considered by a court to be a standard form contract including whether:

  • one party has all or most of the bargaining power in the particular transaction;
  • one party prepared the contract before discussions between the parties;
  • one party was in effect required either to accept or reject the contract as presented;
  • there was an effective opportunity to negotiate the contract; or
  • the terms of the contract are specific to one party or to the particular transaction.

When is a contract term “unfair”? The ACL provides that a term of a contract will be unfair if the term:

  • causes significant imbalance in the rights of the parties and their contractual obligations;
  • is not reasonably necessary to protect the legitimate interests of the party who gets the benefit of the term; and
  • causes financial or other detriment to the other person if it were relied on.

In determining whether a term of a contract is unfair, a court must consider the contract as a whole so that the term is read in context and the contract’s transparency assessed (that is, to extent to which the contract is expressed in reasonably plain language, is legible and presented clearly). The ACL provides some useful examples of unfair terms including terms that allow one party to terminate or unilaterally vary the contract.

Importantly, terms that define the main subject matter of the contract and set the upfront price payable under a contract cannot be declared unfair so fall outside the ambit of the unfair contract terms regime.

If a term is declared void by a court, the contract as a whole will continue as if the unfair term never existed as far as this is practically possible. There are no specific fines or penalties where a term is declared to be unfair, although it is possible that if a term is unfair, it may also be unconscionable, with fines of up to $1.1m for corporations and up to $220,000 for individuals applying in such a case.

When will this new law come into effect?

The Federal Government appears to want to push ahead with the introduction of this new law quickly and the Bill will be debated when Parliament returns from its long winter break in August. Once the Bill is passed, there will be a 6 month transition period before the new law takes effect. This means that the new law is not likely to come into effect much before early to mid-2016.

While the new law will not apply to a B2B contract that pre-dates the legislation coming into force, it will apply to any contract that is renewed or renegotiated.

How will this affect your business?

The new law will have implications for all sorts of standardised B2B contracts like on-line terms of sale, terms and conditions of supply where manufacturers or retailers have a significant number of smaller suppliers or distributors, IP licensing arrangements and the like.

Businesses will need to review their B2B standard form contracts before the Bill becomes law to minimise the risk of important contractual terms not being enforceable. We are happy to discuss any specific compliance questions or issues that you have in further detail.