Australia's unfair contract terms regime now applies to standard form 'small business contracts'. While insurance contracts and shipping contracts remain excluded from the regime at this stage, further changes cannot be ruled out. 

When Australia's unfair contract terms regime was first introduced in the Competition and Consumer Act 2010 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth) its application was limited to consumer contracts. In order to be caught by the regime, the relevant contract needed to involve the supply of goods or services, or sale of land, to an individual where the acquisition was wholly or predominantly for personal, domestic or household use or consumption.

From 12 November 2016, the unfair contract terms regime now applies to new standard form small business contracts entered into or renewed, and to any variation of terms in existing standard form small business contracts. Assuming that no exclusions apply to the particular contract or the relevant term, a term in a standard form small business contract can be declared unfair by a court and rendered void (i.e. that term will be of no legal effect or not legally binding on the parties). Importantly, the remainder of the contract will continue to bind the parties if it is capable of operating without the unfair term.

As noted in our earlier update, these changes are likely to impact certain industry specific contracts, including construction industry contracts. The extension of the unfair terms regime will also have implications for a wide range of business-to-business standard form contracts across other sectors including IT and IP licensing agreements, and terms and conditions of supply with smaller suppliers or distributors.

A 'small business contract'

A 'small business contract' is a contract that meets each of the following criteria:

  • the contract is for the supply of goods or services, or the sale or grant of an interest in land;
  • at the time the contract was entered into, at least one party to the contract is a small business – that is, a business that employs less than 20 people (including casual staff employed on a regular or systematic basis); and
  • the upfront price payable under the contract is no more than AUD300,000, or AUD1million if the contract is for more than 12 months.

The upfront price payable under the contract is 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.

What is an Unfair Contract Term?

For a term in a standard form small business contract to be deemed by a court to be unfair, it must satisfy each of the following three criteria

  • it would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
  • it is not reasonably necessary in order to protect the legitimate interests of the advantaged party; and
  • it would cause detriment (whether financial or otherwise) to the other party if it were to be relied upon.

In determining whether a contract term is unfair, a court may also take into account the contract as a whole, the extent to which the term is transparent, the likelihood of detriment and any other matter the court thinks is relevant. There is no requirement to demonstrate reliance or actual detriment by the small business counterparty on the contractual term.

Terms that will be subject to the most scrutiny are terms that permit one party to:

  • avoid or limit the performance of the contract;
  • vary, renew or terminate the contract;
  • vary the price or characteristics of what is to be supplied (without the other party being able to terminate the contract);
  • unilaterally determine if the contract has been breached;
  • penalise the other party for breach or termination;
  • limit the other party's right to sue;
  • impose the evidential burden on the other party in proceedings relating to the contract;
  • limit the evidence the other party can adduce in proceedings relating to the contract; or
  • assign the contract without consent.

An application for a declaration that a term is void can be made by the other person to the contract, the Australian Competition and Consumer Commission (the ACCC), or the Australian Securities and Investments Commission (ASIC).

It is worth noting that the above list of terms that may be subject to scrutiny is not definitive. Judicial proceedings may determine that other categories of terms in standard form contracts are unfair and unacceptable, including, for example, indemnities, which may be subjected to particular scrutiny at some point in the future.

Excluded terms

Various contractual terms continue to be excluded from the operation of the unfair contract terms regime including:

  • terms that define the main subject matter of the contract;
  • terms that set the upfront price that is payable; or
  • terms that are required or expressly permitted by a law of the Commonwealth, or a state or a territory (e.g. permitted under the Franchising Code or another prescribed industry code).

Excluded contracts

While the application of the unfair contracts regime in Australia has been extended, a number of contracts remain excluded from the unfair contract terms regime.

All insurance contracts regulated by the Insurance Contracts Act 1984 (Cth) are still excluded from the regime, although expansion of the regime to cover insurance contracts has previously been proposed. While insurers have resisted such moves on the basis that existing laws sufficiently protect consumers, we expect consumer advocacy groups will continue to push for further extension of the unfair contract terms regime into this sector.

Certain shipping contracts are also excluded from the regime including contracts of marine salvage or towage, charterparty of a ship and contracts for the carriage of goods by ship.

Lastly, constitutions, including the constitutions of many superannuation funds, companies, and managed investment schemes, are not caught by the regime.

What do you need to do?

The extension of this regime to 'small business contracts' follows a 12 month transition period. The ACCC has been active in enforcing the regime in relation to consumer contracts and we expect it will also look to score some early runs in seeking to protect small businesses.

As a starting point, and if in doubt, you should seek further information about your counterparty to determine whether they fall within the definition of 'small business'.

If you are engaging with small businesses in Australia and relying on standard form contracts you should assess the terms of its standard form contracts.

In preparing new standard form contracts, renewing standard form contracts, or varying terms within an existing standard form contracts, you should now be asking:

  • What is the justification for a term?
  • What legitimate interest is the term trying to protect?
  • Is there an alternative way to protect that legitimate interest?
  • Can the term be drafted in a more balanced way?

If terms in your standard form contracts are, or have the potential to be, unfair, you should consider amending or removing the term. If there is uncertainty as to whether a term could be considered to be unfair, you could consider using a tiered approach as has been applied in restraint of trade clauses.