In the middle of 2014, the Treasury, on behalf of Consumer Affairs Australia and New Zealand, conducted a consultation process on Extending Unfair Contract Term Protections to Small Businesses.

The Federal Government has recently confirmed its position in response to the consultation responses.

Whilst the relevant Bill is yet to be introduced into Parliament, the Prime Minister and Federal Small Business Minister have confirmed that they intend for the current prohibitions on ‘unfair contract terms’ (UCT) that benefit consumers, be extended to also provide protections to small businesses.

This was the ‘preferred option’ in the consultation paper, and makes good on the Government’s election promise on this issue.

What is the current law?

Currently, The Australian Consumer Law states that a term of a standard form consumer contract is void if it is unfair. The consequence is that the contract, assuming it can still operate, remains binding, but the relevant unfair term is unenforceable.

A document is a ‘consumer contract’ if it is for the supply of goods, services or an interest in land to an individual, where the individual is acquiring the goods, services or interest for wholly or predominantly personal, domestic or household purposes.

There is a rebuttable presumption that a contact is a ‘standard form’ contract, but a court can consider all relevant matters when determining this.

A term of a standard form consumer contract will then be unfair if it:

  • would cause a significant imbalance in the parties’ rights and obligations under the contract
  • is not reasonably necessary in order to protect the legitimate interests of one of the parties
  • would cause detriment to either party (whether financial or otherwise) if applied or relied on.

What is proposed?

The Federal Government has committed to providing additional protections to small businesses by extending the existing UCT provisions to apply to them.

The key issue is obviously how the pending Bill will define who is a ‘small business’. Whilst a number of different options on this issue were set out in the consultation paper, Mr Billson’s press release indicates that the UCT provisions will apply to “low value standard form contracts”. The other options set out in the consultation paper were:

  • extending the UCT protections to all non-publically listed companies
  • extending the UCT protections to apply to business that fell below a certain turnover threshold
  • extending the UCT protections to apply to businesses with less than a certain number of employees.

Will any new laws apply to franchise agreements?

The application of the proposed laws to franchising and retail leasing will be a significant issue, as these types of agreements are already highly regulated.

For franchise agreements, which are long term agreements, a degree of flexibility is practically essential. However, whilst industry lobby groups have pushed for specific exclusions, no such exclusions have yet been flagged by the Minister. Indeed, Mr Billson’s press release specifically refers to unfair conduct in retail outlet leases.

What is the intended timing?

It was originally intended that the new laws would commence in July, but it is likely that the Bill will only be introduced to Parliament in April at the earliest.

Any introduction of the laws will require an intergovernmental agreement and approval of the States and Territories.

What to do now – stay tuned!

Before seeing the Bill, and the specific drafting of the laws (and definition of the contracts that will be caught), any significant redrafting of B2B contracts may be premature.

However, you should begin thinking about how your business practices may need to change as a consequence of any new laws. For example, it may be that:

  • you enter into more negotiations regarding franchise agreements in the future, to limit the risk of a contract being deemed to be a ‘standard form’
  • franchisors elect to involve franchisees further in their negotiations with landlords regarding a head lease, to limit the risk of a sublease or outlet licence being deemed a standard form contract
  • you may decide to delete any terms that have a high likelihood of being deemed to be unfair from your affected contracts in the future.