You may not be aware but the Australian Consumer Law (ACL) has been amended so that the unfair contract term provisions which protect consumers now also protect small businesses. The amendments took effect in November 2016 and apply to any new small business contract entered into or renewed after that date. If an existing contract is varied after this date, the new laws will also apply to the varied terms. We wrote about this extension of the law in our Direct Selling Legal Update.
In February, the ACCC signalled that the small business unfair contract provisions will be a key enforcement and compliance priority for 2017.
A contract will be a “small business contract” (and must comply with the new laws) if it:
- is for the supply of goods or services (eg a Consultant or Distributor Agreement for the supply of services) or the sale or grant of an interest in land;
- at least one of the parties is a small business (employs less than 20 people, including casual employees employed on a regular and systematic basis); and
- the upfront price payable under the contract is no more than $300 000, or $1 million if the contract is for more than 12 months.
In November 2016, the ACCC released a report on its views on the application of the new laws to particular clauses in small business contracts, including independent contractor arrangements.1 Our Focus Paper on this report is accessible here: ACCC Enforcement of B2SmallB Unfair Terms Law Commences – Drafting Tips to Avoid Breach of the Law.
Potentially Unfair Clauses
In its report, the ACCC identified potential “unfair” terms, which appear in many small business contracts (including independent contractor arrangements). Particular clauses which may be considered unfair include:
- Exclusion for all losses: A term which broadly limits the larger business’ liability (eg the exclusion of any and all liability even when the larger business partly caused the loss or damage) may be unfair. The ACCC considers that the larger business should be liable for loss or damage to the extent that they caused or contributed to it.
- Misleading clauses: Clauses should not have the potential to mislead a contractor where they might have additional rights at law. “Entire agreement” clauses (ie the agreement signed by the parties represents all of the parties’ rights and obligations) may potentially be misleading where a contractor might have additional rights outside the agreement, such as those based on pre-contractual representations by the principal.
- Terms avoiding or limiting obligations: For example, a clause shifting all liability to the smaller business may be considered unfair as may a clause which appears to limit the liability of the larger business unreasonably.
- Unilateral rights to vary: A clause giving the larger business a unilateral right to vary a contract, which could cause the smaller business detriment. The ACCC considers that:
- notice should be provided before any variations take effect; and
- the smaller business should be given an opportunity to end the agreement, without penalty, if they do not agree to the variations.
- Termination clauses: The ACCC considers that, where the small business breaches the contract, they should be given an opportunity to remedy the breach and the larger business must only be able to terminate on grounds that are reasonable.
- Automatic renewal: If the small business is not provided reasonable notice and cannot exit without penalty, a clause providing for automatic renewal may be unfair.
In the context of a direct selling company’s contracts with its independent salesforce, whether clauses of the above nature will be considered unfair will depend upon:
- the extent to which the clause creates an imbalance between the parties;
- whether the clause is reasonably necessary to protect the legitimate business interests of the direct selling company; and
- whether the term has caused detriment (which need not be financial) to the independent contractor.
If a court or tribunal determines that a clause is unfair, the term will be void (ie not binding upon the parties).
Have you checked your contracts to ensure that they comply with the new laws?
If you have not already done so, your standard form agreements with your independent salespeople should be reviewed as soon as possible to minimise the risk of important contractual terms not being enforceable and/or in contravention of key ACL provisions. These agreements include but are not limited to your direct selling company’s:
- Independent Contractor Agreement;
- Policies & Procedures, or similar document;
- Compensation Plan;
- Autoship Agreement; and
- the terms and conditions of supply of any replicated website or back office, which might be provided to an independent contractor.