On 24 June 2015, the Federal Government introduced the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 into the House of Representatives.  The Bill is in essence the same as the exposure draft of the legislation released for public comment in May.

The Bill has been tabled in the House of Representatives, and is not yet scheduled for debate. Assuming the Government is ultimately able to pass the legislation through the House of Representatives, it appears likely that it will not immediately pass through the Senate. Our best current guess is that it will be referred to a Senate Committee for further consideration. However the pressure on the Minister appears to be mainly coming from people who consider the Bill does not go far enough. The Government has an election commitment to introduce the legislation, and has to date been quite strident in resisting submissions arguing that the legislation will create contractual uncertainty, impact bank lending to small business, see small business excluded from business opportunities and create additional compliance cost and disputation.

In simple terms, the legislation seeks to apply the existing prohibitions on unfair contract terms contained in consumer contracts (as set out in section 23 of the Australian Consumer Law (in Schedule 2 to theCompetition and Consumer Act 2010) and section 12BF of the Australian Securities and Investments Commission Act 2001) to “small business contracts”.

A “small business contract” is a contract where at least 1 party is a small business—being, a business with less than 20 employees. The Government has attempted to restrict the application of the legislation to what it considers to be low value contracts, so in the current form of the Bill the legislation will only apply if either the upfront price payable under the small business contract does not exceed $100,000, or for a contract with a duration of more than 12 months the upfront price payable under the contract does not exceed $250,000. However there appears to be some lobbying to remove the dollar limit entirely.  Section 27 of the Australian Consumer Law and section 12BK of the Australian Securities and Investments Commission Act specify matters a court must take into account when determining whether a contract is a standard form contract. These include whether one of the parties has all or most of the bargaining power relating to the transaction and  whether another party was given an effective opportunity to negotiate the terms of the contract (other than simply in relation to price and subject matter). The Australian Competition and Consumer Commission (ACCC) observes “a standard form contract will typically be one prepared by one party to the contract and not negotiated between the parties – it is offered on a ‘take it or leave it’ basis.

A provision in a small business contract will be considered “unfair” if:

  1. it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
  2. it is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the provision; and
  3. it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

If a provision is “unfair”, the provision is excised, but the remainder of the contract remains in effect.

Although in due course the courts may well adopt a relatively narrow definition of “unfair” in the context of an actual provision in an agreement, it should be noted that some of the submissions of those supporting the legislation see it targeting provisions that go to the heart of the commercial bargain – for example provisions that allow one party to unilaterally set or amend fees or otherwise amend an agreement or alter commercial terms. Other provisions some contend are unfair are those that only allow one party to the agreement to terminate, and that provide strong and immediate rights of termination to one party, but not the other.

Although the debate is far from over, it seems likely the legislation will ultimately be introduced sometime next year. Not only will the legislation apply to new contracts, but it will also apply to existing contracts that are renewed or varied after the commencement date.

We recommend that clients begin assessing what contracts they currently have with small businesses, and begin forming a view as to the level of their potential exposure to the proposed new legislation. Retail leases, supply agreements, franchise agreements, sub-contracting agreements, tender documents, finance contracts, consultancy agreements and almost every other form of agreement could be caught. Only insurance contracts, some shipping contracts, managed investment schemes and company constitutions are expressly excluded. There is also the possibility of gaining exclusion by regulation, on the basis that an existing law provides equivalent protections.