On 20 March 2015, the Australian Federal Government announced that the protections against unfair contract terms contained in the Australian Consumer Law (ACL) will be extended to protect small business.
The impetus for the extension of the unfair contract term provisions to protect small businesses is the concern of the Australian Government that small businesses are often in the same position as consumers and presented with “ ‘take it or leave it’ contracts, with little scope to negotiate just and fair terms”.1
In 2014, the Treasury conducted a Consultation on extending unfair contract term provisions to small businesses. This Consultation process was in line with the election campaign “Policy for Small Business” of the Coalition which indicated that, if elected, it would be looking to provide “a fair go for small business by extending the unfair contract provisions currently available to consumers to cover the small business sector.”2
The intention behind the Coalition’s Policy was to extend protections to vulnerable small businesses afforded under the ACL to consumers in respect of standard form contracts which are presented on a “take it or leave it” basis, with very little opportunity to vary the terms. The aggrieved party is disadvantaged as a result of unfair contract terms which create a significant imbalance in the rights and responsibilities of each of the parties.
Small businesses, like consumers, may lack the time and legal or technical expertise to analyse and understand fully these contracts or lack the power to negotiate the terms.
Over 80 submissions were received in response to the Consultation. In addition, approximately 300 responses were received in an online business survey which was conducted as part of the Consultation.
The Treasury has reported that the majority of the submissions supported the extension of the unfair contract terms to small business.
Our Focus Paper on the Consultation is available on our website.3
What does this mean for the direct selling sector?
The media release announcing the extension of the unfair contract term provisions does not provide many details on the manner in which the unfair contract terms will apply to small business.
The ACL will be amended to extend the existing unfair contract term provisions to provide that a term of a standard form contract offered to small businesses is void if it is unfair. This would be consistent with the existing ACL provisions. The ACL regulator, the Australian Competition and Consumer Commission (the ACCC) as well as State and Territory consumer agencies or private parties will likely be able to apply to an Australian court for a declaration that a term of a standard form contract applicable to a small business is unfair, and therefore void.
Currently, there is no definition of “small business” or “small business transaction” in the ACL. It will therefore be interesting to see how amendments to the legislation define “small business” for the purpose of the unfair contract term provisions. In this regard, possible options for defining a “small business” which are canvassed in the Consultation paper include:4
- businesses which are not publicly listed companies;
- transactions that have a value of less than a particular monetary threshold. The Consultation paper notes that, if a threshold approach were adopted, further research would be required to determine the appropriate threshold;
- businesses which have an annual turnover below a particular threshold. For example, the definition of a small business entity in the Income Tax Assessment Act 1997 (Cth) is calculated by reference to a $2 million aggregate turnover test. The Consultation paper notes that such a definition would encompass approximately 94% of Australian businesses; and/or
- businesses which employ less than a specified number of employees. Under the Fair Work Act 2009 (Cth), for example, a “small business employer” is an employer with less than 15 employees.
The Australian Government appears to have adopted the second approach above with the media release noting specifically that businesses offering low value standard form contracts will be required to comply with the amendments.
Depending on the definition of “small business”, the Australian Government’s proposed amendments are likely to have particular relevance for direct selling organisations (DSOs) that enter into standard form contracts and agreements with their independent representatives or distributors, each of which may be considered a “small business”. This is particularly relevant as most independent consultant agreements used by DSOs are in standard form.
If legislation is passed to extend the unfair contract term provisions to small businesses, this may affect the terms and conditions of, for example, autoship agreements which are entered into by independent distributors or representatives. Depending on the amendments which are made to the ACL, including the definition of “small business” which is adopted, the amendments may impact upon the way in which DSOs enter into independent contractor agreements with distributors or representatives and the terms and conditions of those agreements.
The media release states that the Minister for Small Business has written to the State and Territory consumer affairs ministers to request their agreement to the proposed changes. In any event, it is likely to be some time before the changes are enacted. An Explanatory Memorandum and Bill will need to be drafted and then debated in the House of Representatives and Senate.
We will report more fully when details are released about the implementation of these proposed amendments.