Purveyors of small print terms beware.

Business to business (B2B) transactions will start being caught by the unfair contract terms regime under the Australian Consumer Law (ACL) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) from 12 November 2016.   

The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth), which amends the ACL and ASIC Act, extends the unfair contract terms regime to 'small business contracts' (as defined further below). Previously, this regime only applied to 'consumer contracts' (ie contracts for the supply of goods or services to an individual who acquires that good or service at least predominantly for personal, domestic or household use or consumption).   

Although the extended regime does not take effect until late next year, the implications of its introduction are significant.  The transition period allows time for businesses to review their standard form contracts and make necessary amendments to ensure those contracts do not contain 'unfair' terms that will be rendered voidwhen the extended regime takes effect.  Businesses also need to be aware that the extension to the regime applies to existing contracts that are renewed or varied on or after 12 November 2016, not just contracts entered into on or after this date.   

As is currently the case for 'consumer contracts', the protection against unfair terms only applies to 'standard form contracts'. Courts will take into account a range of factors in determining whether a contract is a 'standard form contract', including:

  • whether one party to the contract has most of the bargaining power;
  • whether one party to the contract prepared the terms ahead of any discussion between the parties regarding the transaction; and
  • the extent to which the other party was afforded an opportunity to negotiate the terms of the contract.

Many supply agreements for IT software or services will constitute 'standard form contracts' under the legislation. However, the unfair contract terms regime will only apply where such standard form contracts are either 'consumer contracts' or 'small business contracts', as defined.   

The extension of the unfair contract terms regime to 'small business contracts' brings a greater number of IT supply agreements into play.  For a standard form contract for the supply of IT software or services to be a 'small business contract' it must meet two criteria.  First, one of the parties to the contract must be a business with fewer than 20 employees at the time the contract is entered into.  Casual employees are not counted unless their employment is on a 'regular and systematic basis'.   

Second, the upfront price payable under the contract must be lower than one of the two prescribed thresholds, namely:

  • if the duration of the contract is more than 12 months, the upfront price must not exceed $1,000,000; and
  • for all other contracts, the upfront price must not exceed $300,000.

The amendments to the unfair contract terms regime do not affect the statutory meaning of an 'unfair' term. A term will be considered unfair if the term:

  • causes a significant imbalance to parties' rights and obligations under the contract;
  • is not reasonably necessary to protect the interests of the party advantaged by the term; and
  • would cause detriment if it were relied upon.

The legislation provides a sample list of the kinds of terms that may be unfair.   

What does that mean in practice?  Many terms that are commonly found in standard form IT contracts are likely to be considered 'unfair'.  For example, terms that allow IT businesses to unilaterally:

  • vary the terms of a contract;
  • vary the upfront price or characteristics of the goods or services under the contract; or
  • terminate the contract (or apply penalties for breach or termination),

will likely be rendered void.  However, whether a term is unfair ultimately depends on the particular wording of the term and how it operates in the contract in question.   

Suppliers of IT software and services (and, indeed, suppliers of all goods and services) need to review the terms of their standard form contracts prior to November 2016 and consider whether amendments are necessary.  However, existing standard form contracts can still be used for B2B transactions where the contract is not a 'small business contract' (as defined above).   

We'd recommend that organisations develop separate standard form 'small business contracts' that exclude any terms that could be seen as 'unfair', to reduce the risk of non-compliance with the unfair contract terms regime.