The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Act) extends the unfair contract term protections (previously afforded only to consumers) to small business.

According to the Explanatory Memorandum, the purpose of the Act is to 'reduce the incentive to include and enforce unfair terms in small business contracts, provide a more efficient allocation of risk in these contracts and support small business' confidence in agreeing to contracts'.

The extension of the regime is limited to standard form contracts where at least one party is a small business and where the upfront price payable is less than $300,000 or $1,000,000 if the duration of the contract is more than 12 months.

In this eBulletin, we look at what the new legislation will mean for your business.

Extension of the unfair contract terms regime

The Act amends the Australian Securities and Investments Commission Act 2001 (Cth) and Competition and Consumer Act 2010(Cth) by extending the unfair contract terms protections contained in those Acts to a standard form contract if:

  • at least one party to the contract employs less than 20 people; and
  • the upfront price of the contract does not exceed either:
    • $300,000; or
    • if the duration of the contract is more than 12 months, $1,000,000.

Below, we look in more detail at what needs to be considered when determining the types of transactions that will be captured by the unfair contracts regime.

What is a standard form contract?

The factors relevant in determining whether a contract is a standard form contract include:

  • whether a party has all or most of the bargaining power relating to the transaction;
  • whether the contract was prepared before any discussion relating to the transaction occurred between the parties;
  • whether a party was required to accept the terms of the contract in the form in which they were presented;
  • whether a party was given an opportunity to negotiate the terms of the contract; and
  • whether the terms of the contract take into account the specific characteristics of a party or the particular transaction.

A contract will be presumed to be a standard form contract unless a party proves otherwise.

What is a small business?

A small business is a business that has less than 20 employees. The number of employees is the total of all full-time, part-time and casual employees (i.e. where casual employees work on a regular and systematic basis).

How do you calculate the upfront price of the contract?

The upfront price under a contract is the consideration payable under the contract, as disclosed on or before the contract is entered into.

According to the Explanatory Memorandum to the Act, if a contract provides for the supply of multiple goods or services, the upfront price will be the consideration paid for the total supply under the contract. The consideration does not include any amounts that are contingent on the occurrence or non-occurrence of a particular event. For example, termination fees and late payment fees are not included when calculating the upfront price.

Any interest payable under a contract will ordinarily be taken into account in calculating the upfront price payable, but the Act makes it clear that, for credit contracts, the upfront price does not include any interest payable under the contract.

What is unfair contract term?

A term of a contract is 'unfair' if it:

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

In considering whether a contract is unfair, a court must take into account the extent to which the term is transparent, and have regard to the contract as a whole.

Examples provided in the legislation of unfair terms include a term that:

  • only permits one party to avoid or limit performance of the contract;
  • only permits one party to vary, renew or terminate the contract;
  • penalises only one party for a breach or termination of the contract;
  • only permits one party to vary the upfront price payable under the contract without the right of the other party to terminate the contract;
  • permits one party to unilaterally determine whether the contract has been breached or to interpret the meaning of the contract;
  • permits one party to assign the contract to the detriment of the other party without that other party’s consent; or
  • limits one party’s right to sue the other party.

Terms that have previously been found by the Federal Court to be unfair include terms that:

  • allowed an internet service provider to unilaterally vary the price for providing services to the customer without prior notice and without providing the customer with a right to terminate the contract;
  • required a customer to indemnify a supplier in all circumstances, even where the loss had been caused by the supplier's breach of the contract or wilful misconduct; and
  • allowed a supplier to unilaterally terminate the contract at any time, without cause or reason.

What are the consequences if a contract contains an unfair contract term?

If a party to a small business contract considers that a term is unfair, it can apply to the Federal Court for a declaration that the term is an unfair term.

An unfair term will be void. The remainder of the contract will, however, continue to bind the parties if the contract can operate without the unfair term.

There are no offences or penalties arising in relation to unfair terms.

When do the changes commence?

The changes will likely come into effect in November 2016, 12 months after the bill implementing the changes receives Royal Assent. The new protections do not apply to a contract entered into before this date. However, if the contract is renewed or varied after this date, the new protections will apply to the contract as renewed or varied.

What these changes mean for your business

During the 12 month transition period, we recommend that:

  • standard form contracts used with small business be reviewed to determine whether they contain any terms that may be considered an unfair term;
  • existing small business contracts be reviewed to determine whether they are subject to the new unfair contracts regime on variation or renewal, and if so, whether any terms in that contract may be considered an unfair term; and
  • any term in a standard form contact or existing small business contract that is an unfair term be amended.

We also suggest you provide training to staff involved in negotiating contracts to ensure that they are aware of potential limitations on the enforceability of terms that might be included in a small business contract.