Changes to the Australian Consumer Law and to the ASIC Act, which commence in November 2016, extend the unfair contract term protections (previously afforded only to consumers) to small business.

The extension of the regime is limited to standard form contracts (including financial services 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 consider the real impact of these changes and what changes, if any, you need to consider for your business.

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Extension of the unfair contract terms regime

The unfair contract term protections will apply to standard form contracts entered into or renewed on or after 12 November 2016, where:

  • at least one of the parties is a 'small business' (a business employing fewer than 20 people); and
  • the upfront price payable under the contract does not exceed $300,000, or $1 million if the contract is for more than 12 months.

Standard form contracts provide little or no opportunity for the responding party to negotiate the terms – they are offered on a ‘take it or leave it’ basis.

In relation to financial services, when assessing whether a small business credit contract falls within the threshold, any interest payable is excluded from the upfront price payable. Small business contracts that are covered by an industry code, such as the Code of Banking Practice or the Customer Owned Banking Code of Practice, will also be covered by the unfair contract terms law.

The law sets out examples of contract terms that may be unfair, including:

  • terms that enable one party (but not another) to avoid or limit their obligations under the contract;
  • terms that enable one party (but not another) to terminate the contract;
  • terms that penalise one party (but not another) for breaching or terminating the contract;
  • terms that enable one party (but not another) to vary the terms of the contract.

Impact of the changes

According to the Australian Bureau of Statistics, in June 2015, 61% of actively trading businesses in Australia had no employees, 28% had 1-4 and 9% had 5-19. Less than 3% of businesses had more than 20 employees. On that basis, the new rules will (subject to contract size) apply to standard form contracts entered into by the vast majority of Australian businesses.

Sectors identified by the ACCC as likely to be impacted by the changes include retail leasing, franchising and independent contracting. The telecommunications and technology services sectors are also likely candidates.

In relation to financial services, small businesses enter into standard form contracts every day for financial products and services. Contracts for business loans, credit cards and client or broker agreements, for example, are almost certainly standard form contracts. Some scenarios cited by ASIC as potentially impacted by the unfair contract provisions are:

  • under a term of a credit contract, the lender has the right to vary any term or condition of the contract, including interest or fees, if notice is given in writing, and the small business does not have the right to end the contract, even if the lender increases its fees significantly;
  • a term in a mortgage securing a business loan under which a default by the borrower results in the small business being liable to pay large and excessive default fees;
  • automatic roll-overs of fixed-term leases where early termination fees apply to exit the new lease contract.

What are the consequences if a contract contains an unfair contract 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.

If a court finds that a term in a contract is unfair, it can make a range of orders, including:

  • declaring all or part of a contract to be void;
  • varying a contract;
  • refusing to enforce some or all of the terms of a contract or arrangement;
  • directing a party to refund money or return property to the small business affected;
  • directing a party to provide services to the small business affected at the party's expense.

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

What this means for your business

For enterprises using standard form contracts, the risk is that a term of the contract which the enterprise expects to enforce is made void. Though the balance of the contract may remain binding, unless the contract has been reviewed to ensure that other remedies are available, enforcement options may then be limited.

Variation of a contract by a court is similarly undesirable, as the ability to influence the redrafting is limited and risks denying businesses other rights they might have otherwise been able to claim.

Equally, claims of unfairness can be raised by a small-business to hamper the legitimate enforcement of a contract by a larger enterprise.

If these steps have not been taken already, 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.