The unfair contract terms regime in the Australian Consumer Law (ACL) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) has been extended to apply to small business contracts. Clients dealing with small businesses using standard form contracts should be conscious of these changes.

Background and Application

Under the existing unfair contracts provisions in the ACL and ASIC Act, a court can declare an unfair term of a standard form consumer contract to be void. Now amended by the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth) (Amendment Act), terms of small business contracts entered, varied or renewed on or after 12 November 2016 are subject to the unfair contracts provisions.

The unfair contract terms regime under the ACL applies to contracts for the supply of goods or services or the sale or grant of an interest in land, while the ASIC Act applies to financial products and contracts for the supply, or possible supply, of financial services. The provisions do not apply to shipping contracts, constitutions of companies, managed investment schemes or other bodies, or small business contracts subject to prescribed Commonwealth, State or Territory laws. To date, no such laws have been proscribed.

Key Provisions

A term of a contract falls is void under s 23 of the ACL or s 12BF of the ASIC Act if it meets three conditions: (a) the contract is a small business contract; (b) the term is unfair; and (c) the contract is a standard form contract.

Small Business Contracts. "Small business contract" is broadly defined as a contract where at least one of the parties is a business employing less than 20 people and the upfront price payable under the contract does not exceed $300,000 (or $1 million for contracts with a term of more than 12 months). A party's number of employees is determined using a headcount approach and does not take into account hours or workload. Casual employees are only included in the count if they are employed on a regular and systematic basis. The definition of "small business contract" does not take into account the number of employees of a party's related bodies corporate. As such, small subsidiaries of large companies can rely on the unfair contract terms provisions.

Unfair. A term is unfair if it:

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

During a transition period under the amendment, the Australian Competition and Consumer Commission conducted a review of 46 standard form contracts across seven industries, and identified terms likely to raise concerns under the new law. The report summarizing the results of this review, Unfair terms in small business contracts: A review of selected industries, noted that the three most commonly-occurring unfair terms were those that allowed the contract provider: (a) to unilaterally vary all terms (or at least those that have a significant bearing on the contractual arrangement, or which could cause detriment if varied) in an unconstrained manner; (b) potentially broad and unreasonable powers to protect themselves against loss or damage at the expense of the small business by imposing broad indemnities or excessive limitations of liabilities; or (c) an unreasonable ability to cancel or end an agreement as it suits them.

Standard form contracts. If a party alleges that a contract is standard form, it will be presumed be standard form unless another party proves otherwise. Generally, a standard form contract is pre-prepared by one party and provided to the other party with no effective opportunity to negotiate.

Remedies. An unfair term of a standard form small business contract is void, but the contract continues to bind the parties if it is capable of operating without the unfair term. The court may also award compensation for loss or damage suffered by the small business as a result of the contract provider's reliance on that term.

Implications

Clients should be wary of the extended unfair contract terms regime when doing business with parties that may have less than 20 employees, including subsidiaries of large corporations. Any standard form contracts should be checked for draconian terms that fall foul of the unfair contracts provisions. Terms that permit unilateral variation or termination of the contract, or provide unreasonably broad indemnities or limitations of liability are likely to be void under the new law.