The Australian Securities and Investment Commission Act 2001 (Cth) (ASIC Act) and the Competition and Consumer Act 2010 (Cth) (CC Act) each contain provisions protecting consumers from unfair terms, by providing that unfair terms in standard form consumer contracts are void.
Extending unfair contract term protections to small business contracts
On 24 June 2015, a Bill was introduced into Federal Parliament to amend both the ASIC Act and the CC Act to extend these provisions to small business, by providing that unfair terms in standard form small business contracts are also void.
'Small business contracts' are contracts for the supply of goods or services, or the sale or grant of an interest in land, where at least one party to the contract employs less than 20 people and where the price payable under the contract is less than $100,000 or, in the case of contracts with a duration of more than 12 months, less than $250,000.
The proposed amendments will operate in relation to standard form small business contracts in the same way as the existing provisions operate in relation to standard form consumer contracts. As with the existing consumer contract provisions:
- a contract is likely to be a standard form small business contract where one of the parties has all more most of the bargaining power and the other party is required to either accept or reject the terms of the contract without negotiation or amendment; and
- a term of a contract will be unfair if it causes a significant imbalance in the parties' rights and obligations under the contract, would cause detriment to a party if it were relied on and is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term.
The existing provisions include examples of terms which may be 'unfair', and these examples will apply to the new provisions. The examples include terms which:
- permit one party, but not another party, to terminate, vary or renew the contract;
- permit one party to vary the price payable under the contract without the right of the other party to terminate; or
- permit one party to unilaterally vary the goods or services to be supplied, or the interest in land to be sold or granted, under the contract.
Where a term of a standard form small business contract is void, the rest of the contract will continue to bind the parties, to the extent that it is capable of operating without the unfair term.
The proposed amendments reflect the Coalition's policy for small business and will deliver on a Coalition election promise. The proposed amendments also reflect public consultation conducted by the Commonwealth Treasury from 23 May 2014 to 1 August 2014 which found that small businesses are vulnerable to unfair terms in standard form contracts, as they are often offered contracts on a 'take it or leave it' basis. Small businesses, like consumers, often lack the resources and skill to understand and negotiate contract terms.
The proposed amendments will apply to standard form small business contracts entered into after the commencement of the amendments. They will also apply to standard form small business contracts which are renewed after commencement or where the term of the contract is varied after commencement.
There are some existing exceptions to the application of the unfair terms protections, including contracts for the carriage of goods by sea. These exceptions will extend to standard form small business contracts. In addition, the Bill provides that the new provisions will not apply to small business contracts which are subject to prescribed laws of the Commonwealth, the intention being to exempt small business contracts that are subject to comparable protections under other Commonwealth legislation.
The Bill is currently at the Second Reading stage in the Legislative Assembly and may be passed in the Spring Sitting of Parliament, given the strong Government support for the reforms.
Assuming the Bill is passed without amendment to the commencement provisions, the main amendments will take effect 6 months after the legislation receives Royal Assent.
This 6 month transition period gives those who may enter into standard form contracts with small businesses with an opportunity to assess the impact of the amendments on them and, more particularly, to:
- clarify whether they enter into contracts which are likely to be standard form contracts;
- assess the extent to which they enter into standard form contracts with businesses which employ less than 20 people;
- identify any existing contracts which may be renewed or 'rolled over' after the commencement of the new provisions;
- review their standard form contracts to identify any terms which are at risk of being 'unfair' (and therefore void);
- determine whether to amend or delete any terms at risk of being void; and
- determine whether they will have one contract for small businesses and another contract for other businesses, or whether they will continue to use one contract for all businesses.
If standard form contracts with small businesses are a significant part of your business, it may be prudent to ensure that appropriate action is taken well ahead of the commencement of the main amendments in the Bill to minimise the risk of key provisions in such contracts being at risk of being void.
Small businesses should also be aware that the protections do not extend to contracts that have an upfront value over $100,000 or $250,000 in the case of contracts with a duration of over 12 months.