Summary

  • The unfair contract term regime under the Australian Consumer Law only presently applies to standard form consumer contracts.
  • The Commonwealth Government has expressed concern that an imbalance of bargaining power exists not only between businesses and consumers but also between large businesses and small businesses.
  • The Government is seeking public comment on the prevalence of unfair contract terms in business to business dealings and is seeking feedback on four proposed policy options to respond to its concerns.
  • The Government’s preferred option is to extend the current regime to provide protection to small business as well as to consumers via legislative amendment.
  • The approach taken to drafting these amendments will be crucial in determining the scope of any additional protection.
  • The deadline for public consultation is 1 August 2014, however the consultation paper has indicated that this is the first step in an ongoing process.

Historical background

Unfair contract term (UCT) laws formed part of various State based consumer protection regimes until the introduction of the Australian Consumer Law (ACL) and the national UCT regime contained within it. The UCT regime now applies nationally to all standard form consumer contracts.

Prior to the introduction of the national UCT regime, the Government canvassed support for extending the regime to small business as well as consumers. However, following considerable criticism, the Government of the time abandoned the proposal to extend the operation of the regime to small business.

The limits of the UCT law

Currently, there are three elements that must be satisfied under the ACL in order to establish that a contract contains a UCT.

  1. Consumer contract: These are defined under the Competition and Consumer Act as contracts for a supply of goods or services, or a sale or grant of an interest in land, to an individual whose acquisition is wholly or predominantly for personal, domestic or household use.
  2. Standard form contract: While this is a matter for the Courts, a ‘standard form’ contract is likely to be a contract that is prepared by one party, is not subject to negotiation between the parties and is offered on a ‘take it or leave it’ basis.
  3. Unfair: A term is unfair if it would cause a significant imbalance between the contracting parties, if the term is not necessary to protect the interests of the party it is said to advantage and if it would cause detriment to a party if relied upon.

Standard form consumer contracts are often seen in the telecommunications, finance and domestic building industries, as well as in gym and utilities contracts.

Currently, the key impediment to the UCT regime extending to the relationship between large businesses and small businesses is the requirement that the term be contained in a consumer contract.

Extending the UCT regime

Since 2013, the Coalition Government has been committed to extending the UCT protection from consumers to small business, in order to address a concern that the playing field is not level for small business customers in their dealings with other, larger, businesses.

Guided by this policy commitment, the Government is now consulting in relation to the extent of the problem that small businesses face in contracting with larger businesses and seeking comments on the suggested policy responses for dealing with these perceived problems.1

The Government’s preferred option - legislative amendment to extend the UCT laws to protect small business

As noted above, the Government has indicated its preference for reform via an amendment to the legislation to extend the protection to small business. Depending on the ultimate language of these amendments, such an extension has the potential to result in far reaching consequences for businesses dealing with standard form contracts in Australia.

Four important issues that have been identified in the consultation paper are set out below.

  • Defining small business transactions: The consultation paper has identified a number of ways in which small business could be defined, including whether the definition should be based on the annual turnover of a business, the number of employees a business has, whether or not a company is publicly listed or on the dollar value of a transaction (i.e. focussing on whether the business satisfies some test for being a 'small business').

Regardless of the criteria ultimately used to define a small business for the purposes of the regime, the outcome is likely to be arbitrary and create an artificially advantageous position for a certain class of businesses that fall within the definition. Indeed, it is possible to envisage a number of situations where a relevantly defined 'small business' may actually occupy a superior bargaining position to its 'large' counterpart.

  • Supply and acquisition of goods and services: The consultation paper asks whether any extension of the UCT laws to small business should apply only to the acquisition of goods and services by small business, or whether it should also include contracts that involve the supply of goods and services by the small business.
  • Small to small or large to small? The consultation paper seeks further information on whether the UCT laws should extend to dealings between all businesses, including contracts between small businesses, or whether the focus should remain on bargaining power and therefore only apply to contracts between large and small businesses.
  • Extension to financial products and services: The consultation papers asks whether any extension of the UCT laws should include an extension to contracts for financial products and services, or whether these transactions are adequately protected by existing laws?

Any expansion of the UCT laws will require the establishment of some critical definitions, including 'small business' and 'business contract'. These terms are likely to produce significant ambiguity, which can lead to uncertainty when businesses transact with one another.

In addition, an expansive extension of the UCT laws has the potential to significantly increase compliance costs for businesses in their day-to-day operations.

Other options for reform

In addition to the Government’s preferred option for reform, the consultation paper has also outlined three other options set out below.

  • No new government action is taken and the current UCT regime remains in place for consumer contracts only. Small business would continue to rely on existing laws (e.g. unconscionable conduct provisions) to address any issues faced in their dealing with other businesses.
  • A ‘light touch’ from government or a non-regulatory approach through industry initiatives, awareness campaigns to improve information for business and disclosure requirements for standard form contract terms.
  • Obligation to negotiate the terms of a contract if requested by a small business contracting party. Given the perceived efficiency losses and transaction costs associated with this option, the Government did not wish to explore this option further in the consultation paper.

The Government considers the ‘no new government action’ option to be inconsistent with its policy commitment. However, it is arguable that the strengthening of existing business protections in the ACL, such as the unconscionable conduct provisions, will be a more effective means of protecting small business and will avoid the arbitrariness associated with formulating new definitions (e.g. small business) to extend the UCT regime.

Submissions

The Government is seeking views from business and industry on the proposed extension of the UCT laws. While submissions close on 1 August 2014, as this is an ongoing process, further targeted public consultation can be expected throughout the course of the year.

Multiple consultations impacting business to business dealings

Finally, it is worth noting the fact that the consultation in relation to the extension of the UCT regime is taking place concurrently with other reviews and proposed reforms. These proposed reforms are also likely to have an impact on business to business dealings and the protections afforded to small businesses.

The Government’s ‘root and branch review’ of competition policy, chaired by Professor Ian Harper, has been tasked with reviewing the ACL to the extent that it relates to small business. This is a broader review that will consider whether existing unfair and unconscionable conduct provisions work effectively to support small businesses and whether other measures could be introduced to support participation in markets by small businesses.

In addition, there are proposed changes to the Franchising Code of Conduct and the relevant provisions of the Competition and Consumer Act. The Treasury consulted on an Exposure Draft earlier this year. Again, these proposals will have consequences for business to business dealings.

In short, it is surprising and somewhat disappointing that three separate consultations, which have the potential to impact business to business dealings are being pursued independently and concurrently. Despite the interrelatedness of these consultations, there does not appear to be any detailed consideration or explanation as to how the outcomes of these processes will be reconciled with one another.