What is the new law?

Since 2010, a term of a “standard form contract” with a “consumer” (a consumer contract) could be declared void if it was found to be “unfair”.

The new law amends the Australian Securities and Investments Act 2001 (ASIC Act) and the Australian Consumer Law (ACL) so that these protections also apply to “small business” and “small business contracts” (not just to consumer contracts).

Under the new law, a Court will be able to declare that an “unfair” term in a standard form “small business contract” is void.

As with the existing consumer protections, the contract will continue to bind the parties if it can continue to operate without the unfair term.

Is this new law relevant to my organisation?

The new law is relevant if:

  1. your business enters into or renews "standard form" contracts after 12 November 2016; and
  2. at the time the contract is entered into:

(a) a party to the contract is a business that employs less than 20 people; and

(b) the price payable under the contract is less than $1,000,000 (assuming the contract is for more than 12 months) or less than $300,000 (for contracts with a duration of a year or less).

If your contract satisfies these criteria, a Court can declare that an “unfair” term in such a contract is void unless an exemption applies. The particular unfair term will be unenforceable.

At a practical level, there are a range of issues that your organisation should be considering in light of this new law:

  1. Due diligence and M&A: The new unfair contract term protections will need to be considered in any contract review due diligence or vendor due diligence. This will be particularly relevant if significant revenues of the target business are concentrated in “small business” and “standard form contracts”.
  2. New contracts or procurement strategies: If your organisation is affected by the new law, you should review standard form business-to-business contracts to identify and amend terms which could be unfair and void under the new law. This might involve inserting terms which provide a “fairer” balance of the interests of the parties, or by removing potentially unfair terms. This step could also involve altering procurement strategies by giving customers an opportunity to negotiate or to pick certain procurement options. A range of business or industry specific factors will inform the better approach for your organisation.
  3. “Small” might not be that small – the 20 employees test: When counting employees for the purposes of the “20 employees” test, only the employees of the legal entity entering into the contract are counted. The test does not take into account employees of related bodies corporate and there is no aggregation of employees across a corporate group. This can produce surprising outcomes - a subsidiary within a large corporate group that happens to have less than 20 employees could nevertheless be a “small business” for the purpose of the unfair contract terms regime.
  4. Know your customer procedures: If your organisation decides to manage “unfair contract term risk” by using different contracts or different procurement strategies when contracting with “small business”, systems will need to be developed to ascertain whether you are in fact dealing with a “small business” at the time of entry into a contract. Ultimately, this will involve gathering information to apply the “20 employees test”. Also, the law applies whether or not the “small business” is a supplier or acquirer of goods or services.

There will be a range of industry specific issues that will require consideration in, for example, the construction industry, the telecommunications industry, franchising and utilities.

For a more detailed summary of the new law, please see our previous publications, which are available here and here.

In its November 2016 report entitled “Unfair terms in small business contracts: A review of selected industries”, the ACCC provides a useful breakdown of the common terms of concern identified in certain industries (such as retail leasing, independent contracting and franchising), and discusses the kinds of changes that businesses have made. The Report is available here.