On 23 May 2014, the Australian Government in connection with Consumer Affairs Australia and New Zealand (CAANZ) released the “Extending Unfair Contract Term Protections to Small Businesses” Consultation Paper (the Consultation Paper) as part of its public Consultation relating to unfair contract terms.1

The public Consultation is to allow interested parties and stakeholders to provide views on the impact of unfair contractual terms in standard form business contracts. In particular, the Consultation will focus on understanding whether the unfair contract term protections in the Australian Consumer Law (the ACL) should be extended to apply to the small business sector.

What are “unfair contract terms”?

Presently, the ACL contains unfair contract term protections for standard form consumer contracts between businesses and consumers. These protections enable the courts to declare that an ‘unfair’ term within a standard form consumer contract is void and unenforceable.

A term may be considered unfair by a court if it:

  1. would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
  2. is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
  3. would cause detriment to a party if it were relied on.2

An example of an unfair contract term is a term that permits the supplier, but not the consumer, to terminate a contract or vary its terms or renew or not renew the contract.

What are the proposed changes?

The unfair contract term protections currently only apply to standard form contracts between consumers and businesses. The Consultation is considering whether the existing unfair contract term provisions should be extended to cover small businesses when they contract with larger businesses. It is possible that a direct selling organisation’s (DSOs) independent representatives or distributors may each be considered a “small business”. Under the existing ACL provisions, there is currently no definition for “small business”.

The Consultation seeks feedback on four possible options to approach the unfair contractual term issue in connection with small business arrangements.

  1. Option 1: Current and existing laws continue to operate – No government action

The ACL already contains protections against unfair contract terms which apply only to consumers. Option 1 would involve maintaining the status quo with small businesses being entitled to rely on existing laws (which would not change) to provide protection from unfair contract terms.

However, the Australian Government has indicated that this is its least favoured option as it is inconsistent with its policy commitment to “provide a “fair go” for small businesses”.

  1. Option 2: “Light touch” or non-regulatory responses

Option 2 would involve “light-touch” government or industry-led action which does not involve legislation to invalidate unfair contract terms.

The suggested actions include:

  • industry-led initiatives to remove the presence of unfair contract terms in standard contracts;
  • government run awareness and information campaigns for small businesses;
  • information disclosure requirements; and
  • the development of guidance materials for businesses such as checklists of what may be considered to be an unfair term.

Again, this would not involve any legislative change.

  1. Option 3: Legislation amendment to extend the existing unfair contract term provisions

Option 3 would involve legislative amendments to extend the existing unfair contract term provisions in the ACL to provide that a term of a standard form contract offered to small businesses is void if it is unfair. This is the Australian Government’s preferred option as it is reflects the Government’s policy commitment.

Consistent with the existing ACL provisions, Option 3 would allow the regulator, the Australian Competition and Consumer Commission (the ACCC), as well as State and Territory consumer agencies or private parties, to apply to an Australian court for a declaration that a term of a standard form contract is unfair, and therefore void.

  1. Option 4: Legislation to require businesses to negotiate terms on request

Option 4 would involve significant amendments to the existing legislation to require businesses to negotiate the terms of all standard form contracts they offer to small businesses, on the request of the small business party. However, due to the substantial costs associated with Option 4, and the fact that it does not address the information failure and imbalanced bargaining power concerns surrounding standard form contracts, the Australian Government does not intend to consider further this option.

Why the change?

This Consultation process is line with the Australian Government’s election campaign “Policy for Small Business” which indicated that the Government will be looking to provide “a fair go for small business by extending the unfair contract provisions currently available to consumers to cover the small business sector.”3

The intention behind the Policy is to extend the same consumer protections to vulnerable small businesses who may be subject to standard form contracts on a “take it or leave it” basis, with very little opportunity to vary the terms and who are disadvantaged as a result of unfair contract terms which create a significant imbalance in the rights and responsibilities of each of the parties.

This is true for small businesses that, like consumers, may lack the time and legal or technical expertise to analyse and understand fully these contracts or lack the power to negotiate the terms.

How will the proposed changes impact the Direct Selling Industry?

Currently, there is no definition of “small business” in the ACL. It will therefore be interesting to see how amendments to the legislation (if any) define “small business” for the purpose of the unfair contract term provisions.

Depending on the definition of “small business”, the Australian Government’s proposed amendments are likely to have particular relevance for DSOs that enter into standard form contracts and agreements with their independent representatives or distributors, each of which may be considered a “small business”. This is particularly relevant as most independent consultant agreements used by DSOs are in standard form.

If legislation is passed to extend the unfair contract term provisions to small businesses, this will affect the way in which DSOs enter into agreements with independent distributors or representatives and the terms and conditions of those agreements. Given the Australian Government’s commitment to its Policy and its preference for legislative amendment, we consider that it is possible that the proposed Option 3 changes will take effect during the term of the current Parliament.

Call for Action – How can DSOs participate in the Consultation?

The Australian Government has called for stakeholder submissions to be made in response to the issues and questions raised by the Consultation Paper. Any submissions should be uploaded to the Australian Treasury Website by the closing date of 1 August 2014.4

Alternatively, the Australian Treasury offers interested stakeholders  the opportunity to provide shorter submissions or feedback on a particular issue via the “Make a Comment” facility on its website.5 CAANZ has also developed an online survey focused on experiences of businesses with contracts and unfair terms. Also, CAANZ proposes to hold targeted stakeholder meetings to discuss the matters in the Consultation Paper.

It is open to direct selling companies to make a submission. The Direct Selling Association of Australia (DSAA) wishes to ensure that the effect of any law changes on its members is minimised. If your DSO is a member of the DSAA, you may consider contacting the DSAA directly to provide comments or feedback to the DSAA. The DSAA has requested that any feedback be provided by 11 July 2014.