The interpretation of the head count test could turn large businesses into protected small businesses.

Provisions in the Australian Consumer Law and the ASIC Act can render certain terms of a contract void if those terms are judged to be "unfair". These provisions are known as the "unfair contract term" provisions and have existed for several years (UCT Provisions).

Before 12 November 2016, they only applied to "consumer contracts"; they were then extended to "small business contracts" as well, which significantly expanded their reach. The purpose of this extension was to protect small businesses because they are likely to be vulnerable to unfair contract terms in the same way as consumers. It has, however, potentially introduced an odd result which could extend the protection even further – to very large businesses.

How could a large business be a small business?

The definition of "small business contract" is central to determining who may avail themselves of the protection of the UCT Provisions. The definition is in s 23 of the Australian Consumer Law and s 12BF of the ASIC Act. One of the requirements of the definition is a head count test of employees. The head count test is as follows: "one party to the contract is a business that employs fewer than 20 persons". Depending on how the head count test is interpreted, a very large business may be able to avail itself of the UCT Provisions even though they were intended to protect small businesses. How might this be? Consider the following scenario.

A large business is carried on using a group of related corporate entities. All of the staff engaged in the business are employed by one corporate entity. The business uses another entity in the corporate group, which employs fewer than 20 people or perhaps no-one, to enter into contracts for its supplies and acquisitions. In this way, the head count test is fulfilled even though the large business may employ thousands of people.

So far, there has been no judicial consideration of whether a large business can avail itself of the UCT Provisions through structuring its affairs in this way. The ACCC and ASIC have both published guidance saying that it can. If a large business thinks it can avail itself of the UCT Provisions in this way, it should perhaps exercise caution since there is a credible argument that it can't. The argument depends on the interpretation of the head count test.

Scratching our heads over the head count test

The head count test is a little strange for two reasons. First, it refers to a "business" employing persons. A "business" is commonly understood to be a series of activities carried on by an entity and not an actual entity. It is a little peculiar to say that a "business" employs people when only an entity can enter into a contract of employment. However, this peculiarity falls away since there is judicial authority that the phrase "employs" in legislation can mean to "engage in work". Adopting this meaning, it makes sense to say that a business "employs" people because those people are engaged in work by performing the activities of the business.

Second, the head count test says that "the party to the contract is a business". As already noted, a "business" is commonly understood to be a series of activities. A party cannot be a series of activities. This peculiarity also falls away if you accept that the words "the party to the contract is a business" should be read as "the party to the contract is involved in a business" or "is part of a business". This is a logical reading of the head count test which preserves the usual meaning of "business".

On one view, the phrase "one party to the contract is a business that employs fewer than 20 persons" indicates that it is the business, and not the party to the contract, which must engage fewer than 20 persons. If it were the other way round, you might expect the head count test to read "one party to the contract employs fewer than 20 persons and is a business ", but it's clearly not written that way. Once the head count test is understood to require the business to engage fewer than 20 persons, it doesn't matter that the particular entity that entered into the contract may employ fewer than 20 persons. What matters is the number of persons engaged by the business that the contracting entity is involved in. This allows the people employed by related entities to be counted.

This argument is not free from doubt. One could certainly argue that the head count test should be read as though it reads "one party to the contract employs fewer than 20 persons and is a business ", but this could lead to an arguably surprising result: you have a "small business contract" where the only parties to the contract are very large businesses. This outcome would also be somewhat inconsistent with the Parliamentary materials which accompanied the Bill that extended the UCT Provisions to small business contracts. The explanatory memorandum states that the Bill will "extend the consumer unfair contract term protection … to businesses with less than 20 employees" because "[s]mall businesses, like consumers, are vulnerable to unfair terms" and further, the "extension of the unfair contract terms protection to cover small business contracts will address this vulnerability by … providing a remedy for small businesses." [emphasis added] There is no mention of extending the UCT Provisions to large businesses or that large businesses may be vulnerable in the same way as small businesses. The second reading speeches for the Bill are consistent with the explanatory memorandum.

So, there is a credible argument that the definition of "small business contract" may not allow a large business to avail itself of the UCT Provisions simply because its contracting entities employ fewer than 20 people. The ACCC and ASIC have expressed the view that they can avail themselves of the UCT Provisions, but without any judicial consideration of the issue, we don't know what the actual position is. For now, we'll have to wait for a judicial decision or an amendment to the ACL and ASIC Act which clarifies things. In the meantime, caution is warranted.