Small Business to benefit from the Unfair Contract Terms Regime

Small businesses will soon enjoy the benefits of protection against unfair contract terms, previously available only to consumers, following Royal Assent given to the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 on 12 November 2015. The Legislation will apply from 12 November 2016, giving businesses nearly 10 months to make sure their contracts are compliant.

Currently protection from ‘unfair contracts’ is only available to consumers who enter into standard form contracts under Part 2-3, Schedule 2 of the Competition & Consumer Act (2010) (Cth). Yet, small business can be just as vulnerable to unfair terms and standard form contracts as consumers. Small businesses can lack the bargaining power to successfully negotiate changes to the terms of contracts or may simply lack the resources to identify unfair terms and understand their legal and practical risks. The Government has described the amendments as one which will “level the playing field in commercial transactions”.

Under the Legislation, a small business will be able to seek relief with the courts being able to strike out terms considered unfair. The protection would apply to businesses with fewer than 20 employees at the time of the transaction and the upfront price payable under the contract is either:

  1. $300,000 or less; or
  2. $1,000,000 or less if the contract lasts more than 12 months.

What is an unfair contract term?

The Legislation does not propose to amend what an unfair contract term is, but simply extend the right to claim that there is an unfair term by small business.

Pursuant to section 24 of the Act, a term is unfair if:

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

However, all three limbs of the test must be made out, and the court must consider the contract as a whole before a term will be deemed ‘unfair’. Unfair terms can include terms permitting unilateral changes by one party, terms limiting the rights of one party, terms which penalise a party for breach and terms which permit the assignment of a contract to the detriment of the other without their consent.

What is a standard form contract?

Standard form contracts are usually template documents produced by one party and offered on a “take it or leave it” basis. Sometimes, but not often, standard form contracts can be one-sided and contain rights that go beyond the requirements to legitimately protect the drafter’s business interests and may, in fact, cause detriment to the other party.

In determining whether a contract is a standard form Courts will consider:

  1. whether one of the parties has all or most of the bargaining power relating to the transaction;
  2. whether one party was, in effect, required to either accept or reject the contract in the form presented (i.e. whether they were given an effective opportunity to negotiate); and
  3. whether the terms of the contract take into account the specific characteristics of the transaction.

The way forward

The Legislation will affect all contracts made on or after 12 November 2016, and will also apply to existing contracts that are renewed after this date. Businesses have a one year grace period to review and amend their existing standard form contracts to ensure compliance.

Obviously we recommend seeking advice on your contract terms if you are unsure about the legal or practical implications however the extension of the unfair contracts regime will provide comfort to small businesses that cannot afford to negotiate or seek such advice on its contracts.

By Katie Innes, Director, Business Law

This article is intended to provide a summary of the subject matter only. It does not purport to be comprehensive or to render legal advice. No one should act on the basis of any matter contained in this article without first obtaining specific professional advice.