Unfair contract terms protections for small businesses
Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015
From 12 November 2016, the Australian Consumer Law (ACL) and the Australian Securities and Investment Commission Act 2001 (Cth) (ASIC Act) will be amended to extend unfair contract term protections currently afforded to consumers to also cover standard form small business contracts.
The rationale for the amendments is a general acceptance that some small businesses, like consumers, lack the resources or skills to fully understand the implications of contract terms. In the absence of adequate protections, there is little to stop larger businesses including unfair terms in standard form contracts offered to small businesses. The policy aim is to achieve a more appropriate balance between protecting potentially vulnerable small businesses and allowing businesses to contract freely with each other.
The amendments do not extend to contracts regulated under the Insurance Contracts Act 1984 (Cth).
The new law
From 12 November 2016, section 23 of the ACL and section 12BF of the ASIC Act will read:
A term of a consumer contract or small business contract is void if:
- the term is unfair; and
- the contract is a standard form contract.
What is a small business contract?
A small business contract exists if, at the time that the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons and either the upfront price payable under the contract does not exceed $300,000 or the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.
What is a standard form contract?
“standard form contract” is not defined, but undoubtedly includes a contract prepared by one party that is not subject to negotiation. That is, a contract offered on a “take it or leave it” basis.
When is a term “unfair”?
A term will be unfair if it:
- causes a significant imbalance to the parties’ rights and obligations under the contract;
- is not reasonably necessary to protect the legitimate interests of the party who would benefit from the term; and
- would cause financial or other detriment to a small business if it were to be relied upon.
Again, the ACL and ASIC provide non-exhaustive list of examples of terms that may be unfair, including terms that:
- enable one party (but not another) to avoid or limit their obligations under the contract;
- enable one party (but not another) to terminate the contract;
- penalise one party (but not another) for breaching or terminating the contract; and
- enable one party (but not another) to vary the terms of the contract.
The changes do not apply to a term that:
- defines the main subject matter of the contract;
- sets the upfront price payable under the contract; or
- is required, or expressly permitted, by a law of the Commonwealth or a State or Territory.
If a Court or Tribunal finds that a term is unfair, the term will be void. The balance of the contract can still continue to bind the parties, but only if it can operate without the unfair term.
The Court has the power to make a range of orders, including:
- declaring all or part of a contract void;
- varying a contract;
- refusing to enforce some or all terms of a contract;
- directing a party to refund money or return property to the small business affected; and
- directing a party to provide services to the small business affected at the party’s expense.
It is not an offence to include an unfair term in a small business contract and there are no pecuniary penalties for doing so. However, if a person attempts to enforce a provision of a contract that is declared unfair, remedies can apply (including compensation).
The new regime may well have its most significant impact on the construction industry, where standard form contracts between head contractors and sub-contractors are commonplace.
For example, some liquidated damages clauses may fall foul of the new regime. Similarly, unilateral variation clauses, time bar clauses, limitation of liability clauses and termination clauses, all frequently found in construction contracts, could conceivably also be declared void.
Even though contracting out the proportionate liability regime can cause a significant imbalance to the parties’ rights and obligations under a contract, it is arguable that the unfair contract terms amendments will not prohibit contracting out of the proportionate liability regimes in New South Wales, Tasmania and Western Australia. This is because the unfair contract terms amendments specifically provide that a term will not be unfair if it is expressly permitted by a law of a state.
Businesses regularly involved in transactions with small businesses should review their standard form contracts for any terms that could potentially fall foul of the new regime.
Date: 25 October 2016