A Bill to extend the unfair contract protections of the Australian Consumer Law (ACL) for consumer contracts to standard form small business contracts has now passed both houses of parliament.
The new regime will now commence 12 months after Royal Assent, which is expected to be approximately late October 2016.
A term of a standard form contract will be void if it is unfair. The provisions apply only to contracts for the supply of goods or services, or a sale or grant of an interest in land.
What is a standard form contract?
The unfair contract terms provisions only apply to standard form contracts. A contract is presumed to be standard form unless otherwise proven.
In determining whether a particular contract is a standard form contract, a Court must consider:
(a) whether one of the parties has all or most of the bargaining power relating to the transaction;
(b) whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
(c) whether another party was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented;
(d) whether another party was given an effective opportunity to negotiate the terms of the contract; or
(e) whether the terms of the contract take into account the specific characteristics of another party or the particular transaction.
What is an unfair contract term?
A term will only be unfair if it:
(a) would cause a significant imbalance in the parties’ rights and obligations under the contract;
(b) is not reasonably necessary to protect the legitimate interests of the party advantaged by the term; and
(c) would cause financial or other detriment if it was relied on.
When determining whether a contract term is unfair, the court must consider the contract as a whole, and the extent to which the relevant term is transparent (that is, expressed in reasonably plain language, legible, presented clearly and readily available to any party affected by the term).
The ACL provides the following examples of unfair terms:
(a) one party is permitted to avoid or limit performance of the contract;
(b) one party is permitted to terminate the contract;
(c) one party is penalised for a breach or termination of the contract;
(d) one party may vary the terms of the contract;
(e) one party may renew or not renew the contract;
(f) one party may unilaterally vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract;
(g) one party may unilaterally determine whether the contract has been breached or to interpret its meaning; or
(h) one party’s right to sue another party is limited.
What is a small business contract?
The legislation will extend the unfair contract term provisions to small business contracts. A contract will be a small business contract if:
(a) at the time the contract is entered into, at least one party to the contract is a small business being a business that employs fewer than 20 persons. Casual employees are not to be counted for this purpose unless they are employed by the business on a regular and systematic basis; and
i. the upfront price payable under the contract is less than $300,000; or
ii. if the contract has a term of more than 12 months, the upfront price payable is less than $1,000,000.
In determining whether a business employs less than 20 people, casual employees are counted if employed on a regular and systematic basis.
Upfront price is the consideration that is provided for the supply, sale or grant under the contract, and which is disclosed at or before the contract is entered into. The upfront price does not include any amounts that are contingent on the occurrence or non-occurrence of particular events.
In determining the upfront price payable where credit is provided, any interest payable is to be disregarded.
A small business contract will not be covered by the new provisions where the contract is subject to a prescribed industry-specific law that has been deemed enforceable and equivalent.
It remains to be seen whether any existing industry-specific laws will be deemed to have sufficient protections in order to be exempt under the new legislation. Current measures in certain industry-specific mechanisms, such as the Franchising Code of Conduct go some way to addressing the concerns of small businesses by providing for disclosure mechanisms and good faith conduct. However, the current mechanisms are not as broad as the general prohibition on unfair contract terms and are thus not likely to be “equivalent”.
Small business contracts that are the constitution of a company, management investment scheme or other kind of body will also be exempt from the new provisions.
When will the legislation commence?
The legislation will come into effect in approximately late October 2016 (12 months after the date of Royal Assent).
The unfair contract terms will apply to small business standard contracts entered into after that date. However, the provisions will also apply:
(a) if the contract is renewed after that date; or
(b) if a term of a contract is varied after that date, to the varied term.
There is quite some uncertainty as to when the legislation will apply in any given circumstance.
The drafting of the legislation means that businesses may not know whether the regime applies without enquiring into the head count of their potential small business counter-party.
The upfront price may also cause uncertainty where the structure of the payments make it difficult to determine the exact amount.
These uncertainties may dissuade businesses from reviewing and revising their standard form contracts. However, there is one very good reason for businesses to do so. In its media release announcing the extension, the Government stated that it has provided $1.4 million to the Australian Competition and Consumer Commission to ensure business compliance. Ideally this should encourage businesses to review their standard form contracts to, at the least, temper the most egregious provisions particularly in circumstances where they are rarely, if ever, relied on. Alternatively for some agreements, businesses may look to start negotiating their terms to avoid the application of the regime. Either way, the Government may well achieve its stated goal of addressing the imbalance of risk allocation in these type of agreements.
For more information on any of the material contained in this article, please contact Judith Miller
 The Bill also amends the ASIC Act to extend the regime to contracts in respect of financial services and products.