Protection from unfair contract terms extended to small businesses from 12 November 20169 November 2016 | General
For years Australian consumers have been protected from unfair contract terms in standard form contracts by the Australian Consumer Law (ACL) and previously the Trade Practices Act. The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 has extended these protections to small businesses, which are 97% of all businesses in Australia, from 12 November 2016.
We have briefly outlined what these changes mean for you.
1. What contracts are covered by the changes?
The protections from unfair contract terms have now been extended to standard form, small business contracts from 12 November 2016.
Any contract that meets the following criteria is a small business contract:
(a). at the time the contract was entered into, at least one party to the contract is a business that employs fewer than 20 people; and
(i). the upfront price of the contract does not exceed $300,000; or
(ii). the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.
The Australian Competition and Consumer Commission (ACCC) (the entity responsible for enforcing the ACL) defines a standard form contract as a contract that businesses offer to consumers which is the same or similar. While standard form contract is not defined in the ACL, it is presumed that a contract is a standard form contract unless proved otherwise. If required, it will be left to the tribunal or court to determine whether or not a contract is a standard form contract based upon:
(a). the bargaining power of the parties;
(b). whether the contract was prepared before the parties discussed the transaction;
(c). whether one party was required (in effect) to either accept or reject the terms as presented;
(d). whether an opportunity to negotiate the terms was provided; and
(e). whether the terms of the contract take into account the specific characteristics of a party or the particular transaction.
2. What is an unfair term?
Section 24 of the ACL defines unfair and this definition has been extended to small business contracts. In that section, a term of a contract is unfair if:
(a). it would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
(b). it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
(c). it would cause detriment to a party if it were to be applied or relied upon.
Examples of terms that a court or tribunal may consider unfair include:
- terms permitting one party (but not the other party) to terminate the contract;
- terms penalising one party (but not the other party) for a breach or termination of the contract; and
- terms permitting one party (but not another party) to renew or not renew the contract.
If a term is unfair, the court or tribunal may declare all or part of the contract void and vary the agreement. In some circumstances, businesses may even be directed to refund, return or repair products and services or otherwise compensate the other party.
3. What do you need to do?
The changes are not retrospective. This means that only contracts dated 12 November 2016 or later will be caught by the changes. Importantly, however, the changes do apply to any variations or renewals of existing contracts after this date.
Businesses are reminded to consider these changes when negotiating with small businesses and are encouraged to keep records of all negotiations evidencing that an agreement is not a standard form contract. We note that simply negotiating on price will not be sufficient to avoid being a standard form contract.
We suggest reviewing your standard form contracts (including leases) for any terms that may be considered unfair and seek advice if you are unsure.
For further information on this topic, or if you have any questions, please contact a member of our Property & Commercial team.