The Australian Consumer Law (ACL) and the Australian Securities and Investments Commission Act 2001 (ASIC Act) both include unfair contract term protections, however currently these protections are only afforded to consumers and not businesses.

What is an Unfair Contract Term?
An unfair term is defined as a term that:

  • Causes a significant imbalance in the parties’ rights and obligations under the contract;
  • Would cause detriment to a party if relied on; and
  • Is not reasonably necessary to protect the legitimate business interest of the party who would be advantaged by the term.

What is a Standard Form Contract?
A contract will be presumed to be a standard form contract unless proven otherwise. In addition to using its discretion when determining whether a contract is indeed a standard form contract, the courts must also consider the following:

  • Whether one of the parties has all or most of the bargaining power;
  • Whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
  • Whether another party was, in effect, required to accept or reject the terms of the contract in the form in which they were presented;
  • Whether another party was given an effective opportunity to negotiate the terms; and
  • Whether the terms of the contract take into account the specific characteristics of another party or the particular transaction.

Small businesses, like consumers, are vulnerable to unfair terms in standard form contracts as they are often offered contracts on a ‘take it or leave it’ basis and lack the resources and bargaining power to effectively review and negotiate terms. As such, in the absence of adequate protections, there is currently an incentive for businesses to include unfair terms in standard form contracts offered to small businesses. This is particularly the case for low-value contracts as the cost of obtaining legal advice can be disproportionate to the potential benefits of entering into such contracts.

In an effort to protect small businesses against unfair terms in standard form contracts, the Commonwealth Treasury on behalf of Consumer Affairs Australia and New Zealand, conducted an extensive public consultation process from May to August 2014 (which included releasing a consultation paper) in order to gather evidence and information on the extent of the problem and the available policy options. As a result of this consultation process, the Federal Government recently released draft legislation on the proposed new laws relating to unfair contract terms for small businesses.

Key Features of the New Laws
The extension of the unfair contract term protections to cover small businesses will primarily be found in section 12BF in Part 2 of the ASIC Act and section 23 in Part 2-3 of the ACL. This will give courts the power to declare unfair contract terms as void and thus provide a remedy for small businesses. Where a term is declared void, the term will be treated as if it never existed, however the contract will continue to be binding on the parties to the extent that the contract is capable of operating without the unfair term.
The new provisions will be limited in two ways

1. The business must be a small business

A business will be considered a small business if it employs fewer than 20 persons, excluding casual employees not employed on a regular or systematic basis.

2. The contract must be a small business contract

A contract will be taken to be a small business contract, if at the time it is entered into, at least one party is a small business and the ‘upfront price’ payable under the contract does not exceed either $100,000 or $250,000 if the duration of the contract is more than 12 months. The term ‘upfront price’ is defined in both the ACL and ASIC Act as the consideration that is provided, or is to be provided, for the supply under the contract, and which is disclosed at or before the time the contract is entered into. However, it does not include any amount that is contingent on the occurrence or non-occurrence of a particular event.

The reasoning behind establishing this threshold for the ‘upfront price’ is to ensure that there is still an onus placed on small businesses to undertake due diligence for any transactions which are above the threshold and thus considered high-value transactions.

When will the new provisions come into force?
The Government has now released for public consultation the exposure draft legislation and explanatory material. Interested parties are invited to make submissions on the draft legislation by the closing date of Tuesday 12 May 2015.

Following the conclusion of the consultation process, the legislation will then be finalised and introduced into Parliament. Once the legislation receives Royal Assent, there will be a transition period of six months. The new protections are expected to come into effect in early 2016. Any standard form contracts which are entered into or renewed, or terms of existing contracts that are varied on or after the date which the legislation comes into effect will be required to comply with the new provisions.

The effectiveness of this new legislation will largely depend on how aware businesses are of the protections as well as their willingness and ability to comply. In order to help businesses transition to the new arrangements, the Australian Competition and Consumer Commission (ACCC) and ASIC will work closely with state and territory consumer affairs agencies, small business commissioners, industry ombudsmen, industry organisations and the business community. The Government has also committed $1.4 million to the ACCC to further assist with these measures and to ensure the new protections are complied with.

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