Impor­tant news for small busi­ness new laws offer pro­tec­tion against unfair contracts

In Brief

The land­scape for small busi­ness­es in Aus­tralia is chang­ing. Through­out 2016, those of you look­ing to the future will no doubt be plan­ning ahead to ensure your busi­ness does not miss a beat – or an opportunity!

From 2017, small busi­ness­es will have the same pro­tec­tion against unfair con­tract terms that ordi­nary con­sumers cur­rent­ly enjoy.

At present, for small busi­ness own­ers, sign­ing a con­tract is a con­fir­ma­tion and some­times a cel­e­bra­tion that you have won a job, or on the oth­er hand, that some­one has agreed to sup­ply you with goods or ser­vices. It is not the result of a nego­ti­at­ed allo­ca­tion of risks, as may be the case for larg­er busi­ness­es with the time and finan­cial resources to engage in pro­tract­ed con­tract nego­ti­a­tion. In fact, stan­dard form con­tracts are often signed in cir­cum­stances where there has been lit­tle or no real oppor­tu­ni­ty at all to nego­ti­ate the terms.

Sign­ing stan­dard form con­tracts can and often does lead to small busi­ness own­ers agree­ing to terms that can be unnec­es­sar­i­ly oner­ous and in some cas­es can result in sig­nif­i­cant finan­cial detriment.

That could be about to change.

The new laws

On 20 Octo­ber 2015, the Fed­er­al Gov­ern­ment passed the Trea­sury Leg­is­la­tion Amend­ment (Small Busi­ness and Unfair Con­tract Terms) Bill 2015, which will extend the cur­rent unfair con­tract pro­tec­tions that con­sumers cur­rent­ly have, to small busi­ness­es. The pro­tec­tions extend to con­tracts for the sup­ply of goods or ser­vices (which may include IT and telecom­mu­ni­ca­tions ser­vices, finance, motor vehi­cles, trav­el and utilities).

The laws will come into effect on 12 Novem­ber 2016 and will apply to con­tracts where:

  1. at least one of the par­ties is a busi­ness which employs less than twen­ty peo­ple (not includ­ing casu­al employ­ees, unless they are employed by the busi­ness on a reg­u­lar and sys­tem­at­ic basis); and
  2. either:
    1. or the val­ue of the con­tract does not exceed $1,000,000 for con­tracts longer than one year.
    2. the val­ue of the con­tract does not exceed $300,000 for con­tracts short­er than one year; 

What is an unfair con­tract term?

An unfair con­tract term is one which:

  1. would cause sig­nif­i­cant imbal­ance to the par­ties’ rights and oblig­a­tions under the contract;

  2. is not rea­son­ably nec­es­sary in order to pro­tect a legit­i­mate inter­ests of the par­ty who would be advan­taged by the term; and
  3. would cause finan­cial or oth­er detri­ment to a par­ty if it was relied upon.

Exam­ples of unfair con­tract terms include terms that:

  1. allow one par­ty (but not anoth­er par­ty) to avoid or lim­it per­for­mance of the contract;
  2. allow one par­ty (but not anoth­er par­ty) to ter­mi­nate the contract;
  3. allow one par­ty (but not anoth­er par­ty) to vary the terms of the contract;
  4. penalise one par­ty (but not anoth­er par­ty) for breach or ter­mi­na­tion of a con­tract; and
  5. lim­it one par­ty’s right to sue the oth­er party. 

What terms are not unfair?

Terms which define the main sub­ject mat­ter of the con­tract, or which set the upfront price payable under the con­tract, will not be unfair con­tract terms. Like­wise, there are some terms that are express­ly per­mit­ted by law that will not be found to be unfair.
Some con­tracts are exclud­ed from the unfair con­tract terms laws, includ­ing ship­ping con­tracts, con­sti­tu­tions of com­pa­nies and man­aged invest­ment schemes and oth­er kinds of bod­ies, and insur­ance con­tracts.

What hap­pens to con­tracts before and after 12 Novem­ber 2016?

The amend­ments will apply to a con­tract entered into after 12 Novem­ber 2016.

If you have entered into a con­tract before 12 Novem­ber 2016, and the con­tract is renewed, or a term of the con­tract is var­ied after 12 Novem­ber 2016, the amend­ments apply to the con­tract from the date that it is renewed, or to the term as var­ied, and in rela­tion to con­duct after the date the con­tract is renewed or the term var­ied.

What if you think your con­tract includes an unfair term?

Only a court or a tri­bunal can deter­mine whether a term is unfair. If a term is found to be unfair, it will be void i.e. it will not be bind­ing. The rest of the terms in the con­tract will con­tin­ue to be bind­ing if they are capa­ble of oper­at­ing with­out the unfair term.
How­ev­er, court pro­ceed­ings are usu­al­ly a last resort.

If you think your con­tract includes an unfair term, it is best to try and have the oth­er par­ty agree to remove it from the con­tract. If they do not, then you can approach the Aus­tralian Com­pe­ti­tion and Con­sumer Com­mis­sion (ACCC) or the Aus­tralian Secu­ri­ties and Invest­ment Com­mis­sion (ASIC) who may assist you to resolve your dis­pute with the oth­er par­ty to the con­tract. The ACCC and ASIC can also make an appli­ca­tion to the court (or in some cas­es a tri­bunal) to have a term declared unfair. If they do not decide to do that, you can do it your­self, how­ev­er, we rec­om­mend seek­ing legal advice before com­menc­ing proceedings.

Like­wise, if you use stan­dard form con­tracts as part of your busi­ness process­es and are con­cerned about the impact of the new laws, now is a good time to have those con­tracts reviewed.

If you need fur­ther infor­ma­tion, please contact: