Thinking | 10 December 2015
Unfair contract terms – extending beyond contracts with individual consumers to small business contracts
What do the changes mean for businesses?
- The unfair contract term regime will extend beyond governing contracts with individual consumers, and will govern, for example, certain contracts between companies.
- If you are a business that has entered into, or is likely to enter into, a standard form contract with a small business in the next 12 months, we recommend:
- establishing which of those contracts are likely to be with businesses which employ less than 20 people and fall within one of the upfront price thresholds;
- reviewing any standard form contracts for the purpose of assessing which terms may be found to be unfair, and then determining whether they should be amended or removed;1
- potentially amending any borderline clauses; and
- deciding whether to develop separate contracts for agreements with small businesses to those which are used with other businesses.
What does the new Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth) do?
The current unfair contract terms regime under the Australian Consumer Law and the ASIC Act2 applies to standard form ‘consumer contracts’. Consumer contracts are contracts entered into with individuals who are acquiring goods, services or interests in land that are predominantly for personal, domestic, or household use or consumption.3
The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth) (Amendments) will extend the existing unfair contract terms regime to the new category of ‘small business contracts’. The extension of the regime to small business contracts is significant because the unfair terms regime will extend beyond governing contracts with individual consumers to include governing certain company-to-company contracts. Further, the application of the new regime is not limited by the type of goods and services which are being provided under the contract.
The Amendments received royal assent on the 12th of November 2015, meaning the Amendments will commence on this date in 2016. This transitional stage was extended in the Senate from an initial six month timeframe, in recognition that the ACCC would assist businesses to transition to the new regime.
What are the existing unfair contract term prohibitions?
Under the existing regime, a term from a consumer contract can be declared unfair if the term is unfair,3 and the contract is a standard form contract. Under the Amendments, these two tests now apply to terms of small business contracts.
When is a term unfair?
- the extent to which the term is transparent; and
- the contract as a whole.5
A term is transparent if the term is:
- expressed in reasonably plain language;
- presented clearly; and
- readily available to any party affected by the term.6
The party that is advantaged by a potentially unfair term has the onus of proving that it is reasonable necessary to protect its legitimate interests.7
EXAMPLE UNFAIR TERMS8
Terms may be unfair if they:
|Permit one party, but not the other, to terminate, vary or renew the contract.||Permit one party to vary the price payable under the contract without the right of the other party to terminate.||Permit one party to unilaterally vary the goods or services to be supplied, or the interest in land to be sold or granted, under the contract.|
When is a contract a ‘standard form contract’?
While there is no express definition of a ‘standard form contract’, the relevant Acts contain a number of factors that a court may consider when determining whether a contract is of a standard form.9
If a party to a proceeding alleges that a contract is a standard form contract, it is presumed to be a standard form contract unless another party to the proceeding proves otherwise.10
What are ‘small business contracts’?
What constitutes a small business?
Under the Amendments, small business contracts are contracts in which one of the parties employs less than 20 employees and the following thresholds apply.
In calculating the upfront price payable, all of the consideration under the contract will be valued and it includes any interest payable. For example if a contract provides for the supply of multiple goods or services, the upfront price will be the consideration for the total supply under the contract.11
The Amendments will apply to small business contracts regardless of whether the small business is an acquirer or a supplier. It is likely this is the case to capture situations where small businesses supply goods and services to large businesses often on terms drafted to the advantage of the large business.
What are the consequences if a term is found to be unfair?
Terms in any standard form small business contract found to be unfair can be declared void by the courts if a small business party to the contract, or the relevant regulator – ACCC or ASIC – apply for such a finding. While no fines or penalties can be imposed on a contravening party, there are a number of other remedies that it may face including injunctions, compensation orders, and damages.
It is important to note that the courts may also issue redress orders to other ‘non-party’ consumers who are not parties to the enforcement proceedings in relation to the particular contract but who have suffered, or are likely to suffer, loss or damage in relation to the unfair term.
What happens after the 12 month transition period?
After the 12 month transition period the new legislation will apply to:
- new small business contracts;
- pre-existing small business contracts that are renewed; and
- any terms of pre-existing contracts that are varied.
1These will be terms that create a significant imbalance in the parties’ rights that are not necessary to protect legitimate interests.
2See, for example, the Competition and Consumer Act 2010 (Cth), Schedule 2 (Australian Consumer Law), Part 2-3 and Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), subdivision BA.
3In the case of the ASIC Act, this applies to financial products or contracts for financial services, that are predominantly an acquisition for personal, domestic or household use or consumption.
4Australian Consumer Law, s24(1); ASIC Act, s12BG(1).
5Australian Consumer Law, s24(2); ASIC Act, s12BG(2).
6Australian Consumer Law, s24(3); ASIC Act, s12BG(3) .
7Australian Consumer Law, s24(4); ASIC Act, s12BG(4).
8Australian Consumer Law, s 25; ASIC Act, s12BH.
9Australian Consumer Law, s27(2); ASIC Act, s12BK(2).
10Australian Consumer Law, s27(1); ASIC Act, s12BK(1).
11Explanatory Memorandum to the Amendments, at [2.26].
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