Unfair contract protections for small businesses
From 12 November 2016, the existing unfair contract term protections for consumers will be extended pursuant to the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 to cover standard form small business contracts.
The existing unfair contract term protections for consumers were introduced as part of the Australian Consumer Law (ACL) (as set out in Schedule 2 of the Competition and Consumer Act 2010 (Cth)), which came into force on 1 January 2011. Aspects of the consumer protection provisions in the ACL, including the unfair contract terms protections, are also mirrored in the Australian Securities and Investments Commission Act 2001 (ASIC Act) in relation to financial products and services.
The new regime
Similar to consumers, small businesses often have limited power and a reduced ability to negotiate or vary standard form contracts. Given this recognition, the new law will extend the existing unfair contract term protections to small businesses and will apply to standard form contracts entered into, renewed or varied on or after 12 November 2016, where:
- it is for the supply of goods or services or the sale or grant of an interest in land;
- at least one party is a “small business” that employs less than 20 people; and
- the upfront price payable under the contract is no more than $300,000, or $1,000,000 if the contract is for more than 12 months.
The ACL does not define a ‘standard form contract’. However, as previously blogged, the court will consider relevant factors, including whether one party to the contract has all or most of the bargaining power and whether the contract was subject to negotiation between the parties.
While most standard form contracts and contractual terms will be covered by this new law, there are a number of exceptions. The following contracts are excluded from protection under the law:
- shipping contracts;
- constitutions of companies, managed investment schemes or other kinds of bodies; and
- insurance contracts covered by the Insurance Contracts Act 1984.
Furthermore, as under the existing regime, the extended protections do not apply to standard form contract terms that:
- define the main subject matter of a contract;
- set the upfront price payable under the contract; or
- are required or expressly permitted by a law.
Practical implications for businesses
With a large number of small business contracts anticipated to be subject to the new law, the reform will have significant impact for both small and big businesses. Therefore, all businesses are urged to review their agreements during the 12-month transitional period to ensure that their standard form contracts comply with the new provisions.
Existing Business Contracts
In particular, given that the new regime will apply to small business contracts entered into, renewed or varied on or after 12 November 2016, an assessment must be undertaken each time an existing business contract is renewed or varied to determine whether, at that point in time, the contract constitutes a small business contract within the scope of the regime.
Furthermore, under the unfair terms regime, the concept of ‘upfront price’ excludes any contractual payments contingent on any event. This means that even if the value of a contract is expected to be greater than the threshold amount, if payment is based on contingency, then the value will not be part of the upfront price and the unfair terms regime may apply. Therefore, in practice, businesses may prefer to restructure payment terms in order to minimise contingent payments to ensure that high value contracts are not captured by the regime.
It is important to note that an assessment of the employee threshold under the regime includes casual employees working on a regular and systematic basis. This applies to the contracting party only, and not to the broader group structure.
Mandatory Pass-Through Terms
Lastly, in negotiating any agreements with third parties requiring the inclusion of mandatory pass-through terms in small business contracts, it is important to ensure its compliance with the regime and consider the inclusion of any appropriate indemnity clauses.
Our colleagues in Melbourne have prepared a more detailed post outlining the scope of the regime and some practical implications for businesses. To read more, the article (by subscription to Inhouse Counsel only) can be found here. For further information, please contact Melissa Monks.