Australia: Unfair contract terms: protection extended to small businesses

With the Small Business and Unfair Contract Terms Act 2015 (Cth) (Act) having received royal assent on 12 November 2015, the unfair contract terms protection that has been afforded to consumers since 2010 will soon be extended to small businesses.

Now is the time to review the standard form business-to-business (B2B) contracts you use in your dealings with small businesses to ensure they are not at risk of being considered 'unfair' when the new rules come into effect.

What changes are introduced by the Act?

The Act amends two pieces of legislation which have provided consumers with protection against unfair contract terms for some time, being the:

1. Australian Securities and Investments Commission Act (ASIC Act) for contracts relating to financial services or products (such as loan agreements, leases, hire-purchase agreements, debt factoring agreements)
2. Australian Consumer Law for other contracts.

The Act extends the unfair contract terms protection in these Acts to standard form contracts that meet the following criteria:

• at the time the contract is made, one (or more) of the parties to the contract is a business that employs fewer than 20 people (counting full time employees, part time employees and casual employees who work on a regular and systematic basis), and
• the upfront price payable under the contract does not exceed:
• • $300,000 for contracts lasting up to one year
  • $1,000,000 for contracts lasting more than one year.

There are three key questions to consider in determining whether a standard contract term might be considered unfair under the Act.

What is a 'standard form contract'?

This term is not defined in the Act.

A court will make its own assessment about what constitutes a standard form contract. The factors that a court will take into account include:

• the bargaining power of the parties
• whether the contract was pre-prepared or pro-forma
• whether the contract was a 'take it or leave it" contract
• whether the contract took into account specific characteristics of the parties or the transaction.

What is the 'upfront price' of a contract?

The 'upfront price' of a contract is the consideration payable for the product or service supplied, and disclosed at or before the contract is entered into.

If credit is provided under the contract, the upfront price should be calculated by including the principal amount and disregarding the interest.

What is an 'unfair' term?

There are no prescribed or defined unfair terms. However, types of terms which may be affected include:

• unilateral variation terms
• terms which require an amount to be repayable on demand
• cross default provisions
• terms relating to the seizure of goods.

When will the changes take effect?

The Act will come into effect 12 months after assent (that is, 12 November 2016).

The Act will not apply to contracts that were entered into before this date. However:

• if a contract is renewed after the Act commences, the Act will apply to the renewed contract
• if a contractual term is varied after the Act commences, the Act applies to the term as varied.

What will happen if a contract contains an unfair term?

If a contractual term is deemed to be unfair, it will be void and therefore unenforceable.

However, the contract will continue to bind the parties if it can operate without the unfair term(s).

What should you do to prepare for the changes?

Although 12 months may seem like a long time to prepare for the changes, you may find that some (or many) of your contracts will need to be amended and it is best to assess your position sooner rather than later. We recommend taking the following steps now:

• Review your customer base and categories of customers to get an understanding of how frequently you enter into agreements with businesses that employ fewer than 20 people
• Review your standard form B2B contracts (whether these are contracts with suppliers, customers or independent contractors) which might be used in transactions involving businesses that employ fewer than 20 persons, to determine whether they contain terms that could be considered unfair
• When reviewing your standard form B2B contracts you should also consider agreements that are already on foot but may be renewed or varied at a later date.
• Consider whether and how your standard form contracts might need amending.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.