Government to legislate fair play with small business

The Government has released draft legislation extending the unfair consumer contract terms regime offered under the Australian Consumer Law (ACL) to small businesses.

In the Explanatory Material to the draft legislation the Government has recognised “[s]mall 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 to understand and negotiate contract terms.”

Existing unfair contract terms regime

Currently the unfair contract terms regime in the ACL applies to consumer contracts in a standard form. A consumer contract is a contract for the supply of goods or services, or an interest in land, to an individual person for personal use or consumption. A contract is presumed to be a standard form contract unless the supplier proves otherwise. However, a contract will generally be considered to be a standard form contract where the other party imposes the terms of the contract upon the consumer on a “take it or leave it” basis.

Under the current legislation, subject to certain exceptions, the court has the power to declare a term in a standard form consumer contract void on the basis that it is unfair. For a term to be declared unfair it must satisfy all three of the following tests:

  • the term would cause a significant imbalance in the parties’ rights and obligations under the standard form contract;

  • the term is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and

  • the term would cause detriment to a party to the contract if the term were applied or relied on.

Extension of the unfair contract terms regime to small business

Under the draft legislation, the tests for whether a certain term is unfair remain unchanged. The draft legislation extends the existing regime to standard form contracts where:

  • at least one party is a small business, being a business with fewer than 20 employees on a ‘head-count’ basis (excluding casuals who are not employed on a regular or systemic basis); and

  • the upfront price of the contract does not exceed $100,000.00, or $250,000.00 where the contract’s term exceeds 12 months.

The upfront price is defined as the amount payable for the supply under the contract as disclosed at or before the time the contract was entered into. It does not include any amounts that are contingent upon an event, or any interest that may be payable.

It is not clear from the draft legislation:

  • what due diligence is required of a party to determine whether the business they are contracting with constitutes a small business (ie most parties will not know how many employees a service provider has);

  • whether a party must inquire whether the status of a business has changed before each contract is entered into (ie a small business one day may not be the next);

  • how the number of employees is to be calculated in business structures or corporate groups with multiple employer entities;

  • how the contract price threshold will be applied to contracts with an undefined duration; and

  • how the extended regime will apply in situations where there is a series of contracts rather than one contract (eg some ‘master agreements’ are framed so that a new contract arises in respect of each purchase order placed).

Whether any of these issues will be addressed in the final version of the legislation remains to be seen.

What happens now?

The legislature is considering the feedback it has received in respect of the exposure draft legislation.  It is expected that the legislation will be finalised and will come into force in early 2016. Following enactment, any contracts that are entered into or renewed following the date the law comes into force will be subject to the new provisions.

It will therefore be beneficial for parties contracting with small business to review their standard form contracts to ensure they are compliant with the unfair contracts regime.

Authors: Michael Cossetto & Stephen Sharpe