Small Business Contract Term Protection

On 14 September 2015 the Senate passed the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 (Cth).

This means that small businesses will, from 12 months after the Bill receives Royal Assent, have the right to be protected from terms that are ‘unfair’ in any standard form contract. These protections are an extension of the protections that already exists for consumers in s 23 of the Australian Consumer Law.

You may have seen our previous eBrief on this issue, urging you to make submissions about the draft legislation.

Will these changes affect me?

If you are a small business, or you contract with small businesses, yes.

The draft legislation originally only applied to any standard form contract with a small business where the up-front price payable was no more than $100,000 or, for contracts where the term is longer than 12 months, no more than $250,000. Due to changes introduced in the Senate, these thresholds have been increased.

The legislation will now apply to standard form contracts with a small business where:

  • for contract where the term is up to 1 year, the up-front price payable is no more than $300,000; or
  • for contracts where the term is longer than 1 year, the up-front price payable is no more than $1 million.

If a term in one of these contracts is found to be ‘unfair’, it will be void and therefore unenforceable.

What is a ‘small business’?

A business is a ‘small business’ under this legislation if, at the time the contract is made, it employs fewer than 20 persons. This includes full-time employees, part-time employees and casual employees who work on a regular and systematic basis. That is, using a ‘headcount approach’ regardless of an employee’s hours or workload.

You will be able to tell if you are a small business and therefore protected by these changes. However it will be difficult for you to know with any certainty whether the businesses you are contracting with are small businesses. It would be prudent for you to ensure that all of your standard form contracts comply with this new legislation.

What is a ‘standard form contract’?

The legislation does not strictly prescribe a definition of ‘standard form contract’. Instead, it says that, in determining whether a contract is a standard form contract, a court may take into account any matters it considers relevant, but must take into account the following:

  • whether one of the parties has all or most of the bargaining power relating to the transaction;
  • whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
  • whether another party was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented;
  • whether another party was given an effective opportunity to negotiate the terms of the contract; and
  • whether the terms of the contract take into account the specific characteristics of another party or the particular transaction.

The ACCC considers standard form contracts to be contracts presented on a ‘take it or leave it’ basis. All of your standard terms of trade will be considered standard form contracts.

What makes a term ‘unfair’?

There is no express list of ‘unfair’ terms. The court will consider a term to be unfair if:

  • it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
  • it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
  • it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

The legislation also provides a long list of the types of terms that might possibly be unfair. The types of terms are very broad, including (amongst others) unilateral variation clauses, certain indemnity clauses, and clauses limiting a party’s liability for breach of contract. In some cases, dispute resolution clauses might also be considered ‘unfair’.

That’s all very vague… how can I ensure my contract is ok?

There is extensive case law, both in Australia and overseas, relating to unfair contract terms in a consumer law perspective that help give some guidance as to how this legislation will be applied in a business-to-business context.

The team at Meyer Vandenberg has considered this case law and are ready to assist you with ensuring your contracts will be enforceable when the new legislation commences next year.

For more information contact:

Alisa Taylor | Partner
(02) 6279 4444

Massimo Di Maio| Special Counsel
(02) 6279 4444