Small businesses are about to get a new bargaining chip in contract negotiation

From 12 November 2016, all ‘small businesses’ will 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.

Will these changes affect me?

If you are a small business, or you contract with small businesses, you will be affected.

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, by doing a headcount, 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 – or that you are at least aware of the risks in relation to the enforceability of the provisions.

Are all contracts with small business caught?

No. The legislation, once it commences, will apply to unfair terms in any ‘standard form contract’ with a small business where:

  • for contracts 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 clause in one of these contracts is found by a court to be ‘unfair’, it will be void and therefore unenforceable.

What is a ‘standard form contract’?

The legislation does not strictly prescribe a definition of a ‘standard from 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 one party was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented;
  • whether one 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 one party or the particular transaction.

The ACCC considers standard form contracts to be contracts presented on a ‘take it or leave it’ basis. It is not at all clear what level of negotiation will be enough to exclude the contract from the operation of the legislation. We think that where the only parts of the contract that have been negotiated are price, time and scope (i.e. the annexure or schedule of items) the contract will still be ‘standard form’.

If you use any industry-based contracts (such as the MBA, ABIC or AS suites), these will most likely be considered standard form. The fact that the contract has been approved or negotiated by an industry body does NOT exempt it from a challenge under the legislation.

If you have your own standard terms of trade that you apply to all jobs, these are also likely to be considered standard form contracts, unless you genuinely negotiate each of the terms each time you contract with someone (who has the time for that?!).

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’ if they force a party into a binding dispute resolution process.

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

The legislation is itself quite vague. Much is left to the discretion of the court if and when a challenge is made to the enforceability of a clause. In a construction context this is clearly problematic, as the price of the work would have been negotiated to reflect the terms of the contract itself. If one of those terms is later found to be void, the risk profile of the contract could fundamentally change — but the price will not.

Even though the legislation does not provide much guidance, there is in fact extensive case law, both in Australia and overseas, relating to unfair contract terms in a consumer law perspective that does help define how this legislation will be applied in a business-to-business context.

The team at Meyer Vandenberg has considered this case law in depth and are ready to assist you with understanding:

  • if you contract with small businesses, the risks of voidable clauses in the standard form contracts you use in your business; and
  • if you are a small business, the types of clauses you might now be able to challenge in contracts imposed on you.

For more information contact the Building and Construction Dispute Resolution Team:

Alisa Taylor — Partner — Construction Dispute Resolution Team
(02) 6279 4388
alisa.taylor@mvlawyers.com.au