Small Business Unfair Contracts Regime

By Jack Newton, Law Graduate, MST Lawyers

The existing unfair contracts regime in the Australian Consumer Law (“ACL”) that presently only protects consumers is to be extended to apply to all small businesses, including franchisees.

On 20 October 2015, the amending legislation was passed through both Houses of Parliament. It is expected to receive Royal Assent shortly.

The unfair contracts regime will only apply to contracts that are entered into, renewed or varied after the commencement of the legislation. Contracts that predate the new law coming into effect will not fall within the regime. The legislation will likely commence in early November 2016. We will provide an update when the precise date is known.

What will it cover?

A “small business” is a business that employs fewer than 20 people. This is calculated by a headcount of each full time and part time employee and each casual employee that is employed on a regular and systematic basis.

The protections will apply only to “small business contracts”, which are contracts that are for:

• the supply of goods or services, or a sale or grant of an interest in land; and
• at the time the contract is entered into, at least one party is a small business; and
• one of the following applies:
  • the contract is for a term of 12 months or less and the upfront price payable under the contract is less than $300,000; or
  • the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.

The unfair contracts regime only covers what are called “standard form contracts”. These are contracts prepared by one party and are not subject to negotiation. When required to determine whether a contract is a standard form contract, courts generally take into account the following factors:

• bargaining power between the parties;
• whether there were discussions prior to the preparation of the contract;
• whether one party was required to accept or reject the contract;
• opportunities to negotiate the terms of the contract; and
• whether the characteristics of the other party are taken into account by the contract.

Importantly, when a party seeks to rely on the unfair contracts regime in court, there is a presumption that the contract is a standard form contract. The opposing party must prove, with evidence, that the contract is not a standard form contract.

When is a term unfair?

An unfair term is a term that:

• causes significant imbalance between the parties’ rights and obligations; and
• is not reasonably necessary to protect the legitimate interests of one party; and
• would cause detriment (whether financial or otherwise) to a party if it were to be relied on.

The ACCC provides several examples of terms that may, depending on the context, be seen to be unfair. These include:

• Terms that permit one party to avoid or limit performance of the contract;
• Terms that permit one party to terminate the contract for trivial breaches;
• Terms that permit one party to vary the terms of the contract;
• Terms that permit one party to renew or not renew the contract;
• Terms that permit one party to vary the upfront price payable under the contract, without giving the other party the right to terminate; or
• Terms that limit one party’s right to sue another party.

While these examples must be assessed in each contract’s individual context, they provide a snapshot of the possible application of the unfair contracts regime to small business and in particular franchises.

What is the upfront price?

There has been some confusion as to what payments fall within the ‘upfront price’ payable under a small business contract.

The upfront price payable under a contract is the consideration that:

• is provided, or is to be provided, for the supply, sale or grant under the contract; and
• is disclosed at or before the time the contract is entered into.

According to the legislation’s Explanatory Memorandum, the “totality of the consideration” payable according to the contract, but does not include any consideration that is contingent on an event occurring or not occurring. For example, a payment that is payable only on the renewal of a contract or franchise agreement would not be included and neither would interest. On the other hand, payments such as royalties would be included.

Importantly, the upfront price will include non-monetary consideration and would, for example, include the cost of renovations if the contract contained a promise for one party to undertake renovations of their premises.

Are there any exemptions or exceptions?

The Commonwealth Minister may exempt a specified contract, proposed contract or class of contracts from the unfair contracts regime, where another law already provides enforceable protections for small businesses.

It is possible that, in our view, the Commonwealth Minister may consider that the Franchising Code of Conduct (Code) is a law already in existence that provides enforceable protections for small business. Parliament received a number of submissions advocating the exemption for franchising on the basis that the sector is already covered by the Code and should, therefore, be exempted. No decision has been made on this and given it will be 12 months until the legislation commences, it is unlikely a decision will be made in the short term.

What about franchising?

It is clear that the unfair contracts regime will apply to franchises, where the franchise agreement meets the requirements discussed above.

Most franchise agreements are for a term of more than 12 months and in many instances the upfront price payable is unlikely to be more than $1,000,000. In addition, many franchise agreements are standard form contracts where there is little or no negotiation between the parties and even if they are not, the burden of proving this will rest with the franchisor.

Additionally, many franchise agreements have similar terms to those listed in the ACCC’s examples of unfair terms. Franchisors must be wary of the application of the unfair contracts regime to their franchise agreements, in particular to those franchise agreements which will be renewed or entered into in late 2016.

The ACCC has indicated that it will take a cooperate approach to enforcement to work with businesses at the commencement of the legislation. The ACCC will address any concerns directly with businesses in order to identify particular common contract terms that may be unfair.

For more information or to seek advice about amending your contracts and franchise agreements, please contact our Corporate Advisory and Franchising team by email at either franchise@mst.com.au or corporate@mst.com.au or by telephone +61 8540 0200.