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The change is coming – unfair contract term provisions to be extended to small businesses

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By Stuart Jebb, Lawyer, MST Lawyers

On 28 April 2015 the Government released an exposure draft of the new legislation that, if enacted, will extend the unfair contract provisions that traditionally protect consumers in standard form contracts to also protect small businesses.

The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 (“Exposure Draft”) contains new laws that will give courts the ability to declare void, unfair terms contained in standard form contracts between businesses.

Current Law

The Australian Consumer Law (“ACL”) (Schedule 2 of the Competition and Consumer Act 2010(Cth)) contains provisions that protect consumers from unfair contract terms in a standard form contract.   

Section 23 of the ACL states that a term of a “consumer contract” is void if the term is “unfair” and the contract is a “standard form contract”.  

A “consumer contract” is a contract for a supply of goods or services or a sale or grant of an interest in land to an individual whose acquisition is wholly or predominately for personal, domestic or household use or consumption.

Typically a “standard form contract” is a contract that is prepared by one party to the contract and is not subject to negotiations between the parties. That is, it is offered on a ‘take it or leave it’ basis.

Meaning of “unfair”

Whether or not the terms of a contract are unfair will depend on the particular circumstances of each contract. The ACL states that a term of a consumer contract is unfair if it:

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

All three of the above limbs to the unfairness test must be proven to exist for a court to decide that a term is unfair. Furthermore, in determining whether a term of a consumer contract is unfair, the courts must give consideration to the contract as whole and whether the term in question is expressed in reasonably plain language, legible and presented clearly.

Potential terms that may be unfair include terms that permit one party (but not the other) to:

  1. vary the terms of the contract;
  2. renew or not renew the contract; or
  3. terminate the contract.

It is important to note that if some of the terms in a contract are found to be unfair this will not invalidate the entire contract. To the full extent possible, the remaining terms will remain enforceable.  

Similar to the ACL, the Australian Securities and Investments Commission Act 2001(Cth) (“ASIC Act”) also contains very similar provisions that protect consumers from unfair contract terms.

The Exposure Draft

The protections available under the ACL and the ASIC Act in relation to unfair contract terms are currently only afforded to consumers and not businesses. However, much like consumers, often small businesses have the same vulnerability and imbalance of bargaining powers when it comes to standard form contracts.

The proposed laws as outlined in the Exposure Draft seek to address this vulnerability by allowing unfair contract terms in small business contracts to be declared void, providing a new remedy for small businesses.

Amendments to the Australian Consumer Law (“ACL”)

The Exposure Draft outlines proposed amendments to the ACL to:

  1. extend unfair contract term provisions that currently protect consumers to also govern small business contracts that are standard form and valued less than a prescribed threshold; and
  2.  allow for the exemption of small business contracts that are standard form and that are subject to prescribed laws deemed equivalent to the unfair contract term provisions in the ACL, which are enforceable.

A contract is deemed “small business contract” if:

  1. at the time the contract is entered into, at least one party to the contract is a “small business”;
  2. the subject of the contract relates to the supply of goods or services or sale or grant of an interest in land; and
  3. the upfront price payable under the contract does not exceed either:
    1. $100,000; or
    2. $250,000 if the contract duration is more than 12 months

A business will be deemed to be a “small business” if it employs fewer than 20 people. In counting the persons employed by a business, a casual employee is not to be counted unless he or she is employed by the business on a regular or systematic basis.

Amendments to the Australian Securities and Investments Commission Act 2001(Cth) (“ASIC Act”)

The Exposure Draft also outlines proposed amendments to the ASIC Act to extend its unfair contract terms to cover small business contracts relating to the provision of financial services using the same proposed new definitions and upfront price thresholds discussed above.

Application of Exposure Draft

If enacted, the amendments in the Exposure Draft will apply to the following:

  1. contracts amended;
  2. contracts entered into; and
  3. contracts renewed

on or after the date the legislation comes into effect.

Who will the new legislation affect?

Given that only one party to a standard form contract needs to be a small business in order for the entire contract to be subject to the new unfair contract provisions, the enactment of the Exposure Draft will have significant implications on most businesses.

Usually franchise agreements are standard form and are provided to franchisees on a “not negotiable” basis.  In light of the proposed changes to the current law franchisors will need to review their franchise agreements as amendments may be required  to ensure that vital terms of the franchise agreement remain enforceable.  This is the case even though the franchisor may employ hundreds of people and is not itself a small business.

Other businesses that sell goods and services with their standard terms and conditions attached to a quote or invoice may also be caught by the new laws. As a result, some terms of their standard terms and conditions may no longer be enforceable where they otherwise were at the time of drafting. 

Consultation process

There is a relatively short consultation period of two weeks in which interested parties are invited to comment on the exposure draft and explanatory material. The short consultation is presumably to have the draft enacted by, or as close to, the Government’s previously announced intended start date of 1 July 2015.

The closing date for submissions is Tuesday, 12 May 2015

If you require any advice on unfair contract terms legislation, or contracts and franchising matters more generally, please feel free contact our Corporate Advisory & Franchising team by email franchise@mst.com.au or by telephone +61 8540 0200