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The Commonwealth Government has recently passed the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 (Cth).  The new law will come into effect on 12 November 2016.

Looked at one way, the new law will extend a similar protection already available to consumers under the Australian Consumer Law, to small businesses. All small businesses will need to understand how this law will apply to their business agreements.

What is a small business contract?

A small business contract is defined to mean:
  • at the time the contract is made, one or more of the parties to the contract is a business that employs fewer than 20 persons (counting full-time employees, part-time employees and casual employees who work on a regular and systematic basis, using a headcount approach, regardless of an employee’s hours or workload); and
  • the upfront price payable under the contract does not exceed $300,000 (for contracts lasting up to one year), or does not exceed $1m (for contracts lasting more than one year).

The new law will cover contracts where the small business is either the supplier or the acquirer of goods or services.  The contract would have been entered into or varied on or after the commencement of the new law (12 November 2016).

Which Contacts are affected?

The new law will affect a whole range of small business contracts, including:
  • contract for the supply of goods or services
  • contracts for the sale or grant of an interest in land (including sale or leasing of land);
  • contract for the supply of financial products and possibly financial services also, if the contract meets certain criteria set out in the legislation.

There are few exceptions proposed in the legislation so caution should be exercised.

What is an ‘unfair term’?

The new law sets out a three part test for determining whether a term is an ‘unfair term’. A term is unfair if:
  • it would cause significant imbalance in the parties’ rights and obligations; and
  • it is not reasonably necessary to protect the legitimate interests of the stronger party; and
  • would cause detriment if it were relied on.

The court must also consider whether the term is “transparent”, and must consider it in the context of the whole contract.  A term is “transparent” if it is expressed in plain language, presented legibly and clearly and readily available to affected parties. A term that is not transparent is not automatically unfair and a term that is transparent may still be unfair.  The requirement of transparency does not apply to terms which are implied into contracts by statute.

There are some comments we would make about the test:
  • In terms of the second limb – inadequate explanation of complex or onerous terms may suggest that the terms were not reasonably necessary to protect the legitimate interests of the stronger party.
  • In terms of the third limb – a likelihood of detriment is not going to be enough to satisfy the test.  However, the test of detriment does not need to be financial.
Some possible examples of unfair terms could include:
  • automatic contract renewals including for excessive periods, especially where the new fees are significantly higher; or there are excessive fees for terminating the contract; the contract renewal is triggered without notice and/or there were onerous or complicated requirements surrounding the notice that small business needed to give to if they wished to end the contract.
  • excessive damages clauses that do not reflect actual losses.
  • Unnecessarily high interest rates on outstanding money.
  • Terms allowing a party to unilaterally vary the agreement terms.
There are however, certain terms which can never be considered unfair. Excluded terms are:
  • terms that define the main subject matter of the contract.
  • terms that set the upfront price.
  • terms that are required, or expressly permitted, by a Commonwealth, state or territory law.

In practical terms what does this mean for business?

It will not be an offence to include an unfair term in a small business contract and there are no fines or penalties for doing so.

However, if a party attempts to enforce an unfair term in a small business contract that is declared unfair then remedies can including court-awarded compensation to the affected party.  Parties therefore need to be careful how they approach the enforcement of a small business contract.

A court will be able to declare a term of a small business contract to be an unfair term and therefore void. That being said, the rest of contract can potentially continue to bind the parties to it so long as the contract remains capable of operating without the unfair term.

An application to declare a term ‘unfair’ could be made by the affected small business, the Australian Competition and Consumer Commission, any state or territory regulator or Australian Securities and Investments Commission.

What should I be doing now?

Whilst there is lead time before the new law comes into operation, any business that is a small business or that does business with a small business, should start to think about reviewing its standard agreements with an eye to complying with the new law.


16 November 2015