HWL Ebsworth Lawyers

Unfair Contract Laws Extended to Business Contracts

Late last month, the Small Business and Unfair Contract Terms Bill 2015 was passed by federal parliament. The new law amends the unfair contract terms provisions of the Australian Consumer Law (ACL) and Australian Securities and Investments Commission Act (ASIC Act) to cover 'small business contracts'. This will make Australia the only major jurisdiction in the world where protections of this type will apply to business to business contracts.

The new law provides that any term in a standard form small business contract that is 'unfair' will be void and therefore unenforceable. The federal government has described the law as a 'small business' protection. However, the drafting of the legislation means it may potentially apply to a range of substantial contracts and corporations.

So, what is a small business contract?

A contract will be a 'small business contract' if:

  • At the time of entering the contract, at least one party to the contract is a business that employs fewer than 20 people (excluding casual staff); and
  • Either the upfront price payable is less than $300,000 or, if the contract term is greater than 1 year, less than $1m.

This definition would seem to rise to some potentially anomalous results. For example: 

  • The legislation refers to 'a business that employs fewer than 20 people'. 'Business', in this context, is not defined. It is also not clear how a 'business' (as opposed to a corporation or a person) can be an entity that enters into a contract. If a large corporation goes into a new area of business, can it claim the benefit of these protections until there are more than 20 employees in its new business unit? Can a multinational claim the benefit of these laws until it has 20 employees in its Australian business?
  • The definition of 'upfront price' excludes amounts contingent on the occurrence of a particular event. For loan contracts, the relevant definition of 'upfont price' in the ASIC Act excludes interest payments, but does include the principal loan amount. This means a wide variety of lending arrangements could be caught, varying on the basis of the loan term. Similarly, contracts under which royalties or licence fees of many millions of dollars might be payable could still be caught as 'small business contracts' if each payment is contingent on the occurrence of an event (eg, such as a sale).  

What's a 'standard form' contract?

The new regime only applies to 'standard form' contracts. The question of whether a contract is 'standard form' is subjective and left to the judgement of the court. Clearly, contracts such as 'shrink wrap' software licences and non-negotiable standard form leases or supply agreements will be caught. It is not clear, however, how much negotiation must be engaged in to take a contract outside the scope of these provisions. The legislation does make it clear, that merely negotiating on price or the goods or services to be provided is not sufficient.

What is an unfair term?

Broadly speaking, a term is 'unfair' if it causes an imbalance in the parties’ rights and obligations that is greater than reasonably necessary to protect the legitimate interests of the party advantaged by the term, and the term would cause detriment if it were relied on. A contract term does not actually have to be used unfairly to be challenged under this legislation - it is sufficient for a term to be void if it could, in theory, be used unfairly.

What are the practical implications of this new law?

These new laws will have far reaching effects across a range of industries. For example: 

  • A number of common clauses in standard form franchise agreements will be susceptible to challenge under these provisions. Most franchisors will need to review and potentially redraft significant aspects of their franchise agreements;
  • Supply agreements - many large suppliers and many large purchasers (such as the supermarkets and department stores) insist on the use of standard form supply contracts. Where the counterparties are 'small businesses', many clauses in such agreements may have to be redrafted to provide more balanced rights and obligations for both parties;
  • Finance contracts, hire agreements and telecommunications contracts will all have to be rewritten for small business customers in the same way that the consumer versions of such contracts have recently had to be revised for the existing unfair contract laws;
  • Landlords of large premises that use standard form leases may find clauses that are too broad or protective may become unenforceable; and
  • Independent contractors will gain a powerful way to challenge unfair terms in their contracts of engagement.
12 months to get ready

Standard form small business contracts will be caught if they are entered into 12 months after the new Act receives Royal Assent. Contracts that are renewed after this time, and variations to existing contracts after this time, will also be caught by the new regime.

What should you do now?

Small businesses as well as large corporates should seek legal advice to determine whether their contracts will be caught by the regime. Contracts that may be caught should be reviewed to assess the risks and potential consequences of challenge. In many cases, it is likely to be possible to redraft provisions to make them more resistant to challenge. Although a 12 month transition period may seem long now, the time required to redraft and implement new standard form agreements can be considerable. We therefore recommend that clients start the review process sooner rather than later.