Protection for small businesses against unfair contract terms : ss 23 – 28 of Schedule 2 to the Competition and Consumer Act 2010 (Cth)

BACKGROUND

Following public consultation processes, new laws[1] came into force on 12 November 2016 which extended existing consumer protection laws against unfair contract terms to “small business contracts” (e.g. business to business contracts). Under these laws, small businesses can also have an “unfair” term in a “standard form contract” declared as void in specified circumstances. In doing so they would not have to comply with the term.

Findings identified in the Explanatory Memorandum to the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 suggest that, like consumers, small businesses are vulnerable to the inclusion of unfair terms in standard form contracts as they often lack:

  • the resources to identify unfair terms, appreciate their significance and determine whether they can manage the associated risks;
  • the resources to engage in negotiations over the terms of a contract;
  • the bargaining power to successfully negotiate the terms of a contract; and/or
  • the resources and bargaining power to resist the enforcement of unfair contract terms.

The stated objective of this reform[2] is to promote fairness in contractual dealings with small businesses with regard to standard form contracts. This will reduce small business detriment and have positive impacts on the broader economy by increasing small business certainty and confidence, and providing for a more efficient allocation of risk.

WHEN DOES PROTECTION TO CONSUMERS / SMALL BUSINESSES APPLY

The unfair contract terms protection provisions are contained in ss23 – 28 of Schedule 2 to the Competition and Consumer Act 2010 (Cth) (Australian Consumer Law). Section 23 provides that a term of a “consumer contract” and “small business contract” is void if the term is “unfair” and the contract is a “standard form contract”. We do not examine consumer contracts which were protected prior to the amendments but examine the concepts of “small business contracts”, “standard form contracts” and when terms will be considered to be “unfair”.

Small business contract

In summary, in order for the contract to be a small business contract, each of the following must apply:

  1. The contract must be for the supply of goods or services or a sale or grant of an interest in land;
  1. At least one of the parties to the contract is a business that employs less than 20 people[3]; and
  1. The upfront price[4] payable under the contract is $300,000 or less, or the contract is for a duration of more than 12 months and the upfront price is $1,000,000 or less.

Standard form contracts

Standard form contracts are everywhere for example IT services contracts, advertising services contracts, mobile phone contracts, licences of office space, gym memberships etc. They are an efficient and effective way for businesses to contract. The Court will take into account any facts that it considers to be relevant however at the time of writing it “must” take into account the following in determining whether a contract is a standard form contract:

  • 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 another party was, in effect, required either to accept or reject the terms of the contract (other than certain excluded terms discussed below)in the form in which they were presented;
  • whether another party was given an effective opportunity to negotiate the terms (other than certain excluded terms discussed below); and
  • whether the terms of the contract (other than certain excluded terms discussed below) take into account the specific characteristics of another party or the particular transaction.

Excluded terms: the protection does not extend to terms to the extent that they define the main subject matter of the contract, set the upfront price payable under the contract, or are terms required by law.

Excluded contracts: the protection does not extend to contracts which are individually negotiated, or to certain types of contracts such as contracts of marine salvage or towage, a charterparty of a ship, and contracts for the carriage of goods by ship, constitutions of companies or managed investment schemes or other kinds of bodies.

After 12 November 2016: The contract needs to have been entered into, renewed or rolled over after 12 November 2016. The law also applies to amendments to contracts after 12 November 2016 but not to the terms which have not been amended.

Unfair terms

There is a three limb test to unfairness. A term will be “unfair” if:

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

The Court “must” take into account the extent to which the term was transparent[5] and the contract as a whole. Make sure your print is not too fine!

Some prescribed examples of the types of terms which may be unfair are as follows:

  • a term that permits, or has the effect of permitting, one party (but not another party) to avoid or limit performance of the contract;
  • a term that permits, or has the effect of permitting, one party (but not another party) to terminate the contract;
  • a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract;
  • a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract;
  • a term that permits, or has the effect of permitting, one party (but not another party) to renew or not renew the contract;
  • a term that permits, or has the effect of permitting, one party to vary the upfront price payable under the contract without the right of another party to terminate the contract;
  • a term that permits, or has the effect of permitting, one party unilaterally to vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract;
  • a term that permits, or has the effect of permitting, one party unilaterally to determine whether the contract has been breached or to interpret its meaning;
  • a term that limits, or has the effect of limiting, one party’s vicarious liability for its agents;
  • a term that permits, or has the effect of permitting, one party to assign the contract to the detriment of another party without that other party’s consent;
  • a term that limits, or has the effect of limiting, one party’s right to sue another party;
  • a term that limits, or has the effect of limiting, the evidence one party can adduce in proceedings relating to the contract; and
  • a term that imposes, or has the effect of imposing, the evidential burden on one party in proceedings relating to the contract.

WHAT DOES THIS MEAN FOR BUSINESSES?

Unfair terms can be declared void and unenforceable. The contract does however continue to bind the parties if it is capable of operating without the unfair term[6]. It is important that the contract contains for example a suitable severance clause, and that the relevant provisions are drafted for severance.

Whilst no fines or penalties can be imposed on a contravening party, there are a number of other remedies that it may face including injunctions and damages.

Businesses should review their contract terms if they have not already done so. If you are on the receiving end of an unfair contract term, seek advice.

Contact our Sydney business lawyers for assistance in relation to the above.  Our commercial lawyers, business lawyers, and disputes lawyers provide expertise in corporate and commercial advisory services as well as litigation and dispute resolution.  Take a look also at a sample selection of our more basic fixed fee legal services.

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[1] The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth) amended the Competition and Consumer Act 2010 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth)

[2] Explanatory Memorandum to the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015

[3] Including casual employees if they are employed on a regular and systematic basis (s.23 (5)).

[4] The meaning of this can be taken intrinsically from s.26 (2) as, in summary, being the price that is to be provided for the supply that is disclosed at or before the time the contract is entered into. It does not however include any price that is contingent on an event happening. In other words, it is the known price of the contract that will definitely be paid e.g. in a 12 month phone contract costing $10 per month, the upfront cost will be $120.

[5] i.e. it is expressed in reasonably plain language, legible, presented clearly, and readily available to any party affected by the term

[6] s23 (2) of The Australian Consumer Law

The information provided in this article is provided by way of general information only. It does not constitute legal advice, and should not be relied upon as such. Specific independent legal advice should be obtained before deciding to act, or not to act, upon the views expressed or information contained in this article.

Copyright of Heathfield Grosvenor 2016. All rights reserved.

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