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msi - lachlan commins1By Lachlan Commins, Patterson Houen Commins, Lawyers, Sydney.

Do you operate a small business which employs fewer than twenty people?

As part of your business operations, do you enter into contracts with larger organisations?

Are you worried that terms in the contract are unfair and may operate to your detriment?

New Legislation

Well, have no fear, because the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 is here.[1]

As part of your business operations you may find that it is essential, or at the least commercially prudent, for you to enter into contracts with larger organisations that appear to be placed in a stronger bargaining position than yourself. To do so is risky, as the disparities in bargaining power may mean that the terms of the contract have been loaded in favour of the larger party and to your own (potential) detriment.

This is where, however, the legislation mentioned above may come to your aid.

If:

  • You are a small business that employees fewer than twenty people; and
  • You have entered into a ‘standard form contract’ (as an acquirer or supplier); and
  • The ‘upfront price payable’ under the contract is for no more than $300,000, or $1 million where the contract is for longer than 12 months; and
  • The contract was entered into or renewed, or the applicable term was varied, on or after 12 November 2016,

you may apply to a court or tribunal for a declaration that a particular term of the contract is ‘unfair’. If the court or tribunal makes the declaration, the term will henceforth be considered void, meaning that it will cease to be applicable between the parties. The rest of the contract will, however, remain in place to the extent that it can operate without the avoided term.

It is important to note that it is only a court or tribunal that has the power to declare a contract term as ‘unfair’ in order to enliven the benefit of the legislation. Further, the legislation does not make it an offence in itself, and nor does it penalise a party responsible, to have included a term in a contract which is later declared by the court to be ‘unfair’. It will be a contravention of the legislation, however, if a party proceeds to enforce or rely on the term after it has been declared as ‘unfair’.

The Essentials

So, what is a ‘small business’ for the purposes of the legislation? If at the time of entering into the relevant contract you employ fewer than twenty people you will be classified as a ‘small business’. This figure is to be calculated on a ‘head-count’ basis (that is, figuratively, number of bodies) and not in accordance with the number of hours worked by each employee. Additionally, all casual employees are to be included in this count as long as they are employed on a regular or systematic basis, and further only employees of the legal entity entering into the contract are to be included.

You may be unsure at this stage whether or not the contract you have entered into is a ‘standard form contract’ and therefore covered by the legislation. However, you need not worry at this stage. If in any proceedings dealing with the legislation, if one party to the contract alleges that it is a ‘standard form contract’ the onus will be on the other side to prove that it is not. Accordingly, if in any proceedings, you allege that you have a standard form contract, the court or tribunal will presume that it is one unless the other side can show that it is not. Essentially, a ‘standard form contract’ is one that has been offered to the other party on a ‘take-it-or-leave-it’ basis with little or no scope for negotiation regarding the terms that have been included.

What is, I hear you asking, the ‘upfront price payable’? Think of this amount as the contract sum, what we lawyers call the ‘consideration’ passing under the contract. In calculating this amount, do not include any contingent charges or fees which may or may not arise depending on the occurrence or non-occurrence of a particular event (such as late fees or other penalties); that is, focus on the agreed-to-sum that is to pass from one party to the other as payment for the goods or services that are to be supplied. Importantly, if the contract is a commercial loan, only the principal sum will constitute the upfront price payable and not the interest payments.

And finally, what, oh what, could be considered an ‘unfair term’? The definition of ‘unfair’ is not expressly provided in the legislation, but it does nevertheless list out a series of clear contractual scenarios that demonstrate when a term will be considered unfair. Additionally, both the ACCC and the ASIC websites provide similar examples of hypothetical contract terms that each demonstrate when a contract term may be considered as unfair. In essence, if a particular contract term unreasonably provides one side with a clear and unnecessary advantage or level of power in the relationship and which can be enforced to the detriment of the other party, the court may well consider the term unfair.

One more thing…

Let it be known, that those contract terms which: define the ‘main subject of the contract’; set the ‘upfront price payable’; or are otherwise expressly required or allowed for by a law of a State or Commonwealth, cannot be declared as ‘unfair’ and are therefore outside the scope of the legislation’s protections.

Also, you should know that: the legislation will apply whether you (as the small business) are the acquirer or the supplier under the contract; that government contracts are covered to the extent that the government  body is carrying on a business; and the legislation does not apply to commercial insurance contracts or shipping contracts.

Finally, contracts entered into before 12 November 2016 will not be affected by the new legislation; however if that contract is renewed, varied (in part), or transitions into a ‘holding-over’ period after this date, the legislation will apply to the renewed contract, the varied term(s), or the latest contractual period as the case may be.

What you can do

If you are a non-small business party:

  1. Undertake an exercise to review all your contracts which will be affected by the legislation. That is where:
    1. The other party is a small business;
    2. The contract is and has been agreed to in ‘standard form’; and
    3. The ‘upfront price payable’ is for less than the prescribed amount.
  2. Isolate those terms which a third party could consider to be unfair in the circumstances of the corresponding contractual and business relationship. To this extent it may be helpful to consult the relevant regulator’s website (ASIC or the ACCC) as they each contain useful examples as to what a court or tribunal would consider unfair.
  3. Either eliminate or redraft such unfair terms, or invite the other contracting party to enter into negotiations about the application and effect of the term(s).

If you are a small business party:

  1. Undertake an exercise to review all your contracts which will be affected by the legislation. That is where:
    1. You have agreed to the contract without having being invited or being able to negotiate its terms (that is, on a ‘take-it-or-leave-it-basis’); and
    2. The ‘upfront price payable’ is for less than the prescribed amount.
  2. Isolate those terms which you consider operate unfairly against you to the extent that they seem to unnecessarily leverage the bargaining power and rights under the contract in favour of the other party.
  3. Address such terms with the other contracting party to see if the term can be eliminated or redrafted so that it operates more evenly and fairly between you and the other party.
  4. As a measure of last resort, seek legal advice with a view to perhaps having the term declared ‘unfair’ – and therefore void – by a court or tribunal.

[1] From 12 November 2016.

Contact the author directly by email or by telephone

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