As discussed in our recent article titled Small Businesses can now breathe easier thanks to new unfair contract legislation, after months of debate in both the House of Representatives and the Senate, the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 was passed and will come into effect on 13 November 2016. In this article we will explain what this actually means when it comes to everyday business. Importantly, it provides new protection for small businesses on unfair contract terms.
Currently Schedule 2 of the Competition and Consumer Act (2010) “ACL” and the Australian Securities and Investments Commission Act (2001) “ASIC Act” contain mirroring terms that provide consumer protections against unfair contract terms in standard form contracts. The ACL grants protections in relation to the supply and sale of goods and the ASIC Act protections in relation to the supply of financial services.
Scope of the Act
The purpose of this Act is to extend these consumer protections against unfair contract terms to small businesses. These amendments will come into force 13 November 2016 and make unfair terms in a standard form small business contract void and unenforceable. In small business to small business transactions these amendments will affect small businesses on both sides of the contract as either the buyer or seller of goods or services. For businesses that do not fall within the definition of small business, additional care will need to be taken in standard terms and conditions used. Especially in the context that these amendments were enacted largely to counteract the perceived power imbalance most small businesses face in he commercial context.
This Act is not retrospective and so it will not apply to contracts that were entered into prior to the commencement of the provisions 13 November 2016, however, it will apply to contracts that are entered, renegotiated or renewed after this date.
For the purpose of the amendments a small business is a business with 20 or less employees. This number includes employees working part time and casual staff with regular and systematic hours. This is the definition adopted by the Australian Bureau of Statistics (ABS).
Small Business Contract
A small business contract is defined where one party classifies as a small business for the purposes of this legislation and the upfront contract prices is no more than:
- AUD$300,000 for contracts of less than 12 months; or
- AUD$1,000,000 for contracts of more than 12 months.
The upfront cost is defined in the both Acts (ACL s26(2) and ASIC s12BI(2)) but in practice will in most cases be the entire price under the contract.
Standard Form Contract
If a party alleges that a contract is a standard form contract the onus is on the other party to prove otherwise. In making a decision on this matter the court must consider the following:
- Relative bargaining power or the parties;
- Whether contract was prepared by one party prior to any discussion between the two parties;
- If a party was in effect required to either accept or reject the contract terms;
- Whether a party was given effective opportunity to negotiate; and
- Whether terms take into account specific characteristics of the other party/business
Key Provisions Exempt from Unfair Term Conditions
A number of key provisions within a contract are expressly exempt from these provisions including:
- A term that defines the main subject matter of the contract, but only to that extent;
- Set out upfront price under the contract; and
- Terms required or expressly permitted by State or Commonwealth law.
Additionally, the unfair terms provisions will not apply to a contract that is the constitution of a company or generally contracts in relation to insurance.
Businesses have been granted a 12 month leniency period in which to review their business to business contracts in relation to unfair terms. Any standard contracts or terms and conditions used in sale or supply of goods and services should be reviewed. Small businesses need to be aware that they may be both the victim and the perpetrator of an unfair term. Review of a small business’ contracts with other businesses is important to ensure that they do not fall foul of the new provisions in either capacity.
For larger businesses it is important to establish which contracts they have on foot that will fall within the scope of these provisions when they are renewed or renegotiated. As well as ensuring any new contracts comply with the provisions. Ultimately, assessing current and potential business relationships and ascertaining that other party’s size is crucial for all businesses.
In relation to these amendments size really does matter. We will be posting further articles on this topic including what is an unfair term.