Unfair Contract Terms – is it a thing of the past for small business?

What’s new?

The Government is introducing legislation [Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015] extending the unfair contract term protections under the Australian Consumer Law to small business.

Why is this being pursued?

It seems that the main motivation behind this action is to “level the playing field” in B2B transactions by protecting small businesses who lack the resources, experiences and expertise resources to negotiate contract terms or understand the legal and practical implications of them.

Some small business owners:

• are more likely to feel that their business does not have the resources to negotiate a better deal or they may consider the costs disproportionate to the perceived risk of detriment that might result from entering into the contract; or
• that standard form contracts are offered on a “take it or leave it basis” with terms that cannot be negotiated

Evidence suggests that businesses tend to focus on price and quality, and have less understanding of the common terms and conditions found in standard form contracts.

As a result, the other party offering standard form contracts have an incentive to include ‘unfair’ terms, i.e. terms that advantage their position beyond their legitimate business interest and, if exercised, can cause detriment to the other party

Ultimately, once the new laws are enacted, it is expected that this option will significantly reduce the incentive for businesses to include and rely on unfair terms. This will have a significant positive impact on the wellbeing and confidence of the more than two million small businesses in Australia, most of which transact through standard form contracts.

When will it start?

The new law will amend the Australian Securities and Investments Commission Act 2001 (ASIC Act) and the Competition and Consumer Act 2010 (CCA), and is planned to come into effect in early 2016 after a six-month transition period.

When does it apply?                                                      

Only applies to “small business” and “low-value contracts”.

A contract will be deemed a “small business” contract if at the time it is agreed to, at least one party employs fewer than 20 people and where price payable pursuant to the contract does not exceed either $100,000, or the upfront price of $250,000 for contracts of more than one year in duration.

What happens when a term is found to be unfair?

In the same way that an unfair term contained in a standard form consumer contract can be declared void, a court will now also be able to declare void an unfair term of a standard form small business contract.

Where a term is declared void, that term will be treated as if it never existed, however the contract will continue to bind the affected parties to the extent that the contract is capable of operating without the unfair term.

How to calculate number employed?

In calculating persons employed, each full-time, part-time and casual employee constitutes one person. Only casual employees that are employed on a regular and systematic basis (not on a seasonal roster) are to be counted.

What is an unfair contract term?

An unfair term is defined as a term that:

• causes a significant imbalance in the parties’ rights and obligations under the contract;
• would cause detriment (whether financial or otherwise) to a party if it were to be relied on; and
• is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term.

Before deeming a term unfair, a court is also required to consider:

• the extent to which the contract is transparent — that is, if the term is expressed in reasonably plain language, legible and presented clearly and readily to the party affected by it; and
• the contract as a whole.

In other words, a term which is not fair to one party and not reasonably necessary to protect interest of other.

A term that defines the main subject matter or sets out the upfront price of a contract, or a term that is required or expressly permitted by law, cannot be declared unfair.

What is a standard form contract?

Generally, a contract is considered to be standard form if one of the parties has not had the opportunity to negotiate or change the terms of the contract when agreeing to it.

In addition to using its discretion in determining whether a contract is standard form, a court is required to consider:

• 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 in the form in which they were presented;
• whether another party was given an effective opportunity to negotiate the terms of the contract; and
• whether the terms of the contract take into account the specific characteristics of another party or the particular transaction.

In other words, pre-prepared standard form where other party has not had opportunity to negotiate.

Some examples of unfair terms

Industries where unfair terms were reported in stakeholder submissions included: telecommunications, financial products and services, franchising, retail tenancy, waste management, architecture, independent contractors and advertising. Some specific industry examples raised include:

Franchisees: clauses permitting unilateral termination; compulsory acquisition of franchises at less than market rate; liquidated damages that do not reflect actual losses in franchise agreements; and a franchisor to unilaterally vary the operation and procedures manual and change a franchisee’s obligations.

Retail tenancy agreements: onerous and non-transparent terms and conditions contained in shopping centre ‘fit out’ manuals unreasonable ancillary terms such as refurbishment requirements as part of these fit out guides or directors guarantees including security interests / mortgages over directors property.

Financial services and credit contracts targeting small businesses in urgent need of finance: – ‘fee farming’, where a small business that is seeking a loan is liable to pay a brokerage fee even if the broker’s conduct contributed to the small business failing to obtain the loan; and – ‘equity stripping’, where a small business that is already in default has its debt refinanced and is then liable to pay excessive interest and default fees.

Telecommunications industry: suppliers unilaterally varying the price or included available data or calls), automatic renewal terms and terms that permit the supplier to avoid or limit their obligations.

Waste management: limit a party’s right to sue, automatic renewal terms, terms permitting unilateral variation or disparity in the rights to terminate a contract, and terms that allow one party to limit or avoid their obligations.

Online advertising services: automatic renewal with onerous and/or excessive notice requirements, which can lock customers in, particularly as there are often significant fees for early termination.

What do you need to do?

With small business to be protected under unfair terms laws in 2016, all businesses will need to consider the enforceability of their B2B standard term contracts to minimise the risks that various terms might be declared to be void.

With all terms, be transparent – use plain language, be legible, present the terms clearly and readily.

Author

Joe Kafrouni, Legal Practitioner Director, Kafrouni Lawyers

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