Unfair contract terms, a ‘fair go’ for small business?
In recent months, the Commonwealth Government followed up its election promise to give small business a ‘fair go’ by releasing draft legislation which confirms that consumer protections relating to unfair contract terms will be extended to protect small business. The new laws are expected to apply from early 2016.
Currently, unfair terms in standard ‘consumer contracts’ are void under the Australian Consumer Law. Generally, a term will be regarded as ‘unfair’ if;
1. it would cause a significant imbalance in the parties’ rights and obligations arising under the contract
2. and is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term
3. and would cause detriment (whether financial or otherwise) to either party if it were to be relied on.
These provisions only protect ‘consumers’ (individuals) who enter into ‘standard form contracts’, where the consumer is acquiring goods, services or an interest in land for wholly or predominantly personal, domestic or household purposes.
The draft legislation extends these protections to small business (and, therefore, commercial ‘business to business’ contracts). The proposed laws are targeted at improving the negotiating power of small businesses in circumstances where they are offered standard terms with little to no opportunity to vary them (for example, in competitive tender bidding processes).
It appears that the new provisions will only apply where;
1. at least one party to the contract employs fewer than 20 people
2. and the ‘upfront’ price payable’ (excluding interest and contingent fees) does not exceed either; $100,000 for contracts with a term of 12 months or less; or $250,000 for contracts with a term of more than 12 months.
The scope of contracts that may fall within these parameters is significant and will include contracts where both parties are ‘small businesses’ (with fewer than 20 employees). On its face, this approach seems counter-intuitive to the Government’s objective of giving small business ‘a fair go’ and may, in fact, result in higher compliance costs for such businesses.
The proposed legislation does not expressly exclude specific industries which are already heavily regulated, such as franchising and retail leasing.
If you use standard form contracts, consider what changes might be required to your contracts (and business operations) when the new laws come into effect. You should be wary of taking a ‘one size fits all’ approach. ‘Unfairness’ is a fluid concept, which may apply differently to different small businesses.
If you are a small business, on commencement of the new laws, you will enjoy a new level of negotiating power in circumstances where you are presented with unfair ‘standard terms’.