Protecting small business against unfair contracts

Protecting small business against unfair contracts

By Leonie Kyriacou

May 18, 2017

It is estimated that there are 2.1 million small businesses in Australia.  ACCC research estimates that those businesses are offered about 8 “standard form contracts” each year.  For the most part, those contracts are offered to the small businesses on a “take it or leave it” basis.

Even if there was an opportunity for a small business to seek to negotiate the terms, the majority of small businesses lack the internal resources necessary to allow them to participate in the negotiation in any meaningful way.

So, it is hardly surprisingly that ACCC also found that over 60 % of small businesses claim to have experienced unfairness due to contracts and 44% believed that they have experienced harm as a result of unfair terms in contracts.

Recent legislation has gone someway to rectifying this imbalance.  By amendments made to the Australian Securities and Investments Commission Act 2001 (ASIC Act) and the Competition and Consumer Act 2010 (CCA), the protections previously only afforded to consumers against unfair contract terms in “standard form contracts” have been extended to cover small businesses.

Today’s discussion will explain what the new laws are all about and how they may impact on your business to business dealings.

 

Purpose of the new laws?

In the Explanatory Memorandum for the new legislation, the Government outlined its concern that small businesses, like consumers, are vulnerable to unfair terms in standard form contracts.  It noted that unlike larger businesses who may have robust risk management policies, most small business do not have in-house expertise able to properly review and assess contracts and the risks they may pose to the business.  The cost of obtaining advice on such risks can be costly and disproportionate to the potential benefits of entering into such contracts.

For example, a telecommunications provider may provide a business with a lengthy contract to purchase a mobile phone plan.  It is given as a “take it or leave it” deal.  The contract may well contain terms which are grossly unfair and one-sided but the cost of properly reviewing that contract may dwarf the cost of the product itself.  So, if the business needs the phone, it is left with little option other than to just sign the contract as it is.

The Government also took the view that existing competition laws largely address ‘unfair’ behaviour in business dealings, rather than unfair contract terms.

The purpose of extending consumer protections against unfair contract terms is to provide small businesses with a level of protection in circumstances where there is an imbalance of power between the parties in making a contract and that imbalance has resulted in some level of unfairness.

 

What contracts do the new laws apply to?

  • Get your dates right

The new laws only commenced on 12 November 2016, so they only apply to contracts entered into or renewed after that date.  If a contract is rolled over on a periodic basis (for example, month to month), the protections apply from the first time a new period starts on or after 12 November 2016.

If a contract commenced prior to 12 November 2016 but it was varied after that date, the new laws apply to the variation only.

  • Small business contracts only

The new laws do not apply to all contracts.  The application of the new laws is limited:

  • the CCA covers contracts which are for the supply of goods or services or for the sale or grant of an interest in land;
  • the ASIC Act covers contracts for a financial product or for the supply or possible supply of a financial product;
  • both the CCA and the ASIC Act, only covers contracts:
    • between parties where at least one of the parties is a small business; and
    • that have an upfront payable price under the contract of no more than $300,000 or $1 million if the contract is for more than 12 months; and
    • that are a “standard form contract”.

Each of these requirements is discussed in detail below.

Contracts which are also covered by industry codes (for example, the Franchising Code of Conduct or the Code of Banking Practice) will also be covered if they meet the criteria outlined above.

  • Some things are excluded

The legislation excludes some contracts and some contract terms from the unfair contract protections.

Excluded contracts are:

  • shipping contracts;
  • constitutions of companies, managed investments schemes or other kids of bodies;
  • certain insurance contracts regulated under the Insurance Contracts Act 1984 (including car insurance contracts);
  • contracts in sectors exempted by the relevant minister (there are currently no exempt sectors); and
  • individually negotiated contracts (which are therefore not standard form contracts)

Certain contract terms which may appear in standard form contracts are also excluded.  These terms are:

  • terms that define the main subject of the contract (for example, a term which lists the goods or services acquired under a contract);
  • terms that are necessary for the supply of goods and services to occur;
  • terms that set the upfront price payable; and
  • terms that are required or expressly permitted by a law of the Commonwealth or state or a territory.

What is a standard form contract?

The legislation does not define what is meant by “standard form contract”.  However, in general terms, a standard form contract is one that has been prepared by one party to the contract and is not subject to negotiation between the parties. As stated above, it is a contract which is usually (although not always) offered to the other party on a ‘take it or leave it’ basis.

Most businesses are regularly offered standard form contracts in their business dealings.  Common examples include agreements with internet providers, mortgage documents for home loan or business loans; agreements for credit cards or the terms attached to the back of a receipt for the purchase of goods.

Under the new legislation, if a small business alleges that a contract is a “standard form contract”, the contract is presumed to be a standard form contract unless proved otherwise by the party who has prepared the contract.

In determining whether a contract is a “standard form contract” a court may use its discretion, but must take into account whether:

  • one of the parties has all or most of the bargaining power relating to the transaction;
  • the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
  • another party was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented;
  • another party was given an effective opportunity to negotiate the terms of the contract; and
  • the terms of the contract take into account the specific characteristics of another party or the particular transaction.

 

What is a small business?

A ‘small business’ is defined in the CCA and ASIC Act as a business that employs fewer than 20 people employed at the time the contract is entered into (including casual staff employed on a regular or systematic basis).

Only those people employed by the entity which has entered into the contract will be counted.  This means that even if the business is a subsidiary of a larger company or the business has subsidiaries of its own, the employees of those other entities will not be counted.

If an employee works across several entities in related businesses, the employee will count as an employee for the entity that it works for on a regular and systematic basis.

Those of you familiar with industrial legislation such as the Fair Work Act would know that the definition of “small business” varies from that legislation.  It uses a definition of 15 or less employees and requires an entity to count the employees of all associated entities.

For the unfair contract protections to apply, only one party to the contract need be a small business but it is possible that both parties to the contract could meet the definition of “small business”.

 

What is the upfront price payable?

As stated above, for the protections under the new legislation to apply, contracts must have an “upfront price payable” under the contract of no more than $300,000 or $1 million if the contract is for more than 12 months.

The “upfront price payable” means the amount which is disclosed at or before the time the contract is entered into.  It may also include future payments provided that they are disclosed to the small businesses at or before the time the contract is entered into.

However, any interest payable under the contract is excluded from the “upfront price payable” threshold.  Any fees or charges that are contingent on certain circumstances applying (like late fees) are also excluded.

 

When is a term of a small business contract unfair?

The new legislation states that a term of a contract is unfair if:

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

Only a court can determine whether a contract term is unfair.

In deciding if a contract term meets the definition referred to above, a court has the discretion to take into account any matters as it thinks are relevant but the court must consider the contract as a whole and the extent to which the term is transparent.

When considering a contract term in the context of a contract as a whole, a court may form the view that the “unfairness” of a particular term is balanced by benefits offered in other sections of the contract.  For example, a term may limit a party’s right to terminate in one clause but impose comparable limitations on the other party in a different clause.

A term is considered to be “transparent” if it is:

  • expressed in reasonably plain language;
  • legible;
  • presented clearly; and
  • readily available to any party affected by the term.

The Explanatory Memorandum to the Trade Practices Amendment (Australian Consumer Law) Bill (No 2) 2010 (Cth) that just because “a term is not transparent it does not mean that it is unfair and if a term is transparent it does not mean that it is not unfair”.[1]

 

What does this all mean in practice?

The legislation provides some examples of “unfair” contract terms:

  • a term that permits, or has the effect of permitting, only one party (but not another party) to avoid or limit performance of or terminate the contract;
  • a term that penalises, or has the effect of penalising, only 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 (including opt-out automatic renewals);
  • 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.

 

Case Study: Chrisco’s unwelcome Christmas Gift

Australian Competition and Consumer Commission v Chrisco Hampers Australia Limited [2015] FCA 120478 (ACCC v Chrisco)

The ACCC claimed that Chrisco Hampers Australia Limited (Chrisco) has contravened the unfair contract term provisions of the CCA through the operation of the ‘HeadStart’ clause in its standard form contract.

The HeadStart clause required customers to allow Chrisco to withdraw funds from their bank account for the pre-payment of Christmas hampers.  The ACCC commenced proceedings on the basis that money would continue to be withdrawn from the customers’ account even though the original hamper had been paid for in full.  The clause operated so that Chrisco could continue to withdraw funds and would apply those funds to a hamper for the following year until the customer opted out of it.  The payments made under the plan were fully refundable.  A customer could opt out of the HeadStart Plan by ticking a box in the order form.  But they were automatically included in the plan unless they opted out.  The HeadStart Plan did not grant the customer a discount and any refund to the customer would be without interest

The ACCC argued that consumers were not made aware of the clause.  That is, it was not “transparent” and that it represented a detriment to consumers because it committed them to an interest free saving plan.

It was common ground that the agreements between Chrisco and its customers were “consumer contracts” and “standard form contracts” within the meaning of the legislation.  Chrisco made no submissions that the HeadStart term was reasonably necessary to protect its legitimate interests and hence it was presumed that it was not reasonably necessary.

Edelman J said the “essential issue” was whether the HeadStart term caused a significant imbalance in the parties’ rights and obligations arising under the contract.

In making his assessment Edelman J considered whether or not the HeadStart term was transparent.  In the hardcopy catalogue produced by Crisco, the HeadStart term was at the bottom of the order form but it was referred to at other places.  However, his Honour held that the HeadStart term:

(a)     did not clearly identify the amounts that would be debited;

(b)     did not identify the means by which the amounts would be determined; and

(c)     was unclear as to whether Chrisco would write to a customer to confirm that it would proceed with the HeadStart Plan before doing so;

(d)     did not include any explanation as to how a customer could cancel the plan and obtain a refund; or

(e)     did not include any details about what would happen if the debits continued after the customer had paid an amount that exceeded the value of the hamper they ordered in the previous year.

Overall, Edelman J held that the transparency of a term can be reduced where the payment amount or price is not clearly identified (this is especially important where a direct debit is involved as the first time a consumer sees the payment amount should not be on an Order Confirmation) [2] and the method by which a consumer can opt-out or cancel a contract should be clear and easily accessible.  He held that the manner in which the information is presented should be legible and clear especially any terms which impose terms and conditions on the consumer (important clauses and information should not be in ‘fine print’ at the bottom of a back page).

Unsurprisingly, Edelman J held the HeadStart clause was void as an unfair term because there was a substantial imbalance of power between the parties.

 

Case Study: Medico’s Fee

Australian Competition and Consumer Commission v ACN 117 372 915 Pty Ltd (in liq) (formerly Advanced Medical Institute Pty Ltd) [2015] FCA 368

Another case brought by the ACCC regarding unfair contractual terms regarded the refund provision of a medical treatment supply contract.[3]

The refund term required the patient “to pay a 15% administration fee, a pro-rata fee for the expired portion of the treatment, a pro-rata fee for the 30-day notice period, and the cost of medication supplied or prepared for the patient”.[4]

The termination clause applied regardless of when the contract was terminated by the patient and the reason for termination.[5]

Ultimately the court held that the termination clause acted as a penalty provision and created a significant imbalance in the parties’ rights and obligations. [6]

Justice North held that “it was unfair to hold the patient to the agreement on penalty of payment of fees, the method of calculation of which was unknown, imposed in order to cancel the treatment.[7]

The Court held that cancellation clauses must be clear and in writing at the time the contract is entered into.  The unfairness of such a term was increased given the contract was for the supply of medical treatment rather than in a normal commercial arrangement.

An appeal against North J’s decision was rejected by the Full Court of the Federal Court of Australia.[8]

 

So a Court says a term is “unfair”, what next?

If a term that is deemed to be ‘unfair’ by a court or tribunal, that term will be void.  This means that the term is treated as though it never existed (and so is not binding on the parties) but the rest of the contract may continue to operate without that term.

A court can declare that all or part of a contract is void and it can also make orders directing a party to refund moneys or return property to the small business or provide services to the small business.

 

Practical Options?

  • What if an unfair term applies to your business?

Technically only a court can declare that a term of a standard form contract is unfair.  However, the new legislation will benefit small business when dealing with the impact of “unfair” terms.

Having legislation which protects business against unfair terms provides small business with an effective tool to use to seek the other party’s agreement to amend or remove the relevant terms.

The new law creates an important legislative framework from which to require greater parity in commercial dealings.

If you think a term is unfair:

  • you need to contact the other party placing a reliance on the legislation, seek their agreement to have it removed or amended;
  • subject to the circumstances you can also make a complaint directly to the ACCC or ASIC; or
  • seek legal advice on other options to insist your competitor complies with the new laws.

While ASIC and the ACCC rarely act for individuals, they may choose to take action of their own accord if they consider that the matter has broader public interest and is within their areas of responsibility.

  • What if you have clauses in your contracts that may be regarded as unfair?

Businesses who use standard form contracts or offer goods or services subject to their own standard form contract must take a range of steps to ensure compliance with the new laws.  These steps are summarised below:

  • review your:
    • standard terms; and
    • list of clients ,

to work out what and who may be covered by the new laws;

  • if you have identified clients who may be “small businesses”, review the arrangements offered to them and consider whether any steps need to be taken to:
    • amend any unbalanced arrangements;
    • introduce negotiated agreements (as opposed to standard form contracts)
  • review contracts generally to improve plain English drafting, ensure all terms are unambiguous and otherwise improve transparency

And of course, seek legal advice if you are uncertain as to whether or not a contract you are a party to is affected by the new law.

 

For more information contact Leonie Kyriacou on l.kyriacou@pigott.com.au

 

This article is intended to provide general information in summary form on a legal topic, current at the time of publication.  The contents do not constitute legal advice and should not be relied on as such. Formal legal advice should be sought in specific circumstances.

 

 

[1] Trade Practices Amendment (Australian Consumer Law) Bill (No 2) 2010 (Cth) at 5.39

[2] [2015] FCA 120478 at 81, 87, 88, 89-91

[3] Australian Competition and Consumer Commission v ACN 117 372 915 Pty Ltd (in liq) (formerly Advanced Medical Institute Pty Ltd) [2015] FCA 368

[4] [2015] FCA 368 at 951

[5] [2015] FCA 368 at 951

[6] [2015] FCA 368 at 951

[7] [2015] FCA 368 at 954

[8] NRM Corporation Pty Ltd v Australian Competition and Consumer Commission [2016] FCAFC 98 at 204-205