Small businesses will be able to take advantage of unfair contract term law

Small businesses will be able to take advantage of unfair contract term law

By Daniel Fleming

November 17, 2015

On 20 October 2015, the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 was passed by both houses of the Federal Parliament.  When the Bill comes into force sometime next year, it will allow a party to a “small business contract” (as defined in the Bill) to take advantage of the unfair contract term provisions of the Australian Consumer Law (ACL) and the Australian Securities and Investments Commission Act 2001 (ASIC Act).  Presently, only individual consumers are able to take advantage of those provisions.

Currently, the unfair contract provisions of the ACL and the ASIC Act provide that a term of a consumer contract is void if the term is unfair and the contract is a standard form contract.

Section 24 of the ACL provides that an unfair term is one that:

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

Either the party affected by an unfair contract term, ASIC or the ACCC will be able to apply to the Court for a declaration that a term of a “small business contract” is unfair and therefore void.

The Bill defines a contract to be a “small business contract” if:

  1. at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons; and
  2. either of the following applies:
    • the upfront price payable under contract does not exceed $300,000;
    • the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.

In counting the persons employed by a business for the purpose of determining whether a contract is a small business contract, a casual employee is not to be counted unless he or she is employed by the business on a regular and systematic basis.

The small business unfair contract provisions do not apply to a contract that is a constitution of a company, managed investment scheme or other kind of body.

This change to the unfair contract terms law will potentially give small businesses significant leverage in negotiating standard terms and contracts with other businesses.  Importantly, the new law allows a small business to avoid unfair terms of a contract it has entered into with another small business.

Therefore, it is critical for all businesses, regardless of their size, to give careful consideration to their standard terms and conditions, and regardless of whether they are contracting with consumers or a business. This is particularly so given that a business supplying goods or services under standard terms and conditions would generally have no way of knowing whether the counter-party business has fewer than 20 employees or not.

For more information contact Dan Fleming on d.fleming@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.