From 12 November 2016, if you work with small businesses and use standard form contracts, you must ensure that your contracts do not contain unfair terms or you risk having part, or all, of those terms knocked out. This article provides an overview to these changes.

Treasury Legislation Amendments (Small Business and Unfair Contracts Terms) Act 2015 (the Act) On 12 November 2016, the Act will be enforced, amending the Australian Securities and Investments Commission Act 2001 and Competition and Consumer Act 2010 (more specifically Schedule 2 – The Australian Consumer Law). The purpose of the Act is to extend the existing unfair contract term provisions to small businesses entering into standard form contracts valued less than the prescribed threshold.

What does this mean for you?

If you work with small businesses and intend on entering, renewing or varying your standard form contracts, which relate to such things as:
1. Unilateral variation of terms and conditions. For example, where you may amend the terms and conditions of a contract and publish them on your website without sufficient and/or reasonable notice to your customer;
2. Automatic rollover of the contract. For example when a contract expires and you automatically renew it for a further term, unless notice has been provided by your customer that they do not intend to extend the contract; or
3. Enforcing contingent fees. For example default fees and/or liquidated damages which are not disclosed at the time the contract is entered into, then it is essential that you review your contracts before 12 November 2016, otherwise you run the risk that part, or all, of your contract terms may be knocked out by the Court.

What is a small business?

A business is taken to be a small business where it employs fewer than 20 persons, excluding casual employees not  employed on a regular or systematic basis. A head count approach will be used to calculate the number of employees.

What is a small business contract?

A contract is a small business contract if either of the following applies:
1. The upfront price payable under the contract does not exceed $300,000.00; or
2. The contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.00.

Is my small business contract a standard form contract?

As stated above, the unfair contract provisions will affect standard form small business contracts.

Whether a small business contract is a standard form contract will be a question to be decided case by case.

In the past, the Courts, in deciding whether a contract is a standard form contract, have taken  into account such matters as:
1. One of the parties has all or most of the bargaining power relating to the transaction;
2. If the contract was prepared by one party before any discussion occurred between the parties;
3. Another party was required to either accept or reject the terms of the contract;
4. Another party was given an effective opportunity to negotiate the terms of the contract; and
5. The terms of the contract and whether they take into account the specific characteristics of your customer when entering into the contract with them.

Therefore, a standard form contract is a contract which has been prepared by you and is not subject to negotiation, being when your customer has to either accept the terms of the contract or not i.e. on a 'take it or leave it' basis. Examples of standard form contracts in credit are where there is a supply of goods and services to consumers in industries such as telecommunications, finance, domestic building, gyms, rental agreements and utilities.

To which standard form small business contracts DOES the Act apply?

The Act will apply to small business contracts that:
1. Have been renewed on or after 12 November 2016. As such, the Act applies from the renewal date; or
2. Have been varied on or after 12 November 2016. That is, the Act will apply to the term(s) varied on or after 12 November 2016.

To which standard form small business contracts DOES NOT the Act apply?

Whilst most standard form small business contracts will be covered by the Act, there are some exceptions, these being:
1. Contracts entered into before 12 November 2016 (subject to any renewals or variations to the contract and/or terms and conditions);
2. If your customer is unable to allege that your terms of contract are unfair merely on the basis that they have changed their mind, or no longer require the goods and/or services from you. This applies where you are supplying goods and services which are specifically defined in the contract;
3. Where the upfront price has been clearly stated in the contract at the time in which the contract was established;
4. Where there is a requirement or you are expressly permitted by a law to include a specific term. For example, some legislation may permit the inclusion of terms as a matter of public policy to ensure specific transactions occur i.e. cooling- off periods in various industries and their relevant statutory provisions;
5. Terms that have been subject to genuine negotiations between you and your customer;
6. Shipping contracts (as they are subject to a comprehensive legal framework that deals with maritime contracts);
7. Contracts that are constitutions of companies, managed investment schemes or other kinds of bodies; or
8. Contracts in sectors exempt by the Minister, for example insurance contracts as they are regulated by the Insurance Contracts Act 1984.

Is my small business contract unfair?

Generally, if a term is in a standard form contract it will be "unfair" if three tests are satisfied:
1. The term would cause a significant imbalance in the party's rights and obligations arising under the contract; and
2. The term would cause detriment (whether financial or otherwise) to a party if it were applied or relied on; and
3. The contract term is not reasonably necessary in order to protect the legitimate interests of the party seeking to rely on it.

In applying each of the three tests, a Court may take into account such matters as are relevant and is obliged to take into account:
1. The extent to which the term is transparent (that is, expressed in reasonably plain language, legible, presented clearly and readily available to any party affected by the term); and
2. The contract as a whole.

What powers will the Court have?

The Court may declare that a term in a small business contract is unfair on the application of a party to the contract (subject to the relevant thresholds being met) or ASIC.

What happens if the Court determines that my term(s) to be unfair?

If the Court finds that a term is unfair, then there are a range of orders that the Court may make, including:
1. Declaring that the term be deemed void;
2. Refusing to enforce some or all of the terms of a contract;
3. Directing you to refund money or to compensate your affected customer; and/ or
4. Directing you to continue providing goods and/or services to your customer at your expense.

In the event that your term has been deemed 'unfair', and you continue to rely and enforce that term, then you could be engaging in false and misleading conduct by misrepresenting the enforceability of the term to your customers.

Who bears the onus of proof?

The onus of proof lies with you to show that your small business contract does not contain unfair terms.

What you should do before 12 November 2016.

Due to the significant impact that the Act may have to your business, you should:
1. Consider whether the Act applies to your contracts and whether there are any terms which should be amended, if you use standard form contracts in your business;
2. Obtain legal advice and have your contract terms reviewed, removed and/or amended where appropriate and in compliance with the Act;
3. Implement changes to your front end processes to ensure that if you are going to enter into, vary or renew a standard form contract with a small business customer on or after 12 November 2016, that it complies with the Act;
4. Consider whether there is going to be some uncertainty about the fairness of your contract terms and in the event there will be then include additional terms. For example, disclosure requirements as to your customers business or limitation of liability terms; and/or
5. Ensuring your contract, and its specific terms, are clear and transparent.

Should your business require any assistance or advice regarding the impact of the Act
to your business, please do not hesitate to contact BBW Lawyers on on 02 9210 9100 or:

John Fairgray (Partner)

Luis Ormazabal (Associate)
E: or

Balveen Saini (Solicitor)

July 2016 - FNSCRD503 - Promote understanding and effective use of consumer credit - FNS40120 Certificate IV in Credit Management and FNS51520 Diploma of Credit Management

Disclaimer: This is general commentary and should not be relied upon as if it were legal advice.

download full article