From 16 November 2016 the protections to consumers from unfair terms in standard form contracts in Part 2.3 of the Australian Consumer Law (ACL) will be extended to small businesses.
This will apply to the supply of goods or services other than financial services or products in the sale or grant of an interest in land.
Financial services or products will be subject to identical provisions in the Australian Securities and Investments Commission Act 2001.
Why has this happened?
When the unfair terms protections were first put forward in 2009 they were not confined to consumers but had been extended to small businesses. However, following extensive lobbying (including by the AICM) the extension to small business was excluded from the amendments to the ACL when it commenced operation on 1 January 2011.
Nonetheless, that extension to small business remained part of the Liberal/National Party Coalition policy. When the Coalition gained government it signalled its intention to introduce the extension of the unfair contract terms provisions to small business.
Although there was significant opposition from industry the government decided to proceed with the amendments necessary to extend the Unfair Terms Law to small business. In the Explanatory Material to the 2015 Bill the following justifications were put forward for the extension of the unfair contract term provisions.
- Small business is vulnerable
As they are often offered contracts on a "take it or leave it" basis and lack the resources to understand and negotiate contract terms which leads to potential detriment where unfair contract terms are enforced.
- Transfer of Risk to Small Business
Unfair contract terms often allocate contract risks to the party that is less able to manage them (usually small businesses), as they are less likely to have robust risk management policies or be in a position to absorb the costs associated with a risk allocated to them eventuating.
- Lack of Legal expertise
The cost of obtaining legal advice, particularly for low-value contracts can result in small businesses not entering contracts due to their lack of confidence in understanding and negotiating terms. This may mean they miss out on market opportunities.
- Unfair business dealings laws exist but not for contracts.
Existing laws largely address 'unfair' behaviour in business dealings, rather than unfair contract terms. Moreover, the protections available under the ASIC Act for unfair contract terms are currently only afforded to consumers and not businesses.
- More efficient allocation of risk
The extension of the unfair contract terms protection to cover small businesses will reduce the incentive to include and enforce unfair terms in small business contracts, providing a more efficient allocation of risk and supporting small business’ confidence in agreeing to contracts.
- Limited to “Low-value” contracts
Small businesses also engage in highvalue commercial transactions that are fundamental to their business, where it may be reasonable to expect that they undertake appropriate due diligence (such as seeking legal advice). Limiting the extension to lowvalue small business contracts that are standard form will support timepoor small businesses entering into contracts for day-to-day transactions, while maintaining the onus on small businesses to undertake due diligence when entering into high-value contracts.
The amending legislation was introduced into the Commonwealth Parliament on 24 June 2015, passed both houses on 20 October 2015 and received the Royal assent on 12 November 2015. The Act provides that it commences operation 12 months after assent to allow businesses time to adjust their policies, procedures and paperwork.
What contracts are affected?
The amended law will apply to contracts entered into or renewed on or after 12 November 2016 which are:
- standard form contracts
- for the supply of goods or services (or the sale or grant of an interest in land)
- between parties at least one of which employs less than 20 people, including casual employees employed on a regular and systematic basis (which makes it a “small business”, as defined by the amended Act). If a business has subsidiaries which are separate legal entities, employees of its subsidiaries will not be included in the employee headcount.
- contracts where the upfront price payable under the contract is no more than $300,000.00 or, if the contract is for more than 12 months, no more than $1 million.
If the contract is varied on or after 12 November 2016, the amended law will apply to the varied terms.
What is a standard form contract?
A contract will be presumed a standard form contract if a party to a proceeding alleges that it is. The burden will be on the other party to prove otherwise. The court must consider the following when deciding whether a contract is a standard form contract for the purposes of these laws:
- whether one of the parties has all or most of the bargaining power in the transaction
- whether the contract was prepared by one party for any discussion occurred between the parties about the transaction
- whether the other party was, in effect, required either to accept or reject the terms of the contract in the form in which they are presented
- whether the other party was given any real opportunity to negotiate terms contract whether the terms of the contract take into account the specific characteristics of the other party or the particular transaction. A court may take into account any matters it considers relevant, but must take into account the above.
Credit applications, guarantees and other security documents are likely to be standard form contracts for the purposes of the law. It is difficult to see how a trade credit provider relying on a credit application and guarantee would ever be able to rebut the presumption that those documents were standard form contracts.
What contracts and terms are excluded?
- Contracts entered into before 12 November 2016 (unless rolled over or renewed on or after this date).
- Shipping contracts.
- Constitutions of companies, managed investment schemes or other kinds of bodies.
- Certain insurance contracts, such as car insurance.
- Contracts in sectors exempted by the Minister (none declared as yet).
- Terms that define the main subject matter of the contract.
- Terms that set the upfront price payable under the contract.
- Terms that are required or expressly permitted by law of the Commonwealth, or a State or Territory. My view is that a retention of title provision giving rise to registration of a purchase money security interest under the PPSA is such a term.
What is an unfair contract term? There are three limbs of unfair contract terms, the Act says that a term of a small business contract is unfair if it:
- would cause a significant imbalance in the parties’ rights and obligations arising under the contract (1st limb); and
- it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term (2nd limb); and
- it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on (3rd limb).
These 3 limbs must be proven by the small business in order to escape the alleged unfair term.
However, for the purposes of proving the 2nd limb, a term of the contract is presumed not to be reasonably necessary in order to protect the legitimate interests of the trade creditor (who would be advantaged by the term), unless the trade creditor proves otherwise.
In determining whether a term of a consumer contract is unfair, a court may take into account such matters as it thinks relevant, but must take into account the following:
(a) the extent to which the term is transparent;
(b) the contract as a whole.
Transparency of a term
A term is transparent if it is expressed in reasonably plain language, legible, presented clearly and readily available to any party affected by the term. Terms that may not be transparent include terms that are hidden in fine print or schedules, or that are phrased in legal, complex or technical language.
The contract as a whole
While a term in isolation may indicate it is unfair the court will consider it in light of the contract as a whole. Some terms that might seem quite unfair in one context may not be unfair in another. Conversely, if a particular term was decided by a court in one case to be fair, this does not mean it will always be fair.
For example, a potentially unfair term may be included in a small business contract but may be counterbalanced by additional benefits – such as a lower price – being offered to the small business.
However, favourable terms may not counterbalance an unfair term if the small business is unaware of them, for example, implied terms, terms hidden in fine print, in a schedule, in another document or written in legalese.
The ACL provides that the court may also take into account such other matters as it thinks relevant. It is likely that the court would take the following matters into account in most situations:
- pre-contractual conduct of the parties z other options available to small business at the time of the contract
- the notice given to small business customers about the terms of the contract, particularly any unusual terms
- any explanation given to small business customers about the terms of the contract
- whether a small business had reasonable opportunity to consider the terms before concluding the contract; and
- whether small business should or could have sought professional advice before entering into the type of contract in question.
Section 25 of the Act also provides 13 or 14 examples of the types of terms of the contract that might be unfair. However, space does not allow those to be set out.
Enforcement of the new law
The ACCC and state and territory consumer protection agencies share responsibility for enforcement of the unfair contract terms protections for small-business goods and services. ASIC is responsible for enforcing the protections in relation to financial products and services.
If a trade creditor sues a small business to collect a debt and the court makes a declaration that a term is unfair, that term is void and cannot be relied on by the trade creditor as part of the contract.
What to do during the transitional period?
The following are brain-storming ideas, not advice.
- Use the next 12 months to change the structure of your credit documentation distinguishing between security terms (which you won't change) and trading terms (which you may change).
- If you rely on guarantees with charging clauses, be sure you have them all in place with all the customers you want them from by 11 November 2016. z Conduct a survey of your customer base to work out how many fall within the small business definition (i.e., fewer than 20 employees) so you can develop an informed strategy.
- If you want to rely on your current terms and conditions for customers with 20 or more employees, decide if you want to develop 2 sets of terms, one for small business and another for the rest. My view is that will be unworkable.
- Work out what terms can be mutualised without too much harm (e.g., unilateral variation) and change them to avoid needless hassles.
- Alternatively, and despite the avowed purpose of the amendments, consider if there is any point at all in amending your terms and conditions. A lot of the time you won't know on the day of contract whether customer had fewer than 20 employees. It may be that the credit policy will need to be adjusted to allow negotiation if it seems that the small business can prove it.
- Develop a process to annually monitor small business customers so that if a customer moves from less than 20 employees to 20 or more employees the relevant terms and conditions can be varied so that the contract is outside the Unfair Terms Law.
*David Francis is a Solicitor and Director of Francis Commercial Lawyers Pty Ltd Tel: (02) 9587-9002 Fax: (02) 9587-9003 Email: firstname.lastname@example.org
December 2015 - FNSCRD503 - Promote understanding and effective use of consumer credit - FNS40120 Certificate IV in Credit Management and FNS51520 Diploma of Credit Management