Since 2010, consumers who enter into contracts with businesses have received the benefit of protection against unfair contract terms.
From 12 November 2016 that protection will be extended to protect small businesses as well, with the Small Business and Unfair Contract Terms Act 2015 (Cth) (Act) having now received royal assent.
This article provides an overview of the changes that are set to take effect later this year, and the steps that businesses should take sooner rather than later to make sure they are properly prepared.
What changes are introduced by the new legislation?
The Act amends two pieces of legislation which have provided consumers with protection against unfair contract terms for some time, being the:
1. Australian Securities and Investments Commission Act 2001 (Cth) for contracts relating to financial services or products (such as loan agreements, leases, hire-purchase agreements and debt factoring agreements)
2. Australian Consumer Law provision of the Competition and Consumer Act 2010 (Cth) for other contracts.
The Act extends the unfair contract terms protection in these Acts to standard form contracts that meet the following criteria:
- at the time the contract is made or renewed (whether renewed automatically or by negotiation), one or more of the parties to the contract is a business that employs fewer than 20 people (counting full time employees, part time employees and casual employees who work on a regular and systematic basis);
- the upfront price payable under the contract does not exceed:
|- $300,000 for contracts lasting up to one year; or
|- $1,000,000 for contracts lasting more than one year; and
|- the supply of goods or services; or
|- the sale or grant of an interest in land; or
|- a financial product; or
|- the supply of financial services.
In addition, a small business contract that is covered by an industry code prescribed under the Competition and Consumer Act, such as the Franchising Code, will also be subject to the unfair contract terms law. However, if a contract term is required or expressly permitted by the applicable code, the unfair contract term provisions will not apply to that particular term.
There are three key questions to consider in determining whether a standard contract term might be considered unfair under the Act.
What is a ‘standard form contract’?
This term is not defined in the Act.
A court or tribunal will make its own assessment about what constitutes a standard form contract. The factors that will be taken into account include:
- the bargaining power of the parties;
- whether the contract was pre-prepared or pro-forma;
- whether the contract was subject to negotiation or, alternatively, offered as a ‘take it or leave it’ contract; and
- whether the contract took into account specific characteristics of the parties or the transaction.
What is the ‘upfront price’ of a contract?
The ‘upfront price’ of a contract is the consideration payable for the product or service supplied, and disclosed at or before the contract is entered into.
The upfront price does not include any consideration that is contingent on the occurrence or non occurrence of a particular event (for example, early exit fees or break costs).
Payments that are not referable to the product or service supplied are not part of the upfront price payable.
If credit is provided under the contract, the upfront price should be calculated by including the principal amount and disregarding the interest payable under the contract.
What is an ‘unfair’ term?
There are no prescribed or defined unfair terms.
Legislation provides that for a contract term to be unfair, the term must:
- cause a significant imbalance in the parties’ rights and obligations;
- not be reasonably necessary to protect the legitimate interest of the party advantaged by the term; and
- cause financial or other detriment (such as delay) to a party if it were relied on.
The types of terms in standard form contracts which may be affected, and thus considered unfair, include:
- unilateral variation terms
- terms which require an amount to be repayable on demand;
- automatic rollover provisions;
- cross default provisions;
- terms relating to the seizure of goods.
When will the changes take effect?
The changes will come into effect on 12 November 2016.
It is important to note that the new provisions will not apply to contracts that were entered into before this date. However:
- if a contract is renewed after the changes commence, the provisions will apply to the renewed contract; and
- if a contractual term is varied after the changes commence, the provisions will apply to the term as varied.
What will happen if a contract contains an unfair term?
If a contract term is deemed to be unfair, it will be void and therefore unenforceable.
However, the contract will continue to bind the parties if it can operate without the unfair term(s).
What should you do to prepare for the changes?
Although we are still in the early days of 2016 and it may seem that there is a long time to prepare for the changes before they take effect in November, it is likely that some (or many) standard form contracts will need to be amended. It is a good idea for all businesses to take the following steps sooner rather than later:
- Review your customer base and categories of customers to get an understanding of how frequently you enter into agreements with businesses that employ fewer than 20 people.
- Review your standard form B2B contracts (whether these are contracts with suppliers, customers or independent contractors) which might be used in transactions involving businesses that employ fewer than 20 people, to determine whether they contain terms that could be considered unfair.
- When reviewing your standard form B2B contracts, don’t forget to consider agreements that are already on foot but may be renewed or varied at a later date.
- Consider whether, and if so how, your standard form contracts might need to be amended before November 2016.
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