New rules were recently passed to protect small businesses from “unfair” terms in standard form contracts. The new rules mean that an unfair term is void and cannot be enforced against a small business. Other consequences also apply. The new rules commence on 12 November 2016. This is probably the most fundamental change to the regulation of business contracts in Australia in the last 40 years.
Who needs to know?
Anyone who owns or runs a small business and anyone who deals with a small business. Essentially, every business in Australia needs to know about these new rules.
Background and Policy Rationale
The new rules are designed to protect small businesses from the “take it or leave it” approach of one-sided standard terms and conditions used when dealing with small businesses.
The new rules largely mirror the existing laws that already apply to unfair terms in consumer contracts.
Key Aspects
The new rules only apply to “small business contracts”. To satisfy this, the small business needs to have fewer than 20 employees and the upfront price payable under the contract needs to be less than or equal to $300,000 (or $1m if the contract is longer than 12 months). For the purpose of calculating the number of employees, casual employees are counted if they are “employed by the business on a regular and systematic basis”.
The new rules cover the supply and purchase of goods and services by or to the small business. They also apply to the sale or leasing of land (e.g. retail leases) and financial products and financial services e.g. loans.
What is an unfair term? Not surprisingly, this is a relatively vague concept, however, the new rules give some examples of terms that may be unfair:
- a term that permits one of the parties to unilaterally limit its performance of the contract or the other party’s right to sue;
- a term that permits one of the parties to unilaterally terminate the contract;
- a term that permits one of the parties to unilaterally vary the terms of the contract;
- a term that permits one of the parties to vary the price without allowing the other party a right to terminate;
- a term that permits one of the parties to unilaterally vary the goods and services to be supplied; and
- a term that permits one of the parties to unilaterally determine whether the contract has been breached or interpret its meaning.
The terms which may be unfair are not limited to those listed above. Nor are the terms listed above automatically unfair in all circumstances. The new rules give the following guiding principles:
- Does the term cause “significant imbalance in the parties’ rights and obligations”?
- Is the term “reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term”? The new rules assume that a term is not reasonably necessary unless a party proves otherwise.
- Would it cause detriment to the other party if the term were to be applied or relied on?
- Is the term expressed in reasonably plain language, presented clearly and readily available?
Terms which define the subject matter of a contract (e.g. the specifications or type of goods or services to be sold) or the price payable are excluded from the new rules i.e. you cannot argue that the price payable is unfair if the price was disclosed to you on or before the contract was entered into. That said, other fees and charges may be attacked as being unfair if they were not disclosed upfront or only apply if a particular event occurs e.g. late fees.
An “unfair term” in a small business contract is void. This means it cannot be enforced against the small business. The rest of the contract usually continues as if the unfair term did not exist.
Practical Points to Take Away
- Any business in Australia that has its own standard terms and conditions should have them reviewed to ensure any unfair terms are removed or modified to make them fairer. This includes both standard terms of supply and standard terms of purchase. This needs to happen by [12] November 2016. The new rules will apply to small business contracts entered into after that date as well as any existing small business contracts that are renewed or varied after that date.
- The new rules don’t just require “big” businesses to update their standard terms. The rules apply to small businesses dealing with other small businesses in just the same way.
- Consideration should be given to having two sets of standard terms and conditions (one set for day to day use when dealing with most counterparties (including “small business”) and another special set for use where the value of the contract exceeds the applicable $300,000 or $1m threshold). Unlike the monetary thresholds which are relatively clear to apply, it is more difficult in practice to know or reliably calculate whether the 20 employee threshold for your counter-parties is exceeded. Therefore, businesses should generally adopt a default position of simply assuming that all of its counter-parties are below the employee threshold and that the new rules will usually apply.
- Small businesses should be aware that they will soon have greater rights when dealing with other businesses that use standard terms and conditions. Apart from unfair terms being void, small businesses will be able to apply for injunctions to stop the other party applying or relying on unfair terms. Compensation can also be recovered for any loss or damage the small business suffers as a result of an unfair term being applied or relied upon by the other party.
- The Australian Competition and Consumer Commission has published a range of explanatory notes and FAQs about the new rules, including several examples of terms likely to be unfair. Details can be found by clicking here. The ACCC’s guidance on unfair terms in “consumer contracts” is also likely to be helpful when assessing whether a term in a small business contract is unfair. This guidance includes the ACCC’s views on how a range of common clauses can be amended to make them fairer.
- The Australian Securities and Investments Commission has also recently published an Information Sheet about how the new rules apply to financial products and financial services. It can be found by clicking here.