The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth) (“The Act”) commences on 12 November 2016.
The Act aims to amend the existing Australian Securities and Investments Commission Act 2001 (“ASIC Act”) and the Australian Consumer Law (“ACL”) in order to extend the protection which is available to consumers and small businesses. Small businesses are defined as businesses employing less than 20 people or, if the business is or includes the manufacture of goods, 100 people. As the legislation commences on 12 November 2016, the legislation will apply to any contracts renewed or varied after that date.
Main Features of the Legislation
Standard Form Contracts
There is currently no definition of what a standard form of a contract is. In order to determine whether a contract is a standard form contract a court must consider the following factors:
- Whether one of the parties had the majority or all of the bargaining power with regards to the transaction;
- Whether the contract had been arranged before any discussion regarding the transaction had occurred among the parties;
- Whether an alternative party was required to either accept or reject the terms of the contract in the forms which it had been set out;
- Whether an alternative party had the opportunity to negotiate the terms of the contract;
- Whether the terms of the contract consider the applicable characteristics of another party or their specific transaction; and
- Any further factors set out in the regulations.
Term of the contract must be ‘unfair’
Under clause 24 of the ACL, a contract term will be considered unfair if:
- It would allow a significant inequity in a party’s rights and obligations under the contract;
- It is not reasonably necessary to protect the genuine interests of the party who could possibly be advantaged by the term; and
- It would cause a disadvantage, whether financial or otherwise, to a party if it had been applied or relied on.
Clause 25 of the ACL provides numerous examples of unfair terms. These include, but are not limited to, the following:
- A term that permits, or has the effect of permitting, one party (but not another party) to avoid or limit performance of the contract;
- A term that permits, or has the effect of permitting, one party (but not another party) to terminate the contract;
- A term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract;
- A term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract;
- A term that permits, or has the effect of permitting, one party (but not another party) to renew or not renew that contract;
- A term that limits, or has the effect of limiting, one party’s right to sue another party.
Small Business Contracts
The Act is restricted to small business contracts. Small business contracts are those contracts entered into whereby at least one party is a small business. Further, a contract will be a small business contract if the upfront price payable on the contract is not in the excess of $300,000.00, or if the contract has a duration of more than 12 months, it is not over $1,000,000.00.
Once the amendments take effect, the legislation will use a method referred to as the ‘headcount method’ in setting out the amount of individuals employed by a business. “Full time equivalents” are not measured nor are casual employees unless they have been employed on a regular basis.
‘Up front price’
The Act introduces Section 12BI(2) into the Australian Securities and Investments Commission Act 2001 (Cth) which defines úpfront price’ as the consideration that:
- Is provided, or is to be provided, for the supply under the contract; and
- Is disclosed at or before the time the contract is entered into.
A small business which is a party to a contract may apply to the court to find that a term of the contract is unfair. If it is found that a term is unfair, the term may be carved out of the contract and a court may issue an injunction or make a compensation order. There are also remedies available such as:
- The whole or part of the contract may be declared void;
- The contract may be varied from a specific date;
- The court may refuse to enforce all or some provisions of the contract;
- The property may be returned or its value may be refunded;
- Payment equal to any losses or damages;
- The resupply of services; or
- The court may order that an interest in land be reconveyed or amended.
The Federal Court can hear a party’s application or they may refer the application to a state or territory court or tribunal.
Onus of proof
The ACL and the ASIC Act set a rebuttable presumption that a contract is a standard form contract. The onus is on the supplier to prove that a contract is not a standard form contract.
Repercussions for different sectors
The transport and carriage sector operators will need to analyse their terms of the contract to identify whether any clauses will be considered to be unfair terms. If the term is unfair, it will not be enforceable.
Section 15 of the Insurance Contracts Act 1984 limits the unfair terms provisions on some insurance contracts.
There is currently discussions between the Australian Competition and Consumer Commission (ACCC) and shopping centres, major franchisors and other users of standard form contracts. Concerns may be raised about the fairness of terms such as automatic rollovers, limited liability, the right to unilaterally vary contracts and the right to terminate a franchise agreement with no cause.
As a result of the amendments a number of standard form contracts will be affected. The adaptation of a fairness test will allow small businesses to challenge contracts offered to them by stronger parties. These challenges were previously limited to a claim for unconscionable conduct under the ACL. Once the amendments come into effect, small business will have a wider range of avenues to ensure there are fair terms in the contracts which they are a party to.