Unfair contract terms protections to be extended to small businesses

Under the Federal Parliament's proposed legislation, suppliers will need to be careful that they do not significantly limit the rights of small businesses and avoid including unnecessary terms in their standard form contracts.

Small business contracts may be void if courts find a term unfair

On 14 September 2015, the Senate passed legislation extending the existing consumer protections for unfair contract terms in standard form contracts to small businesses.
 
If the proposed legislation is agreed to by the House of Representatives, these amendments will come into force 12 months from the day the legislation receives Royal Assent. The amendments will apply to "small business contracts" entered into after the commencement of the legislation, as well as small business contracts renewed or varied after this date.  
 
The effect of a term of a "small business contract" being declared unfair is that a court may order that all or part of the contract is void.

"Small business contract" is a standard form contract within specified limits

The proposed legislation provides that a "small business contract" is a standard form contract for the supply of goods or services, or the sale or grant of an interest in land where:

• the upfront price does not exceed $300,000 if the contract is under a year or $1,000,000 if the contract's duration is more than 12 months

• at the time the contract is entered into, at least one party to the contract is a business that employs less than 20 persons

A standard form contract is a pre-prepared contract that is presented to customers on a "take-it-or-leave-it" basis. The party offering the contract generally has the most bargaining power in the transaction.
 
In determining whether the 20 person limit has been exceeded, full-time, part-time and casual employees who work on a regular and systematic basis regardless of an employee’s hours or workload are counted.

Unfairness test aims to redress imbalance between parties 

A term of a consumer contract is unfair if:

• it would cause a significant imbalance in the rights and obligations of the parties under the contract

• it is not reasonably necessary to protect the legitimate interests of the party advantaged by the term

• it would cause detriment to a party if it is applied or relied on

Examples of terms that may be declared unfair include if the term:

• permits one party, but not another party, to avoid or limit its performance of its obligations under the contract

• penalises one party, but not the other party, for a breach or termination of the contract

• permits one party, but not another party, to terminate, vary or renew the contract

• permits one party to vary the upfront price under the contract without the right of the other party to terminate the contract

• permits one party to unilaterally vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, or the financial goods or services to be supplied under the contract

• permits one party to unilaterally determine whether the contract has been breached or interpret its meaning

• limits one party's vicarious liability for its agents

• permits one party to assign the contract to the detriment of the other party without that party's consent

• limits one party's right to sue the other party, the evidence on party may adduce in proceedings or imposes the evidential burden on one party for proceedings

Exemptions for some terms and types of contracts  

A term that defines the main subject matter of the contract, sets up the upfront price of the contract or is required by law is exempt from being declared unfair under these protections.
 
The legislation also provides that certain shipping contracts, contracts that are constitutions of companies, managed investment schemes or other kinds of bodies and contracts covered by the Insurance Contracts Act 1984 (Cth) are exempt.

Review standard form contracts against these amendments

Suppliers that use standard form contracts to contract with customers will need to be careful and ensure that they do not significantly limit the rights of small businesses. This includes making sure that their standard form contracts do not include terms that are not necessary to protect their legitimate interests or terms that, if relied on, would cause detriment to the small business.
 
To reduce the risk of legal action from small businesses, parties using these types of contracts should have their contracts reviewed in light of these amendments.