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    Urgent Action Required – Unfair Contract Term Protections to Extend to Small Business Contracts in November 2016

    Overview

    From 12 November 2016, the existing unfair contract term protections that apply to consumers will be extended to cover standard form small business contracts.

    These protections have the effect of rendering ‘unfair’ terms in standard form small business contracts void, and therefore unenforceable at law.

    What is a standard form contract?

    A standard form contract is a contract prepared by one party and offered to the other on a ‘take it or leave it basis’, with no real opportunity to negotiate the terms.

    What is a small business contract?

    A contract is a small business contract if, at the time it was entered into, renewed or amended (being on or after 12 November 2016):

    • it is for the supply of goods or services or the sale or grant of an interest in land;
    • at least one party is a ‘small business’ (ie, employs less than 20 people); and
    • the upfront price payable under the contract is no more than $300,000, or $1,000,000 if the contract is for more than 12 months.

    What is an unfair term?

    A contract term will be considered unfair if:

    • it would cause a significant imbalance in the parties’ rights and obligations under the contract;
    • it is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
    • it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied upon.

    The legislation provides a number of practical examples of unfair contract terms. These include terms that would allow one party to:

    • change prices without giving the other a right to terminate the contract;
    • unilaterally determine when the contract has been breached; or
    • unilaterally vary the characteristics of the goods or services to be supplied.

    Are there any exclusions?

    Yes. While most standard form small business contracts will be covered by this new law, exceptions include:

    • constitutions of companies, managed investment schemes or other similar kinds of bodies;
    • shipping contracts; and
    • certain insurance contracts.

    As under the existing regime, the extended protections also do not apply to terms that:

    • define the main subject matter of a contract;
    • set the upfront price payable under the contract; or
    • are required or expressly permitted by a law.

    What are the practical implications for businesses?

    According to the Australia Bureau of Statistics, approximately 97% of Australian businesses employ fewer than 20 people.[1] This highlights the far reaching effect the new law is expected to have. To provide just a few examples of how it may impact small businesses:

    Supply Agreements

    This is an area where standard form contracts are particularly common. As many businesses either are, or deal with small businesses in some shape or form, these contracts may need to be redrafted to provide more balance in their terms. This includes, for example, removing terms that would allow the supplier to unilaterally alter the type of goods or services it supplies, without giving the recipient the ability to bring the contract to an end. 

    Finance and Credit Contracts

    As was the case when the unfair contract term legislation was developed for consumers, many financial services and credit contracts will need to be redrafted for small businesses to remove terms allowing unfair practices to occur. Examples include terms that would facilitate fee farming[2] or equity stripping[3] of small businesses.

    Telecommunications Contacts

    Suppliers who attempt to unilaterally vary the price or the included calls and data allowance under small business telephone contracts will now fall foul of the legislation. Automatic renewal terms and those that allow a supplier to avoid or limit its obligations will also come under scrutiny.

    Leases and Tenancy Agreements

    Most businesses either offer (as landlords), or are subject to (as tenants), leases governing the use of their premises. These leases often contain clauses that would be considered too protective under the new law, such as those allowing a landlord to unilaterally determine if a tenant is in breach and may be evicted, and will need to be amended accordingly.

    Delivery of Goods

    Although an exception applies to shipping contracts, there is no such exception to the transport of goods by land. This will become an important consideration if delivering goods to small businesses, or having goods delivered, is part of your business model.

    What should your business do next?

    As 12 November 2016 is fast approaching, we suggest you:

    •  identify your standard form business-to-business contracts;

    o   such as services and supply agreements etc;

    • determine whether these contracts may be entered into with small businesses (or whether you are a small business yourself);

    o   it is important to note that an assessment of the employee threshold under the regime includes casual employees working on a regular and systematic basis;

    •  determine whether the upfront price payable will exceed either $300,000 or $1,000,000 if its duration is more than 12 months;

    o   it is important to note that the concept of “upfront price” does not include any payments that are based on a contingency; and

    • identify and review any unfair terms;

    o   if any unfair terms are found to exist, these will need to be amended prior to the new law commencing.

    Can we assist your business with the process?

    Yes. We strongly recommend that you start your review as early as possible. This will allow sufficient time for your standard form small business contracts to be updated and fully understood by your team before the new law takes effect.

    If you have any questions or need assistance with this process, please contact us on (03) 6221 4800 for more information.

     

    Brenton Worth

    Associate

    Groom Kennedy



    [1] Australian Bureau of Statistics, Cat. No. 8165.0, Counts of Australian Businesses, Including Entries and Exits — June 2009 to June 2013

    [2] “Fee farming” describes a process where a small business that is seeking a loan is liable to pay a brokerage fee even if the broker’s conduct contributed to the small business failing to obtain the loan.

    [3] “Equity stripping” occurs where a small business that is already in default has its debt refinanced and is then liable to pay excessive interest and default fees.