Small business and unfair contracts: Amendments to ACL and ASIC Act

Recent Changes to the Australian Consumer Law

The Commonwealth Government has recently passed the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth). The Act makes amendments to The Australian Consumer Law (ACL)[1] and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).[2] The amendment extends the already established nullification of unfair terms in consumer contracts under the ACL and ASIC Act to small businesses.

This change has significant implications for the enforceability of new or varied financial services and financial product contracts, in particular for “standard form contracts” where one of the parties is considered under the Act to be a small business.

A range of protective measures are already available to small businesses such as misleading or deceptive conduct, unconscionable conduct and statutory warranties.  However these protections do not address unfair terms directly.  These protections tend to focus on conduct or circumstance leading up to the formation of the contract rather than the actual contract itself.

What type of contract does this amendment effect?

The amendment applies to standard form small business contracts made or varied after 12 November 2016.[3]

Standard Form Contracts

For the amendment to apply, the contract must be in standard form. In determining whether the contract is a standard form contract, the court will consider:[4]

• whether one of the parties has all or most of the bargaining power relating to the transaction;
• whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
• whether another party was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented;
• whether another party was given an effective opportunity to negotiate the terms of the contract;
• whether the terms of the contract take into account the specific characteristics of another party or the particular transaction; and
• any other matter prescribed by the regulations.

Small businesses

Under the ACL, a small business contract exists where at least one of the parties to a contract is a business with fewer than 20 employees.  This can include a casual employee where he or she is employed on a regular and systematic basis.  The upfront price of the contract does not exceed $300,000 for contracts up to one year and $1,000,000 for contracts lasting more than one year.

Unfair Contract Terms

Under the current ASIC Act, a contract term will be considered to be unfair where the contract:

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

An example of such a term is one which permits or has the effect of providing one party to the contract the ability to terminate but not the other party.

Whether a term is unfair is determined by looking at the contract as a whole.  This means that a term that is imbalanced may be fair as it is counterbalanced by benefits flowing from other terms.

Who can enforce an application for declaring a contract an unfair term?

The Court may declare that a term of a contract is an unfair term, on application by a party to the contract, or by ASIC.  Under the ASIC Act, the contract must be a standard form contract for a financial product or a contract for the supply of a financial product.

What is the effect of a contract term being found to be unfair?

Under the amendment where a contractual term is found to be an unfair term, that term will be void,[5] however, the contract itself will continue to be binding if it is capable of operating without the unfair term.[6]

Lavan Legal comment

We recommend that organisations which provide small businesses with financial products or services review their current standard form contracts and assess whether they contain terms considered to be unfair under the new rules.  Furthermore, in undertaking any variation of current contracts, care should be taken to ensure that the variation does not result in the creation of an unfair term or simply restate the existing provision that may be regarded as unfair.

Lavan Legal can assist with conducting a review of your arrangements with small business customers.  Furthermore, it may be a convenient time to review your standard contract terms.  Our corporate and financial services teams are available to assist you in your contract review in preparation for the commencements of these new measures.