BY NATALIE SMYTH
Presently, the Australian Securities and Investments Commission Act 2001 (“the ASIC Act”) affords protection to “unfair” behaviours in business dealings, rather than unfair contract terms. It should also be noted that the existing legislative protection is only available to consumers.
From 12 November 2016, the Treasury Legislation Amendment (Small Businesses and Unfair Contract Terms) Act 2015 (Cth) (“the Act”) will come in to effect, extending the current consumer unfair contract term protections in the ASIC Act and the Competition and Consumer Act 2010 (previously known as the Trade Practices Act 1974).
What small business contracts will the Act apply to?
The Act will extend the existing consumer protections for unfair contract terms to small business contracts that are for the supply of goods or services, or for the sale or grant of an interest in land.
Under the new legislation, a contract will be deemed to be a “small business contract” if the following applies:
- The contract is in a standard form contract; and
- at least one party to the contract is a business that employs fewer than 20 persons (casual employees exempt); and
- either the price payable under the contract does not exceed $300,000, or if the contract has a duration of more than 12 months, the upfront price payable under the contract does not exceed $1 million.
The new legislation allows for the Court to make a declaration that a term of a small business contract is unfair and void. If this occurs, the legislation provides for the rest of the contract to survive and operate without the unfair term, and for the contract to continue to bind third parties. [1]
What is an unfair contract term?
Under the ASIC Act, an unfair contract term is one that:
- would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
- the contract term is not necessary to protect the legitimate interest of the party who would be advantages by the term, and
- it would cause detriment (financial or otherwise) to a party if it were to be applied or relied upon.[2]
The court, in deciding whether a contract term is “unfair” will also take in to consideration the extent to which the term is transparent, and the contract as a whole. Under the ASIC Act, a term is transparent if it is expressed in plain language, is legible, presented clearly and is readily available to any party affected by the term.[i]
Section 12BH of the ASIC Act also provides a number of useful examples of what will constitute an unfair term. Some of these examples include:
- a term that permits one party (but not another party) to avoid or limit performance of the contract;
- a term that permits one party (but not another party) to terminate, vary the terms of, or renew the contract;
- a term that permits one party unilaterally to decide whether the contract has been breached; and
- a term that limits one party’s right to sue another party.
Other considerations
It is envisaged that the new legislation will give businesses more confidence to negotiate contract terms and to agree to contracts, allowing them to take full advantage of market opportunities.
To prepare for the enactment of the new legislation, it is recommended that businesses review their existing standard form contracts and ensure that they are free from unfair contract terms and compliant with the Act.
If you also require assistance in negotiating contract terms that will benefit your business dealing, or if you require legal advice with respect to reviewing a business contract, including due diligence enquiries, please don’t hesitate to contact our office.
[1] Memorandum to Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015
[2] Section 12BG Australian Securities and Investments Commission Act 2001
[i] Ibid.
