Levelling the Playing Field: The legislative response to unfair terms in small business contracts
/Commercial Law | By Paul Pascoe and Paul Mac of Edwards Mac Scovell
Summary
A recent change to the Australian Consumer Law[1] (ACL) aims to alter the landscape of contracts entered into between small and large businesses for the supply of goods or services.
Historically, there has been a trend for large businesses to exert a certain level of clout to effectively push smaller businesses, with less bargaining power, to sign contracts on terms highly favourable to the more powerful parties. However, the scope of protection now afforded under section 23 of the ACL has been expanded to include parties to small business contracts, as well as individual consumers.
Section 23 of the ACL applies to small business contracts entered into or renewed on or after 12 November 2016 as well as any terms of existing small business contracts varied on or after 12 November 2016.
What is a ‘small business contract’?
Before a party can look to rely on the protection afforded by section 23 of the ACL, it must first establish that the contract constitutes a ‘small business contract’. A contract is a small business contract if the following conditions are satisfied:[2]
- the contract is for a supply of goods or services, or a sale or grant of and interest in land;
- at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons; and
- either of the following applies:
- the upfront price payable under the contract does not exceed $300,000; or
- the contract has a duration of more than 12 months and the upfront payable under the contract does not exceed $1,000,000.
As is the case with consumer contracts, an unfair term contained within a small business contract can only be void if the contract is a standard form contract.[3]
The term ‘standard form contract’ is not defined in the ACL. However, there are a number of factors that a court may take into consideration in deciding whether a contract is a standard form contract. These factors include:[4]
- whether one party has all or most of the bargaining power;
- whether the contract was prepared by one party prior to any discussion between both parties;
- whether one party was required to either accept or reject the terms of the contract as presented by the other party;
- whether another party was given an effective opportunity to negotiate the terms of the contract;
- whether the contract terms take into account the actual transaction or the specific characteristics of another party to that transaction; and
- any other matter prescribed by the regulations.
The ACL further provides that if a party in a legal proceeding asserts that a contract is a standard form contract, it is presumed to be so unless another party to the proceeding proves otherwise.[5]
What is an ‘unfair term’?
The ACL provides that unfair terms contained in a small business contract may be deemed void and removed from the contract. Relevantly, a term of a small business contract will be unfair if the following three criteria are met:[6]
- it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
- it is not reasonably necessary in order 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 on.
The onus of establishing whether a contract term is reasonably necessary to protect the legitimate interests of the party who would be advantaged by that term is placed on that party.
As to whether a term is unfair and void pursuant to section 23 of the ACL, the decision of the New South Wales Civil and Administrative Tribunal, Abraham v Gogetta Equipment Funding Pty Ltd is particularly instructive. [7] In that case, the parties entered into a rental agreement whereby the Respondent hired out to the Applicant a 2007 Holden Commodore. The relevant term of the agreement that was deemed unfair and thus void was clause 8a which stated:
The Hirer’s obligations including the obligation to pay rent continues notwithstanding any defect…of the Equipment.[8]
In determining that this clause was unfair, the Tribunal observed as follows:
- the requirement to continue to pay rent despite any defect or breakdown in the vehicle does produce a significant imbalance in the parties’ rights and obligations under contract;[9]
- any loss the Respondent might incur from the Applicant in ceasing to pay rent could presumably be offset from action which it could take against the dealer in relation to the condition in which the vehicle was sold.[10]
- there can be no doubt in this case that the application of this clause, in the circumstances where the vehicle is defective or has broken down, could result in a significant detriment to the Applicant, so far as he remains liable to pay the rental under the Agreement without having the use of the vehicle being rented.[11]
For further guidance, the ACL itself prescribes various examples of the kinds of terms that may be considered unfair.[12] Some examples of contract terms that may be unfair include terms that:
- permit only one party to terminate, vary or renew the contract;
- permit only 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;
- limits one party’s right to sue another party; or
- permit one party to change the price payable under the contract.
Business owners should carefully consider these examples in the context of reviewing any standard form contracts that they currently use or are a party to, in order to clarify whether any proposed terms they may be thinking of including run the risk of falling foul of the ACL.
Going Forward
The explanatory memorandum to the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 notes the following benefits of extending the scope of protection from unfair contract terms to small businesses:
- it provides a more efficient allocation of risk in small business contracts; and
- it helps to support the confidence of small businesses in agreeing to enter into contracts with larger businesses.
However, it should not be viewed as a green light for small businesses to carelessly sign standard form contracts with the expectation that they will be protected later down the track.
Business owners should keep in mind that section 23 of the ACL does not apply to certain terms of small business contracts. Specifically, it does not apply to terms that:
- define the main subject matter of the contract; or
- set the upfront price payable under the contract; or
- are required, or expressly permitted, by a law of the Commonwealth, a State or Territory.[13]
Ultimately, the scope of protection afforded to small businesses will depend largely on the interpretation of the changes to the ACL by the Courts. That said, the most prudent course of action for small businesses would be to draft or review any contract with, at the very least, due regard to the changes outlined above.
For further information or assistance in relation to the above, please contact Paul Pascoe or Paul Mac.
[1] Competition and Consumer Act 2010, Schedule 2
[2] Australian Consumer Law s23(4)
[3] Australian Consumer Law s 23(1)
[4] Australian Consumer Law s27(2)
[5] Australian Consumer Law s27(1)
[6] Australian Consumer Law s24(1)
[7] [2017] NSWCATCD 22
[8] Ibid at [35]
[9] Ibid at [69]
[10] Ibid at [71]
[11] Ibid at 7[3]
[12] Australian Consumer Law s 25
[13] Australian Consumer Law s26(1)