The Handshake: Protections for small businesses against unfair contract terms

Alex Hutchens, John Kettle, Malcolm McBratney, Paul McLachlan

Under the Australian Consumer Law, unfair terms in standard form contracts with consumers can be declared void, but small businesses (who are often subject to the same power imbalance when negotiating agreements with large suppliers) have to date had no protection under that regime.

On 18 August 2015, a Bill to extend protections against unfair contract terms to small businesses passed the House of Representatives. The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 (Cth) has already been referred to the Senate Economics Legislation Committee which is due to report on the legislation on 14 September 2015.

Who will this affect?

Subject to some limited exceptions, this will affect commercial transactions in all industries (including utilities, telecommunications, IT, real estate, equipment finance, real estate, logistics and transport). The regime will apply to all new, renewed or varied standard form contracts, with a face value of under $100,000 (or under $250,000 for contracts lasting more than one year), where the counter-party is a small business (having fewer than 20 employees).

What does this mean?

If passed through the Senate (predicted early 2016), any unfair terms in these low-value B2B contracts can be declared void by a court and it will be unlawful to seek to enforce such a term once declared void. It is important to note that while the contract will continue to bind the parties if it can operate without the unfair term, the unfair term will be void and unenforceable in all that business’s contracts with small business customers (not just the small business customer who complained), and so the consequences of an unfair term being struck out are significant. For example, if an early termination charge was found to be unfair, it could not be charged to any small business customer with the same clause in their contract, not just the ones who dispute the clause.

What should you do?

If and when the Bill is passed, businesses that supply goods or services to small businesses should review and amend existing agreements (before they are renewed) and review the form of future agreements, to identify and remove any terms which would be unfair (at least for any small business customers). It may also be appropriate to consider whether upfront payment models are commercially appropriate for your business, given the exemption for contracts with upfront payments above the $100,000 and $250,000 thresholds. From a procedural perspective, it will be important to develop strategies to be able to identify small business customers, so that appropriate contracts can be put in place for them, and more robust provisions be retained for larger customers who are not entitled to these protections.

Conversely, small businesses should familiarise themselves with the protections available and, once the legislation has commenced, review all standard form agreements to identify and seek to remove any unfair terms (it is easier to do upfront than to argue after the fact, even if the law is on your side).

We have extensive experience advising suppliers and consumers on the existing unfair contracts regime. Please contact us if you would like further information about this Bill or if you would like advice regarding your or your suppliers’ contracts in the future.