From 12 November 2016, small businesses in Australia will benefit from new protections provided by changes to the unfair contracts laws. The new law on unfair contract terms aims principally to extend unfair contract protections to small business contracts. This article will use examples to explain how and when the new laws will apply, and its effect on some terms in standard contracts.

1. What Contracts Are Affected?

The new law extends protection against unfair contract terms to small businesses by amending existing legislation and including a definition of a new type of contract called a “small business contract”. It will apply to all “small business contracts” that a small business enters into after 12 November 2016. A “small business contract” is a contract:

  • For the supply of goods or services or the sale or grant of an interest in land;
  • Where at least one of the parties is a small business (at the time the contract was entered into); and
  • Which require an upfront price payable of no more than $300,000 or, if the contract is for more than twelve months, of $1,000,000.

Section 250 of the Australian Consumer Law (Cth) already permits a court to declare a term of a consumer contract to be unfair where the contract is “standard form”. The new law now also allows a court to determine that a term of a small business contract is unfair. As with consumer contracts, the small business contract must be a standard form contract.

A “standard form contract” is typically a uniform agreement. A court will consider various factors if it is required to determine whether an Agreement is a “standard form”. These include whether one party holds most, if not all, of the bargaining power and if one party prepared the contract before ever speaking to the other one about their subsequent transaction. A court will also look at whether the terms of the agreement reflect the particular transaction or characteristics of the party that did not prepare the contract (excluding terms that define the main subject matter of the contract, the upfront price payable or a term required or permitted by law). A court will also consider whether the party that did not prepare the contract had a real opportunity to negotiate its terms or was required only to accept or reject them.  

A small business is one which has less than twenty employees. Casual employees are not counted unless they are employed regularly, routinely and on a systematic basis.

2. What Does It Do?

The law aims to protect small business from unfair contract terms. A contract term is unfair if:

  • It would cause a significant imbalance in the rights and obligations of each party under the contract; and
  • It is not necessary to protect the legitimate interests of the party who the term advantages; and
  • It would cause detriment (financial or otherwise) to the other party (i.e. the non-benefitting party) if applied or relied on.

If a court is required to determine if a contract term is unfair, it must take into account the extent to which the term is transparent and consider the contract as a whole. A term is transparent if it is legible, expressed in reasonably plain language and presented clearly. It must also be readily available to those parties affected by it.

While it is a court’s responsibility to declare a contract term unfair, the Australian Competition and Consumer Commission v Chrisco Hampers Australia Ltd [2015] FCA 1204 contains an example of an unfair term. In that case, the Federal Court held that the ‘HeadStart’ term of Chrisco’s customer contract was unfair. The contract concerned the supply of a Christmas Hamper. It allowed the customer to pay for their hamper by instalments for periods of up 12 months. The HeadStart provision required customers to allow Chrisco to continue withdrawing funds from their bank accounts even after they had fully paid for their goods. This term applied unless the customer opted out of it. The money withdrawn after a customer had paid in full for their hamper would be applied to any potential future order the customer made. However, the customer received no discount on this future order. If the customer chose not to place another order but instead requested a refund, their refund did not include interest.

His Honour Justice Edelman held that Chrisco’s HeadStart term was unfair. The term caused a significant imbalance in the rights and interests of the parties under the agreement. The Court noted that Chrisco made no submissions suggesting that the term was reasonably necessary to protect its legitimate interests and found that it caused significant financial detriment to consumers with no corresponding benefit. His Honour also found that the term was not transparent and was unfair in light of the contract as a whole.

3. What if a Term is Considered Unfair?

If a court declares a term of a contract unfair, it will be void. When a term of a contract is void, it no longer binds the parties to the agreement. The remaining provisions of the contract will only continue to apply to the parties if the contract can operate without the unfair term.

4. What are the Exemptions?

However, the legislation provides some exceptions. The new law does not affect any contracts entered into before 12 November 2016. However, if the parties to a contract executed before 12 November 2016:

  • Renew the contract after that date, the new law will apply to the contract as renewed on and from the day on which renewal takes effect; or
  • Vary a term of the contract on or after that date, and the variation is not part of a renewal of the contract, the new law applies to the term as varied on and from the day on which the variation takes effect.

If a contract is automatically renewed or rolled over on or after the 12 November 2016, the new law will apply to the agreement from the date of renewal. If a contract is rolled over periodically, the new law applies from the first time a new period begins after the 12 November 2016.

Also, the new law does not apply to shipping contracts or particular types of insurance contracts. For example, the new law does not apply to contracts for car insurance. The law also does not apply to the constitutions of companies, managed investment bodies and other similar institutions.

The legislation gives the appropriate federal Minister the power to exempt contracts made in a particular sector. At present, the Minister has not exempted any sectors.  

The new law does not affect the terms of a small business contract that define the main subject of the agreement. For example, a provision detailing the goods or services acquired under the contract. It also does not apply to terms that detail the upfront price payable under the contract or a term required or permitted by a Commonwealth, State or Territory law.

Finally, the new law does not affect a clause in a standard form contract if a federal, state or territory law expressly requires or allows the inclusion. For example, a term mandated by the Franchising Code of Conduct or other industry code.

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If you are a small business, it is a good idea to consider what the new law on unfair contract terms means for you. Make sure you undertake this review before 12 November 2016 so that you’re not caught out. If you have questions for our contract lawyers about the new rules on unfair contract terms, contact us today on 1300 544 755.

Masao Watanabe

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