The new Unfair Terms in Small Business Contracts law gives small businesses the same protection as consumers from unfair terms in business-to-business standard form contracts. Below, we answer 8 FAQs about these changes and offer practical guidance to ensure your contracts comply with the new law.
1. Who is a Small Business Under the New Law?
The law applies to standard form business-to-business contracts entered into or renewed on or after 12 November 2016, where:
1. One party is a small business (Head Count Test)
The business employs fewer than 20 people (including casual employees employed on a regular and systematic basis but excluding independent contractors).
2. The contract size is low (Upfront Price Test)
The upfront price payable under the contract is either:
- No more than $300,000; or
- $1 million if the contract is for more than 12 months.
3. Goods, Services or Land
The contract is for the supply of goods or services or the sale or grant of an interest in land.
If a court or tribunal considers a clause is an ‘unfair contract term’, the relevant term becomes void and unenforceable. The remainder of the contract continues in operation.
2. What is a Standard Form Contract?
A standard form contract is a contract which one party provides to another party, where the other party does not have the ability to negotiate the terms. Although the ACL does not specifically define standard form, section 27 provides a framework of factors for courts to consider when determining whether a standard form contract exists.
Factors indicating a standard form contract include where:
- One party possesses the bargaining power;
- The contract is prepared without discussion between the parties;
- The other party must accept or reject terms on a ‘take it or leave it basis’; and/or
- The other party was not given an effective opportunity to negotiate the terms of the contract.
Examples of standard form contracts include:
- Mobile phone plans;
- Airline sales terms and conditions;
- Gym memberships;
- Information technology licenses; and
- Online contracts where the party is required to tick an acceptance box to accept terms and conditions.
3. Is my Contract a Standard Form Contract?
A contract is less likely to be seen as a standard form contract if the contract is prepared following discussion between the parties, or if the receiving party has an effective opportunity to negotiate the terms. Some practical tips to remember include:
- When communicating with another party, explain their ability to negotiate, for example: “We attach the proposed form of agreement. Please review the draft agreement and let us know if you have queries or proposed amendments.”
- Do not name or refer to the agreement (in the title or by reference in correspondence) as “Master”, “Standard” or “Prescribed Terms”.
- Retain copies of correspondence entered into by way of negotiations.
4. What May Be Considered to be an Unfair Contract Term?
An unfair term is generally one that:
- Would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
- Is not reasonably necessary to protect the legitimate interests of the party benefiting from the term; and
- Would cause detriment (financial or otherwise) to a party if it were to be applied or relied on.
All three elements of the unfairness test must be proved for a term to be deemed unfair.
An unfair term could allow only one party to vary the terms of the contract. Providers should give a notice period (e.g. at least 5 business days’ notice) of a material change to terms. Customers must be able to terminate the contract without early termination or penalty fees if a provider’s unilateral variation causes the customer detriment.
Allowing one party to terminate the contract for any possible breach, but not the other party, is likely to be unfair.
The contract should include grounds for termination. The ACCC says that right to terminate for material breach is considered fair.
In general, the party should be given the opportunity to remedy the breach and where relevant, the contract should include post-termination steps.
Early Termination Charges
While early termination charges vary, excessive early termination charges may be unfair. Early termination charges that equate to customers paying out the remainder of their contract are also likely to be unfair. Any early termination charge should be either:
- A genuine estimate of losses if a customer terminates the contract; or
- Takes into account the costs saved by the provider in not being required to deliver the service.
Allowing only one party to choose to renew the contract, but not the other, may be unfair. Automatic renewal clauses are a concern if:
- They are not adequately disclosed;
- No notice is provided that a contract is about to renew;
- The provider can change the cut-off date for cancellation of the renewal; or
- The customer will incur large early termination charges if they cancel after the contract has automatically renewed.
Possible solutions include:
- Adequately disclosing the renewal date in the contract;
- Ensuring the cut-off date for cancelling the renewal is clear and not subject to unilateral change by the provider; or
- The customer can cancel the contract after the initial term, without being required to pay damages or additional fees to exit.
Terms that limit liability excessively, may be unfair. The contract must specify that any limited liability clauses don’t limit the legal rights that a customer may have to claim for loss under the Australian Consumer Law.
An overly broad indemnity clause may be considered unfair, for example:
- A customer should not be liable to indemnify the provider, to the extent that the provider was negligent, or caused or contributed to the misuse of the service.
- A customer should not be liable to indemnify the provider, to the extent that a third party caused the loss or damage.
Misleading Statements About Rights at Law
Ensure that your contract does not suggest that it excludes the customer, client or contractor’s rights at law as this may be considered unfair, and a possible breach of the Australian Consumer Law. This is especially relevant to ‘entire agreement’ clauses that may indicate that the contract takes priority over rights at law.
5. What Will the Court Consider?
Courts will consider the following factors when deciding if a contract term is unfair:
- The entire contract and its purpose;
- The extent to which the contract is expressed clearly, in plain language and presented clearly to the other party;
- Whether the term is unilateral; and
- The bargaining powers of each party.
The Federal Court considered unfair contract terms in Australian Communications and Media Authority v Bytecard Pty Ltd  FCA 38.
The Australian Competition and Consumer Commission brought proceedings against ByteCard, an internet service provider, for having unfair contract terms in its standard terms and conditions.
The Federal Court held that the following were unfair contract terms:
- Terms that allowed ByteCard to vary the price under an existing contract without discussion with the customer and without allowing the customer to terminate the contract;
- Terms that required the customer to indemnify ByteCard under any circumstances, even when loss, damage or liability was caused by ByteCard’s breach of the contract; and
- Terms that enabled ByteCard to terminate the contract at any time, without any reason.
6. Who Can Bring an Action?
Small Businesses, the Australian Competition and Consumer Commission, state or territory regulators and the Australian Securities & Investments Commission can bring an action relating to unfair contract terms.
A small business operator who considers that a contract they have been presented with contains unfair terms, should first communicate with and negotiate with the contract provider to aim to resolve the issue by amending or removing the term.
Businesses can contact the ACCC or their relevant state or territory fair trading agency if they cannot negotiate a satisfactory outcome.
7. What are the Possible Outcomes?
Only a court or tribunal can decide that a term is unfair, not the ACCC.
If a court decides certain clauses are ‘unfair contract terms’, the relevant term becomes void and unenforceable. The remainder of the contract continues in operation, to the extent it can without the unfair term.
If a court declares that a term is unfair, and a party seeks to apply or rely upon the unfair term, the court may grant remedies including:
- An injunction preventing the party from acting upon the term;
- An order to provide redress to non-party small businesses; and/or
- Other orders that the court thinks are appropriate.
8. What Contracts are Excluded?
The Australian Consumer Law excludes certain contracts from the unfair contract terms changes, namely:
- Marine salvage or towage;
- Charterparties in shipping;
- The carriage of goods by ship; or
- The constitution of a company, managed investment scheme or other kind of body.
The following are not subject to the unfair terms assessment:
- Terms which define the main subject matter of the contract (e.g. recitals);
- Terms which set the upfront price payable under the contract; or
- Terms which are required, or expressly permitted, by a law of the Commonwealth, a State or a Territory.
It is important that small businesses know their rights when another business, large or small, provides them with a contract. If the contract is a standard form contract, then the new laws apply.
If the contract is not a standard form contract, and instead it can be negotiated, then you can still use the unfair contract terms principals as a guide for your negotiations. Larger companies who deal with small businesses also need to know what contract terms are permissible, and what contract terms are at risk of being viewed as unfair.
If need assistance with ensuring your standard form contracts meet the new legal requirements, or negotiating fairer terms in a contract, get in touch with our contract lawyers on 1300 544 755.