Small business and unfair contract terms amendments take effect

What your business needs to know

The small business and unfair contract terms amendments to the Australian Consumer Law and the Australian Securities Investments Commission Act commenced operation on 12 November 2016.

There will be significant practical impact on business to business contracts when one or more of the parties are considered to be a small business. We specifically highlight the importance of these amendments on standard form contracts.

The amendments give Courts and Tribunals the ability to declare unfair contract terms void and award compensation.

What contracts are affected?

The amendments will apply to all contracts signed after 12 November 2016 and all contracts renewed or varied after 12 November 2016. 

What are the definitions of small business, small business contract, and standard form contract?

A small business is defined under the amendments as a business that employs fewer than 20 persons.  This test is applied to both parties to the contract and if either party is found to employ fewer than 20 persons, the legislation will apply. 

A small business contract is defined using upfront price as a threshold, specifically:

  1. $300,000.00 for contracts with a term shorter than one (1) year; or
  2. $1,000,000.00 for contracts with a term longer than 12 months.

A standard form contract is essentially a ‘take it or leave it’ style contract with no avenue for negotiation.

What are unfair terms?

The amendments set out examples of unfair terms, including:

  1. Terms that allow one party but not the other to terminate the contract without cause; 
  1. Terms that penalise, or have the effect of penalising, one party but not the other for a breach or termination of the contract;
  1. Terms that allow one party but not the other to vary the terms of the contract;
  1. Terms that permit, or have the effect of permitting, one party but not the other party to renew or not renew the contract;
  1. Terms that permit, or have the effect of permitting, one party to vary the upfront price payable without the right of the other party to terminate the contract;
  1. Terms that permit, or have the effect of permitting, one party to unilaterally determine whether the contract has been breached or to interpret its meaning; 
  1. Terms which award liquidated damages to one party that do not reflect a genuine pre-estimate of loss;
  1. Terms which require one party to bear the risk of a high cost, low probability event;
  1. Terms which impose excessive interest rates on outstanding moneys;
  1. Terms which affect or limit a party’s ability of redress or remedies for breach by the other party;
  1. Terms that limit, or have the effect of limiting, one party’s liability for acts or omissions by agents or employees; or
  1. Terms that permit, or have the effect of permitting, one party to assign the contract to the detriment of the other party without consent.

The list is not exhaustive.

Our recommendation

Due to the significant practical impact of these amendments, we strongly recommend that all businesses (including businesses with more than 20 employees) review their standard form business to business contracts (including contracts with franchisees, suppliers, customers or independent contractors) which fall within the upfront price thresholds and potentially might be used in transactions involving small businesses.

Some of the steps which you can take to ensure you comply with provisions of the legislation include: 

  • consider creating a separate set of contracts for big businesses and small businesses
  • consider structuring the price to exceed the financial threshold
  • consider asking the other party how many people it employees
  • if you own a business that employs fewer than 20 employees, use the new regime as a bargaining tool

To discuss your business’s requirements, contact any MDL office on 3370 5100 or fill out the contact form here. We will provide practical advice on ensuring compliance with these amendments.