On 28 April 2015, the Federal Government released for consultation, draft legislation to extend protection against unfair contract terms to small businesses.
When releasing the exposure draft, the Government stated its intention was to give small business "a fair go"1. However, elements of the proposed legislation may create significant uncertainty and, in some instances, may be contrary to the best interests of small business.
Current Law
The Australian Consumer Law (ACL) currently includes an unfair contract terms regime that protects consumers2.
A term of a consumer contract is void if the:
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term is unfair
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contract is a standard form contract.
A term of a consumer contract is unfair if it:
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would cause a significant imbalance in the parties' rights and obligations arising under the contract
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is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term
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would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
The Australian Securities and Investments Commission Act 2001 (Cth)3 (ASIC Act) also includes an unfair contract terms regime, which is substantially the same as the regime in the ACL and applies to financial services and financial products, including credit.
Extension of Unfair Contracts Regime to Small Businesses
Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 (Draft Legislation), if passed, will amend both the ACL and ASIC Act to extend the unfair contract terms regime to standard form small business contracts.
The Draft Legislation, surprisingly, will apply even when both parties are small businesses. This will increase the costs to small businesses which use their own standard form contracts when dealing with other small businesses. Those small businesses will need to review their standard contract terms for unfairness.
As whether a term is 'unfair' depends upon the particular circumstances and is open to different interpretations, there will be increased contractual uncertainty for such small businesses when contracting with other small businesses. These additional costs and risks for small business appear to be an unintended consequence of the Draft Legislation.
What is a 'Small Business'?
Under the Draft Legislation, a business is a 'small business' if it employs fewer than 20 persons. In counting the persons employed by a business, a casual employee is not counted unless he or she is employed by the business on a regular and systematic basis.
This definition can lead to some anomalies which do not seem to have been addressed in the Draft Legislation. For example, it is not unusual for incorporated joint ventures to have few or no employees. Applying the Draft Legislation, the joint venture vehicle for say two large mining enterprises would be able to seek relief under the unfair contract term regime. A similar anomaly arises where a subsidiary of a large company, or even a large company itself (where the employees are employed through a related service entity), may be able to seek relief under the proposed new regime. We assume this is a further unintended outcome of the Draft Legislation.
We can also foresee real practical difficulties for business in trying to identify whether the business they are proposing to contract with is a 'small business'. There is nothing in the Draft Legislation which allows a business to simply rely upon what they are told by the other business in relation to the number of persons they employ. In the absence of some form of safe harbour arrangement, businesses will either need to undertake extensive due diligence in order to ascertain if the other business is a small business or revise all their standard form contracts to comply with the new regime. The increased costs associated with this may ultimately be borne by the small businesses the Draft Legislation is purporting to protect.
What is a 'Small Business Contract'?
A contract is a small business contract if:
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at the time the contract is entered into, at least one party to the contract is a small business
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either of the following applies:
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the upfront price payable under the contract does not exceed AUD100,000
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the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed AUD250,000.
In working out the upfront price payable under a contract under which credit is or is to be provided, any interest payable under the contract is disregarded.
As the relevant time for assessing whether a business is a 'small business' is the time the contract is entered into, a business using a standard form contract will need to consider the issue each time it contracts with a business (ie it cannot assume it is not a small business just because it was not a small business the last time they dealt with each other).
It is also not always clear whether particular arrangements are one contract or a series of contracts. For example, where there is a master supply agreement is each order under that agreement one contract or is a new contract entered into each time there is a further order and supply?
It is also not entirely clear how contracts of undefined durations are to be dealt with (eg revolving credit facilities that are repayable upon demand). Is it to be assumed that such contracts have a duration of more than 12 months?
Commencement and Transitional Arrangements
Once the Draft Legislation is passed and receives Royal Assent, there will be a period of six months before it comes into effect. It is currently expected that the operative provisions will come into effect in early 2016.
Small business contracts that are entered or renewed, or terms of existing small business contracts that are varied on or after the legislation coming into effect, will need to comply with the new laws.
Consultation Period
The Draft Legislation is open for consultation until 12 May 2015.
Good for Small Business?
There obviously are some benefits to small business that are able to take advantage of the regime.
However, there are some gaps/anomalies in the Draft Legislation that we believe need to be addressed.
Further, there is little doubt that the new regime will create greater contractual uncertainty and impose additional costs on the businesses that are required to comply with it. It may well be the case that these additional costs are ultimately passed on, by way of higher prices, to the small businesses the regime is trying to protect.
We are concerned of the potential effect the new regime may have on financing arrangements. Small business is already concerned about its ability to access, and the cost of, credit. We suspect that the extension of the unfair contract terms regime to small business may exacerbate the difficulties some small businesses have in obtaining credit at a reasonable cost.
What Should you do?
If you have any concerns in relation to the Draft Legislation you may like to make a submission to Treasury.
If, as we suspect likely, the Draft Legislation passes (even if in a slightly amended form), businesses will need to review their standard form small business contracts and procedures to ensure they comply with the new regime.
[1] Media Release of Minister for Small Business, The Hon. Bruce Bilson MP, "Draft Legislation Released- Unfair Contract Terms" dated 28 April 2015.
[2] Competition and Consumer Act 2010 (Cth), Schedule 2, Part 2-3.
[3] ASIC Act, ss 12BF to 12BM.
