Unfair terms in standard form contracts for consumers were outlawed in 2010. Now unfair terms in standard form contracts for small business will be outlawed as of 13 November 2016.

Here, we set out what you need to know, and do, to achieve unfair contract terms for small business (UCTSB) compliance.

Impact Summary

Standard form contracts for small businesses are still permitted after the commencement of the UCTSB regime in November 2016. However, certain provisions will be unfair and consequentially void and unenforceable, unless the commercial basis for those provisions is explained. For example, absolute unilateral discretions for one party are not permitted – their use must be restricted to specified circumstances. A clause restricting such discretion could read:

The credit provider may amend the contract:

1. to comply with any change or anticipated changes in any relevant law, code of practice or guidance 
2. to reflect any decision of a court, ombudsman or regulator
3. to reflect a change in the credit provider's systems or procedures, including for security reasons
4. as a result of changed circumstances, including by adding benefits or new features
5. to respond proportionately to changes in the cost of providing the loan
6. to make the loan contract clearer.

What are Unfair Contract Terms?

A term of a standard form contract with a small business is unfair if it:

• would cause a significant imbalance in the parties' rights and obligations arising under the contract
• is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term
• would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

If a contract term is unfair and is included in a standard form contract it is void and unenforceable.

The Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) includes an unfair contract terms regime in sections 12BF – 12BM which applies to financial services and financial products (including credit), which is substantially the same as the regime in the Australian Consumer Law (ACL).

ASIC is expected to provide guidance on the UCTSB regime.

What is a Standard Form Contract?

A contract sets out the legal relationship between two parties. The respective bargaining power of parties to a contract is a critical factor when negotiating the terms of their contract. Where there is an inequality in bargaining power the terms of a contract are often set by the more powerful party in what is known as a standard form contract and is offered to the less powerful party on a take it or leave it basis.

What is a Small Business Contract?

A small business contract is one where:

• the contract is for the supply of goods, services, including financial services and products, including credit, or sale of (or grant of an interest in) land
• at the time the contract was entered into at least one party is a business employing fewer than 20 persons (including not-for-profit businesses)
• the 'upfront price' payable is equal to or less than:
  • AUD300,000
  • AUD1,000,000 if the duration of the contract is more than 12 months.

The new UCTSB regime will apply to small business contracts from late 2016 that are:

• entered into
• renewed (to the entire renewed contract)
• varied (to the varied terms only).

The UCTSM regime will apply to standard form small business contracts entered into between:

• a small business & non-small business (i.e. a large business)
• a small business & a small business
• a small business & a consumer.

What Must you do Before Late 2016?

It is expected that the UCTSB regime will commence on 13 November 2016.

All businesses will need to review their standard form contracts and procedures relating to small businesses to ensure they comply with the new regime. This is a similar review to those undertaken in 2010 when unfair contract terms for consumers were introduced. You should:

• review your standard form contracts formation procedures
• amend or create UCTSB compliant business rules, with documented policies and procedures
• introduce any necessary computer system changes for example, where information is pre-populated into contracts
• create standard UCTSB compliant clauses to ensure these are consistently applied across all your standard form contracts
• appoint a UCTSB project leader
• design and implement a compliance plan
• train staff who will be handling standard form contracts
• review arrangements with third parties who may assign standard form contracts or other contractual relationships to your business for example, any dealers or contractors.

What Happens if you Fail to Comply with the UCTSB Regime?

A Court can declare, under either the ASIC Act or the ACL that a contract term is unfair. That term then becomes void and unenforceable. For example, the unfair term included a fee or charge that could be unilaterally varied. If this fee is void and unenforceable then a business would likely be required by the Court to refund that fee or charge to all customer parties to that standard form contract.

Furthermore, while a term declared unfair will be void, the contract will continue to bind the parties to the contract, to the extent that the contract is able to operate without the unfair term. This means that if, due to the voiding of the unfair term a contract became less commercial and the contract could not be terminated on some other ground, a business may be stuck in that contract.

Other penalties include negative publicity, increased regulatory scrutiny, further Court orders for other forms of redress, injunctions or any other order the Court sees fit to make and penalties for misleading and deceptive conduct.

Practical tips for Achieving UCTSB Compliance

1. Understand the impact of UCTSB on your business
2. Develop a UCTSB checklist
3. Identify the contracts falling within the scope of your review
4. Classify clauses and develop pro forma clause solutions to apply across all standard form contracts falling within the UCTSB regime
5. Review standard form contracts on a clause by clause basis
6. Create a process to identify small business customers each time a contract is entered into, renewed or varied.