Endeavouring to even up the playing field – protection for small business

The protection against unfair contract terms in the Australian Consumer Law (ACL) was extended to small business on 12 November 2016. Previously, the provisions only applied to standard form contracts with consumers. Now it is not only consumers but also small businesses that are protected.

What does the ACL say about unfair terms in business contracts?

The provisions about unfair contract terms in Part 2-3 of the ACL apply to any new small business contract formed after 12 November 2016 or existing contracts that are renewed or varied after that date.

Section 23 of the ACL provides that a term in a small business contract will be void if it is unfair and the contract is a standard form contract. A small business contract is one for a supply of goods or services, or the grant of an interest in land, where:

  • at least one party is a business that employs less than 20 persons; and
  • either:
    • the upfront price payable does not exceed $300,000; or
    • the contract term is more than 12 months and the upfront price payable does not exceed $1m.

The upfront price is the consideration provided for the supply, sale or grant under the contract that is disclosed at or before the contract is entered into. It does not include consideration that is contingent on the occurrence or non-occurrence of a particular event.

What types of terms are unfair?

A term is unfair if it would cause significant imbalance in the parties’ rights and obligations under the contract and it:

  • is not reasonably necessary to protect the legitimate interests of the party advantaged by the term; and
  • would cause detriment to a party if it were applied.

Section 25 of the ACL sets out some examples of the kinds of terms that may be unfair. Most relevantly for government contracts, the examples include terms that grant one party unilateral rights to terminate or vary the contract.

The Australian Competition & Consumer Commission (ACCC) conducted a review of standard form contracts used in the following areas leading up to the introduction of the small business contracts reforms:

  • advertising
  • telecommunications
  • retail leasing
  • independent contracting
  • franchising
  • waste management
  • agriculture.

Upon completion of its review, the ACCC published a Report detailing a number of specific terms that it believes are unfair, including:

1. Unilateral rights to vary all terms in a contract in an unconstrained manner

A term that allows one party to unilaterally vary important parts of a contract, such as the product or price, will likely be unfair, particularly where no prior notice is given and no opportunity to terminate once the change takes effect.

This does not mean that a unilateral right of variation will be unfair in all circumstances. Ways that a clause could be amended to avoid being unfair include limiting the types of things that can be varied or allowing the other party to terminate after a change takes place.

2. Broad and unreasonable indemnities or excessive limitations of liability

The ACCC considers that overly wide indemnities will be unfair.  In particular, clauses that require one party to indemnify the other even for loss or damage caused by the second party’s own acts will likely be unfair. Indemnities should be limited to loss or damage caused by the acts or omissions of the relevant party.

3. Unreasonable ability to cancel or end contracts

The ACCC’s view is that a right of termination for any breach of contract may be unfair. It suggests amending a contract to only allow termination for ’material breach’. However, if such an approach is taken it is crucial that the term ‘material breach’ be properly defined in the contract.

Enforcement priorities

The ACCC’s Small Business in focus report highlights that its actions in relation to unfair contract terms in small business contracts have led to significant changes in the industries, including:

  • UBER has amended its standard driver agreement to remove a right to terminate ‘without cause’
  • Fairfax Media amended a term in its advertising contract that allowed it to refuse or withdraw an advertisement for any reason at any time
  • Lend Lease Property Management (Australia) amended its standard lease to limit the power to recover costs to those properly and reasonably incurred
  • Sensis amended automatic renewal terms in its standard product contract terms
  • Jetts Fitness amended a wide-ranging restraint of trade clause in its franchise agreement.

The ACCC’s 2017 Compliance and Enforcement policy states that unfair contract terms in the health, construction and agriculture sectors will be prioritised by the ACCC. It also foreshadowed a shift away from education-focused compliance work to enforcement action.

What does this mean for government agencies?

Government agencies are bound by the Australian Consumer Law to the extent that they carry on a business. With more and more government activity taking on a commercial or business-like aspect, the situations where agencies may be found to be carrying on a business are also increasing.

Agencies need to familiarise themselves with the unfair contract terms provisions and consider the content of any standard form contracts when dealing with small business. The situations where unfair terms may arise in small business contracts include:

  • contracts of sale
  • retail or commercial leases
  • engagement of independent contractors
  • purchase of goods or services from small business.

If you have any questions about unfair contract terms, please contact Chris Maxwell, A/Assistant Crown Solicitor of our Commercial and Property Team on 3239 6996 or at chris.maxwell@crownlaw.qld.gov.au or Catherine Jackson, A/Senior Principal Lawyer on 3404 3518 or at catherine.jackson@crownlaw.qld.gov.au.

The information in this publication is provided for general purposes only. It is not to be relied on as a substitute for legal advice. Crown Law and the Department of Justice and Attorney-General accept no liability for losses caused by reliance on the material in this publication. Formal legal advice should be obtained for particular matters.

Published: 20 October 2017

Author: Catherine Jackson