The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015, which amends the Australian Securities and Investments Commission Act 2001 and the Competition and Consumer Act 2010, passed both Houses of Parliament on 20 October 2015, and the new Act will commence in about 12 months.
Under Australian law, a contract term will only be regarded as ‘unfair’ if:
- it causes a 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
- it causes financial or other detriment to a consumer if it is relied upon.
If a term is found by a Court to be ‘unfair’, it is deemed to be void. The remainder of the contract will then continue to bind the parties, provided it is capable of operation without the unfair term. The effect of this can be to render critical provisions of a contract such as warranties, releases from liability and termination rights void, even in circumstances where a similar warranty, release or termination right would have been valid and enforceable if more carefully drafted.
Currently, these laws only apply to standard form ‘consumer contracts’, which are contracts for the supply of goods or services to an individual whose acquisition is wholly or predominantly for personal, domestic or household use or consumption.
However, once the Act commences, these laws will apply not only to ‘consumer contracts’ but to all standard form contracts entered into with a small business with a value of less than $100,000 (or up to $250,000 for multi-year contracts). This will have major ramifications for most businesses which currently use “standard form contracts” for supplies of goods or services to commercial customers in Australia. Affected contracts are likely to include:
- licence agreements or assignments of intellectual property assets;
- franchise agreements;
- agreements for the supply of physical products;
- agreements for the supply of professional services;
- agreements with distributors of products; and
- agreements for the supply or procurement of software or computer hardware.
Under the new Act, a ‘small business’ is defined as any business with less than 20 employees, and all contracts will be considered ‘standard form contracts’ unless otherwise established. Given that around 96% of Australian businesses employ 20 or fewer persons, almost all standard form contracts used to contract with small businesses in Australia will need to be examined before the new laws commence to ensure that they are compliant.
Tony Conaghan, IDI franchising country experts for Australia