Unfair contract terms, small businesses and amendments to Australian Consumer Law

Given the often limited resources available to small businesses, it can be difficult to keep informed about the myriad of legal obligations with which they must comply.  Under section 23 of the Australian Consumer Law (ACL), businesses must ensure that they comply with the obligation not to impose “unfair contractual terms” on consumers.

Whilst previously, this section did not extend to ‘small business contracts’, this prohibition has recently undergone review by The Commonwealth Treasury, and proposed changes are set to extend the legal burden to apply to small businesses.  As such, to ensure that businesses do not find themselves subject to legal action, it is important to understand when a term in a contract is unfair, and what the consequences may be.

Unfair contract terms defined

Under section 23 of the ACL, unfair terms contained in a standard form consumer contract are void. However, before this provision will apply, three (3) factors must be established. A term can only be voided if:

• the contract is a “standard form contract”(SFC);
• the SFC is a “consumer contract”; and
• the term is “unfair”.

Standard form contracts

A standard form contract is one that has been prepared by one party to the contract and the other party has no power to negotiate its terms. It is usually offered on a ‘take it or leave it’ basis.

Businesses need to be aware that once a customer alleges that a contract (for example, an online retailer’s “terms of sale”) is an SFC, it will be presumed that this is the case under section 27(1) ACL. Once the presumption has been raised, the onus is on the business to establish that this is not the case.

Determining if a contract is an SFC is ultimately a matter that is within the Court’s discretion, however section 27 of the ACL provides, in making such a determination the court must consider:

• the relative bargaining power of the parties;
• whether or not the contract was prepared by one party prior to any discussion concerning the transaction between the parties;
• whether one party was, practically speaking, required to either accept or reject the contract in its present state (was it a “take it or leave it” situation); and
• whether the customer was given an effective opportunity to negotiate the terms of the contract (with the exception of terms relating to price.

Consumer contracts

“Consumer contract” is defined in section 23 of the ACL as a contract for the supply of goods or services or the sale or grant of an interest in land to an individual whose acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption.

Put simply, where a business sells retail goods to individuals it is likely that any contract between the business and its customers will be a consumer contract.

What makes a term unfair?

As per section 24 of the ACL, a term in an SFC will be considered unfair if it:

• would cause a significant imbalance in the rights and obligations between the business and the customer under the contract;
• is not reasonably necessary in order to protect the legitimate interests of the business; and
• would cause detriment (whether financial or otherwise) to the customer if it were to be applied or relied on.

From the above, terms that are at risk of being held to be unfair include those that:

• permit the business to unilaterally vary the contract;
• restrict the customer’s ability to terminate the contract;
• restrict the customer’s options for dispute resolution; and
• impose an excessive interest raid on unpaid amounts.

Extension of unfair contract term provisions to “small business contracts”

On 12 November 2015 the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Amending Act) received royal assent.  The Act extends the provisions of section 23 of the ACL to “small business contracts”.

Under the amended section 23 of the ACL, a contract is a “small business contract” if:

• the contract is for a supply of goods or services, or a sale or grant of an interest in land;
• at the time of contracting, at least one party to the contract is a business that employs fewer than twenty (20) persons; and
• either:
  • the upfront price payable under the contract does not exceed $300,000.00; or
  • the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.

The Amending Act also substitutes a new section 250 into the ACL, which allows the Court to declare that a term of a small business contract is an unfair term on application by a party to the contract or the regulator.

These changes will come into effect on 12 November 2016, and pursuant to the new section 290A of the ACL, will only apply to contracts entered into on or after that commencement date.  The amendments can apply to a contract entered into before the commencement date if the contract is renewed or varied on or after the commencement date.

Best practice and standard form contracts

In light of these imminent changes, it would be prudent for businesses that rely upon standard form contracts to take this opportunity to review any standard form contracts used, and to ensure that the terms contained would not be deemed unfair under section 24. Failure to do so may result in a later finding that terms included in such contracts are void and unenforceable, which has potential to be severely detrimental to small businesses.

Links and further references

Legislation

Australian Consumer Law

Competition and Consumer Act 2010 (Cth)

Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth)

Further information about unfair contract terms

If you require further information concerning unfair contract terms in standard form contracts, please contact us for an obligation free and confidential discussion.

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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