Australian small businesses have welcomed the introduction of new legislation designed to extend unfair contract terms for small business contracts. Widely acknowledged as a long overdue step, the changes will see small businesses now gain much needed leverage during contract negotiations and bring the laws protecting them more into line with those protecting individual consumers.

Earlier this year, in a joint media release with then Small Business Minister, Bruce Billson, former Prime Minister, Tony Abbott, described small businesses as "the engine room of Australia's economic future". Contracts, their statement went on to say, were often presented to small businesses on a "take it or leave it" basis, with "little scope to negotiate just and fair terms".

And they were right. Prior to changes passed by the Senate on 14 September 2015, bigger and more powerful businesses could issue standard form contracts which included terms that were often manifestly unfair. For example, a larger company could deny a smaller business the right to terminate the contract when the larger company itself was free to do so. Similarly, the contract could include terms which allowed the bigger business to unilaterally change prices at any time during the course of the agreement.

The new protection rules, which are expected to come into effect late 2016 , will apply only to standard form contracts involving small business.

Small business contract definition

When a contract is prepared by one party and given to the other without consultation or the opportunity to negotiate terms, and where the party who has prepared the contract holds most, if not all, of the bargaining power, the contract is referred to as a standard form contract.

Under the revised regulations, a contract is considered to be a small business contract if at least one of the parties has no more than 20 employees. Based on headcount rather than one an hours-worked approach, this total includes full and part-time employees and any casuals employed on a regular and systematic basis.

The value of the contract is significantly higher than first proposed, with the upfront price threshold now $300,000 for a single year agreement or $1,000,000 for those extending beyond 12 months.

Terms considered to be unfair

There are three main points here. Under Australian Consumer Law, a contract term is considered unfair if:

·         It is not reasonably necessary for it to be included in the contract to protect the legitimate interests of the party being advantaged by the term;

·         Its inclusion in the contract gives rise to a significant imbalance in the parties' rights and obligations; and



·         It would be to the detriment of a party if relied on, be that in a financial sense or otherwise.

It's important to note that any terms which clearly set out the main subject matter of the contract and which set the upfront price cannot be deemed to be unfair.

What can the courts do?

First, they must look at the contract as a whole, gauging whether the term in question is able to be easily understood within the context of the contract. A court can rule a term be struck out if it deems it to be unfair. In other words, it becomes unenforceable and treated as if it didn't exist. However, the contract may still continue to operate and be binding to both parties as long as it is able to be so, without the unfair term, and as far as it is practicable to do so.

Whilst there are no specific fines or penalties associated with a term being found to be unfair, the court can impose significant fines if the fact that the term was included in the contract in the first place is found to be unconscionable. In these instances, fines can be as high as $1.1 million for corporations and $220,000 for individuals.

How should my business prepare for these changes?

All small businesses, including those which are not-for-profit, need to examine their low-value standard form B2B contracts.   Included in the review should be any contract used in conjunction with suppliers, customers or independent contractors which may potentially involve dealing with businesses of 20 or fewer employees.

Because what may be an unfair term for one business may not be recognised as an unfair term for another, it's important that each standard form contract is reviewed on its individual merits to ensure it is free of any terms which may cause it to fall foul of the new legislation.

For professional and up to the minute advice on how best to meet your business obligations in this area, contact the KDA Group on 02 4861 8383 and speak to one of our consultants