Unfair contract terms regime to extend to small business contracts08 November 2016
In November, the unfair contract terms regime that currently applies to standard form consumer contracts will be extended to standard form small business contracts. This will potentially impact the way in which universities contract with suppliers of work, services and goods. Now is an opportune time for universities to undertake a review of their standard contracts and take any necessary action to ensure compliance with the new requirements.
When will the amendments commence?
The amendments will come into effect later this year on 12 November 2016. They will apply to standard form small business contracts entered into or renewed after this date as well as to individual terms of existing standard form small business contracts varied after this date.
What does this mean?
As a consequence of the passing of the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth), amendments will be made to the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and to Schedule 2 of the Competition and Consumer Act 2010 (Cth), otherwise known as the Australian Consumer Law (ACL), to extend the existing unfair contract terms regime that applies to standard form consumer contracts to standard form small business contracts.
As a result of the amendments, unfair terms in standard form small business contracts will be void. A contract will remain binding as long as it can still operate without the void term.
It is important to note that it is not an offence to include an unfair term in a contract. However, if a person attempts to apply, rely on or enforce a provision that is unfair, then remedies can apply, including the granting of injunctions, making orders to compensate persons who have suffered damage or orders preventing or reducing the loss or damage suffered by both parties.
The ACL unfair contract term provisions that are being extended will apply to contracts for the supply of goods or services and contracts for the sale or grant of an interest in land. The application of the provisions to standard form small business contracts will mean that services agreements, works agreements, supply agreements, leases and many other standard type contracts that a university would enter into on a regular basis could be affected.
The ASIC Act unfair contract term protections apply to contracts for financial products or contracts for the supply, or possible supply, of financial services.
It is noted that this article does not focus on the impacts of the ASIC Act unfair contract term protections, but focuses on the impacts of the ACL unfair contract term protections.
What is the test for an unfair contract term?
First, the contract must be a small business contract, meeting the following criteria:
- it is for a supply of goods or services, or a sale or grant of an interest in land
- at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons (including full-time employees, part-time employees and casual employees who work on a regular or systematic basis), and
- either of the following applies:
- the upfront price of the contract does not exceed $300,000, or
- the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1 million.
Second, the contract must be a standard form contract, which generally means it was pre-prepared by one party and provided to the other party on a "take it or leave it" basis with no effective opportunity to negotiate the terms. There is no set definition of a standard form contract, although factors that must be taken into account in assessing if a contract is a standard form contract include:
- whether one of the parties has all or most of the bargaining power relating to the transaction
- whether the contract was prepared by one party before any discussion between the parties relating to the transaction had occurred
- whether another party was required to either accept or reject the terms of the contract in the form in which they were presented
- whether the party was given an effective opportunity to negotiate the terms of the contract, and
- whether the terms of the contract take into account the specific characteristics of the other party or the particular transaction.
Note, an inability to negotiate the upfront price is not an indicator that the contract is a standard form contract.
Third, the term must be unfair, meeting the following criteria:
- it would cause a significant imbalance in the parties' rights and obligations arising under the contract
- it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term, and
- it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
All three factors need to be satisfied. In determining whether a term is unfair, courts can take into account such matters as deemed relevant, but must also take into account the extent to which the term is transparent and the contract as a whole. Any term that is reasonably necessary to protect the legitimate interests of the party to be advantaged by that term, will not be deemed unfair. However, a term is presumed not to be reasonably necessary unless proven otherwise. The legislation provides a number of examples of the kinds of contract terms that may be unfair, but it is not exhaustive and is also subject to the discretion of the Court on a case by case basis.
What should you do now?
Most universities are likely to use contracts that could be defined as standard form contracts and engage with the type of contractors, suppliers or service providers who satisfy the small business criteria. It would be prudent to conduct a review of any contracts that potentially fit these criteria before 12 November 2016 to ensure compliance with the amendments when these come into effect.
Visit ASIC's website to find out more about the impacts of the amendments.