Changes to the Law on Unfair Contract Terms will come into effect from 12 November 2016

Between 1 January 2011 and 31 December 2014 the Australian Competition and Consumer Commission ("ACCC") was contacted by 1,375 small businesses to complain about unfair contracts. From 12 November 2016 small businesses will benefit from changes to the current laws governing unfair contract terms as a result of the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth) ("Act").

Commonwealth Parliamentary Debates appear to reveal the motivation behind the Act, which will amend Schedule 2 of the Competition and Consumer Act 2010 (Cth) (Australian Consumer Law ("ACL")), with Members expressing concerns that small businesses are vulnerable and are being backed into a corner when negotiating contracts.

The amendments to the ACL will principally have the effect of extending the protection for "unfair consumer contracts" to "small business contracts". Part 2.3 of the ACL will apply to standard form contracts entered into, or renewed, after 12 November 2016 with the effect that any unfair terms within those contracts will be deemed void.

A "standard form contract" is a contract prepared by one party and presented to the other on a "take it or leave it" basis. The party presented with the contract is given little to no opportunity to negotiate the terms of a standard form contract.

The new laws will apply to business-to-business standard form contracts where:

  1. At the time the contract is entered into at least one of the parties is a business that employs less than 20 people (including casual employees employed on a regular and systematic basis);
  2. The contract is for the supply of goods or services, or the sale or grant of an interest in land; and
  3. Either:
    a. The upfront price payable under the contract is no more than $300,000; or
    b. The contract has a term of more than 12 months and the upfront price payable does not exceed $1 million.

The ACCC has stated that the upfront price payable includes any payments to be provided for the supply, sale or grant under the contract that are clearly disclosed at or before the time the contract is entered into.

The ACCC has also acknowledged that it may be difficult for businesses to know the number of employees of the other contracting party. This will make it difficult to assess whether the other contracting party is a "small business" for purposes of the Act. In this respect the ACCC has provided the following comment:

Even if you take steps to find out how many employees the other party has (e.g. by seeking written assurance), the law will still apply if it turns out that the other party in fact has less than 20 employees. If in doubt, it's safest to assume that your contract is caught by the law.

What is an unfair term?

Section 24 of the ACL provides that a term is unfair if:

  • 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.

In considering whether a term is unfair the Court will look at the transparency of the term and will consider the contract as a whole. In considering whether a term is transparent the Court will assess whether the term has been expressed in plain language, is legible and presented clearly, as well as being readily available to the party affected by the term.

Examples of unfair terms (prescribed by the ACL) include:

  1. Terms that permit one party (but not another party) to:
    i. Avoid or limit performance of the contract;
    ii. Terminate the contract;
    iii. Vary the terms of the contract;
    iv. Renew or not renew the contract.
  2. A term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract.

The ACCC has confirmed that the following industries will be the subject of initial compliance activities:

  • Franchising;
  • Retail leasing;
  • Advertising services;
  • Telecommunications services;
  • Independent contracting (e.g. IT consultants and architects).

The Federal Court of Australia has previously considered the effect of Part 2.3 of the ACL in the context of consumer to business contracts. Businesses should be guided by these examples when considering whether the terms of their contracts may be deemed unfair.

The ACCC is advising businesses to take the following action if they believe a term of their contract is unfair.

  • Ask the other party to remove the term or amend it so it is no longer unfair;
  • Talk to a lawyer;
  • Contact your local state or territory consumer protection agency;
  • Contact the ACCC.

To conclude, we provide the following peculiar example of a term that the Federal Court of Australia has recently found to be unfair in the context of consumer-to-business contracts.

The case below relates to the terms of supply of Christmas hampers. Chrisco Hampers had included a term in its contract that allowed Chrisco Hampers to continue to withdraw funds from its customers' bank accounts after the customers had completed payment for their hamper, on the basis that the amounts withdrawn would be held as a prepayment for any future hamper purchased. The term would apply unless the customer opted out of it.

In Australian Competition and Consumer Commission v Chrisco Hampers Australia Limited [2015] FCA 1204 (10 November 2015), His Honour Justice Edelman stated:

  • Chrisco's contracts with its customers contained a term (called the HeadStart term) that required the customers to allow Chrisco to continue withdrawing funds from the customer's bank account even after the customer had made full payment for the goods. The term would apply unless the customer opted out of it. The money withdrawn from the customer's bank account would be used for any future order made by the customer but the customer would not obtain any discount on a future order and if the customer did not place an order, but requested a refund of the money paid, the money would be refunded without interest.
  • The first issue concerns whether the HeadStart term is an "unfair term" within the meaning of s 24 of the ACL. The essential issue in this case is whether the HeadStart term caused a significant imbalance in the parties' rights and obligations arising under the contract. One of Chrisco's submissions was that the demographic of its customers, some of whom were described as "unsophisticated", was such that it was an advantage for them to have money removed from their accounts prior to placing another order unless they elected to the contrary or sought a refund. Chrisco submitted that the removal of the money from the customers' accounts without interest, and without any discount on a prospective order, conferred a benefit on the customers. Chrisco said that the benefit was that the customers were given the ability to pay for prospective orders by smaller instalments over a longer period of time (albeit at a higher cost taking into account the time value of money). As I explain in the body of these reasons, such a "benefit" is not substantial. I consider that in all of the circumstances of the HeadStart term and Chrisco's contract the term was unfair.

Should you have any questions regarding your contract or that of another business you're dealing with, please contact one of our experienced solicitors.

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Date posted: 2016-10-24