Treasury invites feedback on unfair contract term protections to small business

Like individual consumers, many small businesses lack the time, resources, legal or technical expertise and bargaining power to negotiate changes to terms specified in standard form contracts.

In November 2016, the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (the Act) took effect to:

• extend the consumer unfair contract terms (UCT) protections in the Australian Consumer Law (ACL) and the Australian Securities and Investments Commission Act 2001 (ASIC Act) to small business contracts that meet the prescribed criteria
• make provision for exempting certain small business contracts from the operation of the legislation, where those contracts are subject to prescribed laws that are deemed equivalent to the UCT protections in the ASIC Act or the ACL, and which are enforceable.

For the protections to apply, the following criteria must be met:

• the contract is a standard form contract
• at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons
• the upfront price payable under the contract does not exceed $300,000, or $1 million if the contract runs for more than 12 months.

The review

During the passage of the Act through Parliament in late 2015, the Government agreed to undertake a review of the extension to small business within two years after its commencement. The legislation commenced on 12 November 2016.

The Treasury released on 21 November 2018 a discussion paper seeking feedback from stakeholders on the impact of the extension of UCT protections to small business and whether the objective set for the original reform has been met. It is also seeking views about whether any changes are required to improve the current framework.

The consultation period ends on 21 December 2018 and the Treasury will issue a report by 1 February 2019.

Consultation paper issues for discussion

Thresholds

The criteria for the UCT protections to apply, effectively sets two thresholds – the number of employees of the business and the monetary value of the contract. The Treasury is asking: 

• whether the headcount approach works in practice and if it does, whether an employee number of 20 is appropriate
• whether the value threshold appropriately covers contracts that warrant UCT protections.

Coverage

The UCT protections are currently only applicable to standard form contracts. Standard form contracts are normally pre‑prepared by one party and are typically offered on a ‘take it or leave it’ basis to the counterparty. The Treasury is asking: 

• what factors and circumstances make it difficult to determine whether a contract is a standard form contract and what clarifications would assist with making this determination.

Exemptions

The UCT protections do not apply to terms that define the main subject matter of the contract, set the upfront price payable under the contract or are required, or expressly permitted, by a law of the Commonwealth, a state or territory.

There is also an exemption mechanism that allows certain contracts to be excluded from the protections, where those contracts are subject to equivalent and enforceable protections under a law that is prescribed by regulation. In addition, the UCT provisions do not apply to contracts of marine salvage or towage, ship charter parties, contracts for the carriage of goods by ship, or provisions in the constitution of a company, managed investment schemes or other similar bodies.

The Treasury is asking:

• if the exemptions are appropriate and whether there should be an expansion of the exemptions.

Overall effect

Since the UCT protections were extended to small business two years ago, there has been a range of enforcement and compliance activities by the ACCC and ASIC. Litigated cases in particular have helped to broaden business understanding of UCTs. The Treasury is asking:

• whether the current regime offers an appropriate level of protection to small businesses
• whether additional examples are needed to clarify unfair terms. 

How we can help?

We will keep you updated with any developments in the UCT arising from this consultation and review process. In the meantime, if you require any advice on the application of the UCT to your business’ contracts or would like a general review of your standard contracts, please do not hesitate to contact us.

Author: Darren Pereira & Olivia Pasternak

Contacts

Sydney

Darren Pereira, Partner
T: +61 2 8083 0487
E: darren.pereira@holdingredlich.com  

Melbourne

Dan Pearce, Partner
T: +61 3 9321 9841
E: dan.pearce@holdingredlich.com

Brisbane 

Trent Taylor, Partner
T: +61 7 3135 0668
E: trent.taylor@holdingredlich.com

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future. 

Published by:

Darren Pereira

Olivia Pasternak

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