Better protection from unfair contracts for small businesses afoot

How many times have you been in discussions with a larger or more powerful supplier or customer and been presented with a one-sided contract and told that if you want the business you have to agree to it? Particularly if you are a small or medium-sized business in Australia, the reality is that this will happen regularly.

Australia’s competition law (the Competition and Consumer Act 2010), is much like the law of the jungle — it is about survival of the fittest, rather than ensuring the survival of particular competitors. Because of this, our competition law does not generally focus on the micro level in terms of a supplier imposing onerous obligations on a particular customer or a customer imposing onerous obligations on a particular supplier. Over the years, this has left many small businesses forced to live with obligations that are one-sided and quite unfair.

Under the Australian Consumer Law (which is part of the Competition and Consumer Act 2010) small businesses have some protection from “unconscionable conduct”. The general picture that emerges from various court cases is that the conduct has to be really over the top before the court is likely to act.  From a practical perspective, one of the problems that has arisen is over the word “conduct”. The courts view it as not covering the actual wording in a contract, but rather restricted to the manner in which the contract is obtained, or the way in which the contract is used later on against the weaker party. This means the unconscionable conduct provision does not look at specific terms of the contract in isolation and say that they are too unfair to be allowed to remain.

Well, the good news is that from 12 November 2016, small businesses will enjoy similar protection from unfair contract terms that consumers currently do under the Australian Consumer Law.

The starting point — what is a ‘small business’?

One thing that is very clear in Australia is that there is no universal definition of what is a small business. Almost every law uses a different test — which makes life confusing, if not frustrating. And the Australian Consumer Law is no different, but for the new law relating to unfair contracts, a small business is very narrowly defined.

When we talk of unfair contracts, a small business is defined as one that employs fewer than 20 staff (including casuals working on a regular and systematic basis).  Personally, I would have said this is more of a micro business!

Does the protection apply to all contracts entered into by a small business?

No it doesn’t! Unfortunately, this new protection has been restricted to standard form contracts with an upfront price payable under the contract of less than $300,000, or less than $1 million if the term is greater than 1 year, for contracts that are entered into, or renewed, after 12 November 2016.

Rather than include a definition of what is a “standard form” contract, a contract is assumed to be standard form unless the party that prepared it can prove to the court that it isn’t. Deciding this will involve considering whether:

• the contract was prepared by it before or after discussions with the small business;
• there was a real opportunity for the small business to negotiate changes to the terms of the contract, particularly the unfair term;
• whether one of the parties has all or most of the bargaining power relating to the transaction; and
• the contract took account of the specific characteristics of the small business and/or of the particular transaction.

The new law will not apply to shipping contracts and some insurance contracts.

What is an unfair contract term?

To decide whether a term of a standard form agreement with a small business is unfair, the court must consider the contract as a whole, including any other terms that might offset the unfairness. This will include whether the term is transparent or buried in the fine print — the more it is buried the more likely it will be seen as unfair. To be unfair, the term must:

• cause a significant imbalance in rights and obligations between the small business and the stronger party;
• go beyond what is reasonably necessary to protect the legitimate interests of the stronger party; and
• cause financial or other detriment to the small business if it is relied on by the stronger party.

Ultimately, only a court can decide whether a term is unfair.

Some examples of potentially unfair terms:

1. A term allowing the stronger party to unilaterally vary key aspects of the contract (such as price of the goods or services to be provided) with no right for the small business to terminate if it does not agree to the change.
2. A term which excludes or severely limits the liability of the stronger party.
3. A term that requires the small business to indemnify the larger business against all loss and damage, including loss or damage caused by the stronger party, arising in relation to the contract or the goods or services supplied under it.
4. A unilateral right for the stronger party to terminate the agreement without cause (ie, for convenience), whereas the small business is locked in with no similar right.
5. A term which requires the small business to pay liquidated damages or pay the other party damages equal to the fees for the remaining period of the contract, if the contract is terminated early — even if terminated by the stronger party for convenience or terminated due to a breach by the stronger party.
6. A term that allows the stronger party the sole right to interpret the meaning of the contract, or whether a term has been breached, without having to act reasonably or be subject to any dispute resolution process.
7. A term that removes the right to a refund of a deposit if the small business terminates the contract — even if it terminates because of the stronger party’s failure to perform its obligations under the contract.

All these examples raise concerns because they cause a serious imbalance in the parties’ rights and obligations and it is unlikely that such a term is necessary to protect the stronger party’s legitimate interests. If the stronger party relies on the terms, they will almost certainly cause financial or other detriment to the small business.

So what does it really mean for you?

The main consequence of a contract term being declared unfair is that it cannot be enforced against the small business. If the remainder of the contract can still operate without the unfair term then the term will be severed from the contract. If not, the entire contract will be void and a court will set it aside.

Although the new law will help some small businesses, the reality is that the cut-off level of 20 employees will mean that many small businesses will be unable to utilise it and will have to continue to rely on the existing unconscionable conduct provision in the Australian Consumer Law. That provision is still effective in the right circumstances and was relied on by the ACCC last year over Coles’ treatment of some suppliers (with $10 million in penalties as well as large refunds to the suppliers). The ACCC is also relying on the unconscionable conduct provision in its current action against Woolworths for Woolworths’ actions against some of its suppliers.

What should you do if you think you are being asked to agree to an unfair term?

At the end of the day, it will be a commercial decision whether or not you sign the agreement in the form presented by the other party. But if you think it contains an unfair term we strongly recommend that you:

• ask the other party to remove the term or amend it so it is no longer unfair;
• get legal advice so you understand the risk the term poses and what options you might have to challenge the agreement later on — if things go off the rails;
• contact your local state or territory consumer protection agency or the ACCC if you cannot afford to use lawyers to help you with a dispute over the unfair term.

*Robert is the Principal of Robert Williams Legal & Regulatory Solutions, a specialist practice in the areas of commercial legal risk management, competition and consumer law, food and other regulatory issues. 
He has built his career as an external legal advisor; a senior in-house legal adviser with 15 years in both ASX listed and large privately owned companies; and originally as a regulator with the Australian Competition and Consumer Commission (ACCC).

Robert’s comprehensive experience encompasses all aspects of competition and consumer law, food law and other regulatory issues facing companies in Australia and New Zealand. Robert understands the pressures and issues facing food businesses in Australia and New Zealand, having worked in the industry for almost 10 years as a senior in-house lawyer, as well as assisting various food businesses as an external legal adviser. His company acts for many small businesses across Australia and is always happy to talk with you about such problems.

Image credit: ©stock.adobe.com/au/Michael Gray