Fair play now the law for small businesses
This week changes have come into effect that will change the way companies do business with small businesses, as laws prohibiting unfair contract terms are extended to cover small business contracts.
This change effectively bolts small business contracts on to a framework introduced in 2010 that already prohibits unfair terms in consumer contracts. The hope is that these amendments will allocate risk more efficiently and promote confidence amongst small businesses that might otherwise fear being hung out to dry by more powerful parties.
This is a perfect time for businesses to review their contracts in order to ensure their compliance with the latest legislation.
Does this change affect me?
If your business could answer ‘yes’ to all of the following questions, the amendments are likely to affect you:
- Is my business party to contracts for:
- Is at least one of the parties to that contract a business that employs fewer than 20 people?
- Is the upfront price payable no more than $300,000 (or $1,000,000 if the contract is of more than 12 months’ duration)?
- Is it a ‘standard form’ contract (e.g. there was no real opportunity for negotiation)?
When is a term unfair?
Broadly, the ASIC Act and the Australian Consumer Law provide that a term is unfair if it:
- significantly imbalances the rights and obligations of the parties;
- is not reasonably necessary to protect a party’s legitimate interests; and
- would cause financial or other detriment to a party if enforced.
However the upfront price, disclosed before entry into the contract, cannot be disputed as unfair.
Examples of what is unfair
The legislation provides some examples of what might be considered ‘unfair’. This could include:
- terms that give only one party the right to avoid or limit their performance;
- terms that give only one party the right to terminate, penalise for breaches or vary the contract’s terms;
- terms that give only one party the right to renew the contract; and
- terms that limit one party’s right to sue.
We also can look to the Courts treatment of consumer contracts for what ‘unfair’ means. In Ferme & Ors v Kimberley Discovery Cruises Pty Ltd  FCCA 2384, the Federal Court found that it was an unfair term for a cruise company to fully retain fares if a cruise was cancelled due to extreme weather, since customers could not negotiate the ticket’s terms and the company could keep all the money regardless of its cost of cancellation.
In ACCC v CLA Trading Pty Ltd  FCA 377 the Federal Court also voided terms where a rental car company tried to offload as much liability as possible on to its customers for damage and loss somehow associated with the rental car, irrespective of who was at fault.
However, Jetstar Airways Pty Ltd v Free  VSC 539 reminds us that the whole contract must be taken into account. In that case, even though the airline imposed substantial fees on a customer for simply changing the name on her booking, the term was not unfair because it was counterbalanced by a considerably cheaper fare in the first place.
The crux of the matter is that the courts will be reluctant to uphold terms that give one party a big overall advantage over another.
Effect and implications
If an affected contract contains unfair terms, those terms will be void and unenforceable.
However, the mere fact that a term is unfair is not a contravention of the Australian Consumer Law or the ASIC Act. If the contract is capable of operating without the term, the rest of it will continue to bind the parties as before.
But if an unfair term is relied upon, the courts can then order an injunction or the payment of compensation.
If you’re dealing with small businesses, or if you are a small business and have signed up to standard form contracts, it’s a good idea to pull them out and review them. For straightforward legal advice about your contracts, please contact Paul Gordon at email@example.com or on 7111 2999.
~ Henry Materne-Smith & Paul Gordon
 Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth).
 Competition and Consumer Act 2010 (Cth) Sch 2 – The Australian Consumer Law (‘ACL’); Australian Securities and Investments Commission Act 2001 (Cth) (‘ASIC Act’).
 Explanatory Memorandum, Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 (Cth) 4-5.
 See the new Australian Consumer Law 2010 s 23(4)(a) (‘ACL as amended’).
 Australian Securities and Investment Commission Act 2010 s 12BF(1)(c).
 ACL as amended s 23(4)(b); ASIC Act s 12BF(4)(a).
 ACL as amended s 23(4)(c); ASIC Act s 12BF(4)(b).
 ACL as amended s 23(1)(b); ASIC Act s 12BF(1)(b).
 ACL s 24(1), ASIC Act s 12BG(1).
 ACL s 26(1)(b); ASIC Act s 12BI(1)(b).
 ACL s 25(1); ASIC Act s 12BH(1).
 ACL s 23(1)(a); ASIC Act s 12BG(1)(a).
 ACL s 15; ASIC Act s 12BM.
 ACL s 23(2); ASIC Act s 12BF(2).