Foul Ball or Fair Play?

As of 12 November 2016 amendments to subsections of the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act) relating to contracts of financial products and financial services and the Competition and Consumer Act 2010 (Cth) (the ACL) will see protections currently available to consumers extended to small businesses.  The aim of the amendments is to ensure small businesses, including contracts to subcontractors in the construction industry, are treated fairly when entering into contracts with larger entities.

These amendments will apply to contracts entered into on or after 12 November 2016, to existing contracts renewed on or after 12 November 2016 and to terms of contacts varied on or after 12 November 2016.

The little league

Under the new regime, a “small business contract” will include a contract where:

1. the contract is for a supply of goods or services, or a sale or grant of an interest in land; and
2. one of the parties is a business that employs less than 20 employees (including casual employees who work in a regular and systematic basis); and
3. one of the following applies:
   1. the upfront price payable under the contract does not exceed $300,000; or
   2. the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1 million.

The ‘upfront price payable’ is the total consideration payable under the contract which is disclosed at or before the time the contract is entered into but will exclude contingent amounts and contracts under which credit is or is to be provided, interest payable.

For example, where a contract provides for an initial fee upon signing and subsequent annual fees, the ‘upfront price payable’ will be the total amount of fees disclosed for the life of the contact (including subsequent annual fees), but would not include contingent amounts such as early break or termination fees or late payment fees.

Strike out – the Red Card

The new law will give the Courts power to declare that a contract term is ‘unfair’ and strike out the term where it has a detrimental effect on the small business party.  The remaining terms of the contract remain enforceable, to the extent they are capable of operating without the unfair term.

Terms which will attract scrutiny are those which enable one party to:

1. limit their obligations or liabilities, or terminate or renew the contact;
2. impose penalties for breaches, excessive fees or interest rates on outstanding monies;
3. assign the contract without consent; and
4. unilaterally vary the contract.

The idea is to give small businesses a fair go when entering into seemingly ‘non-negotiable’ contracts with larger businesses, but the practical effect may prove costly for corporates. 

The ripple effect and practical tips

Parties to standard form contracts may not be the only players affected.  The ripples may be felt by parties to subcontractor agreements, franchise agreements, retail leasing, guarantees, restraints and other supplies on credit.

Practical tips include:

1. review existing contracts and terms prior to 12 November 2016;
2. reconsider terms or contracts which provide for unilateral powers;
3. clearly identify the amount payable pursuant to the contract;
4. draw to the other parties’ attention to specific terms prior to the agreement;
5. ensure contracts are written in clear, plain and transparent language;
6. do not bury onerous terms in fine print;
7. know who you are contracting with and be cautious where one party lacks the resources or skills to appreciate the implications of the contractual terms.

To discuss how the unfair contracts law may affect your business, please contact Dajana Malnersic on 02 9234 1500.