Christmas comes early for the ACCC: Labor Government set to deliver on its promise concerning unfair contract penalties
The Australian Competition and Consumer Commission (ACCC) is about to receive a gift it has been wanting to be delivered straight to small businesses in the form of protective legislation making unfair contract terms illegal. The Australian Small Business and Family Enterprise Ombudsman (Ombudsman) first confirmed on 26 July 2022 that the Albanese Government would deliver this gift on the back of its election commitment to introduce penalties for unfair contract terms in standard form small business contracts.
Since 2018, the ACCC has been calling for reforms of the current unfair contracts regime as it looks to address the regime’s fundamental shortcomings and grant itself with the ability to enforce these laws. Just as Santa would need his reindeers to deliver gifts, the ACCC looks to ride its sleigh with the Albanese Government towing it to deliver the reform to the small business sector.
The Current Legislation
Currently, under section 23 of the Australian Consumer Law (Schedule 2 of the Competition and Consumer Act 2010 (Cth)) (ACL), unfair contract terms law applies to a term in a ‘small business contract’ if:
- at least one party to the contract is a ‘small business’; and
- the contract is a ‘standard form contract’; and
- the contract is for, amongst other things, a financial product or services (such as business loans, credit cards, insurance cover or broker agreements), or a contract for supply of doos or services or the grant of an interest in land; and
- the contract was entered into or renewed on or after 12 November 2016, or a term in an existing contract was varied on or after 12 November 2016.
Unfair Contract Term
A term of a contract (but not the entire contract itself) will be unfair if it:
- would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
- is not reasonably necessary to protect the legitimate interests of the stronger party who would be advantaged by the term; and
- would cause detriment to the weaker party if applied or relied upon.
All three elements must be present for a term to be unfair, and subsequently void. The regime allows the entire contract to continue unless it is unable to operate without the unfair term.
Small Business Contract
A contract is a ‘small business contract’ if:
- at least one party to the contract is a ‘small business’ – that is, a business that employs fewer than 20 people at the time the contract is signed (including casual employees employed on a regular or systematic basis); and
- the upfront price payable under the contract does not exceed $300,000 (or, if the contract is for more than 12 months, $1 million). Upfront price includes payments, fees and charges payable over the life of the contract. For example, a lease would include all rent payable for the term of the lease, and a franchise agreement would include both the initial franchise fee paid to the franchisor upon entry into the agreement along with ongoing royalties throughout its term. Calculating the upfront price may therefore involve an element of estimation using the methodology specified under the relevant agreement.
Standard Form Contract
A ‘standard form contract’ is a contract that has been prepared by one party to the contract (the business which is offering the product or service) without any prior negotiation phase between the transacting parties. Essentially, it is a ‘take it or leave it’ contract.
Generally, if a small business alleges that a contract is a standard form contract, it is presumed to be a standard form contract unless proven otherwise.
The Proposed Legislation
The Labor Government’s proposed legislation will seek to make three significant amendments to the unfair contract provisions under section 23 of the ACL, and includes:
- the introduction of civil penalty provisions allowing the ACCC to seek a civil penalty from a Court for any breach of the unfair contract laws. Currently, it is not unlawful for a contract to contain an unfair contract term. For a term to be unfair, there must be a ruling from a court;
- increasing the threshold for a small business from a business with less than 20 employees to a business with less than 100 employees; and
- introducing an alternative threshold for small businesses of having an annual turnover being less than $10 million.
We recommend all businesses utilising small business contracts to anticipate a very proactive regulator, and one which is ready to deliver the gift it has been anticipating itself.
All businesses should be aware of the current laws and upcoming changes to unfair contract term laws. Businesses should be proactive and carry out reviews of all of the standard form contracts that they use in their businesses.
Salerno law has a dedicated corporate, commercial and financial services team with substantive knowledge on how to protect their client’s commercial position and interests. Should you have any questions in relation to our commercial services, please do hesitate to contact our team. Salerno Law strives for the best possible outcome for their clients by providing quality advice to companies and individuals in all practice areas.
By Hesh Aiyach & Luke McKavanagh
Hesh is part of Salerno Law’s corporate and commercial law team. He is a keen and avid lawyer with extensive business experience acquired during his time as a business owner. Since his time of admission into practice, he has been exposed to an array of matters in the corporate, banking, and finance sectors, assisting both small and large companies. He understands that small businesses need the best protection and that all businesses should be equipped to deal with regulatory changes as they arise. His commercial legal development and business experience offer clients the benefit of a lawyer who will look after their businesses as if it was his own.
Luke is part of Salerno Law’s franchise, commercial and property law team. His days involve providing advice on a wide variety of commercial issues that arise in operating small to medium businesses, where he assists clients who are growing their business or wanting to protect what they’ve established. Luke has specialised in franchising law since his admission into practice and has acted for a diverse range of franchisors and franchisees of a variety of franchise systems. He is also an active member of the Queensland Law Society Franchising Law Committee where he keeps on the forefront of the latest developments in laws affecting franchising, and contributes towards submissions to government on topical issues facing the franchising industry
Salerno Law’s Business and Commerical Team have extensive experience in advising owners, executives and managers of start-ups, SMEs, private equity firms, not-for-profits, indigenous corporations and large corporations across all commercial and legal areas. Our team takes the time to establish and maintain meaningful relationships with their clients with the objective of becoming the long-term trusted business advisers for their clients. Establishing such a relationship assists us in identifying our client’s unique objectives, risks and challenges and to provide our services accordingly.
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