Move to extend unfair contract term protections to small businesses

The Commonwealth Government has recently released a consultation paper dealing with whether the unfair contract term protections offered to consumers under the Australian Consumer Law (ACL), should be extended to small business contracts.

Standard form contracts are often offered to small businesses due to their ability to allow parties to enter into arrangements quickly and to allow larger businesses to have uniformity of trading terms among their various suppliers. However, like consumers, many small businesses can lack the power to negotiate the terms of these contracts with larger companies, due to information imbalances, lack of access to legal expertise to analyse contracts, and costs.

The prevalence of this imbalance allows larger businesses to insert unfair contract terms into standard form contracts, sometimes without the small businesses knowing the consequences of such provisions.

There is a great risk that these contracts allow larger businesses to:

1. transfer certain risks to smaller businesses that may be unmanageable for those entities;
2. unilaterally vary or terminate the contract; and
3. change the price or characteristics of the goods or services being supplied.

The extension of the unfair contract term protections to small businesses would enable the court to declare void a term within a standard form contract that is ‘unfair’, as is currently the case in consumer contracts under section23 of the ACL.

As stated in section 24 of the ACL, a term in a consumer contract is unfair if it:

1. causes significant imbalance in the parties’ rights and obligations arising under the contract;
2. is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
3. would cause detriment to a party if it were to be relied on.

This definition of unfair would be extended to small business contracts under the Government’s policy commitment.

The Government is looking for feedback on whether these provisions should be extended to protect small businesses, or whether a different solution should be sought. Further, it is seeking input as to the definition of ‘small business contracts’, and whether such contracts should include both the acquisition and supply of goods and services.

You can provide feedback on the consultation paper until 1 August 2014 in three ways:

1. a short survey;
2. feedback via the website; and
3. by lodging a formal submission.

If you would like assistance preparing a submission, would like further information on how the possible extension of the unfair contract term protections could affect you, or if you are concerned you may be party to a contract that includes unfair terms, please contact us.