In this post we will talk about the new Unfair Contract Regime (Regime), which came into effect in November 2016 in accordance with the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015. The purpose of the Regime was to protect small businesses from being exploited by their mega counterparty, which previously is only afforded to individual consumers.
Unfair Contract Void
Under the new regime, a consumer contract or small business contract (including contract for financial services) is void if:
- The term is unfair; and
- The contract is a standard form contract.
What is a small business contract?
A contract is a small business contract if:
- The contract is for a supply of goods or services, or a sale or grant of an interest in land; and
- At the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons; and
- Either of the following applies:
- The upfront price payable under the contract does not exceed $300,000;
- The contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.00.
How does it work?
We believe the best way to check whether a contract is unfair and void is to read the wording backwards starting from determining the nature of the business. Here is a step by step walk through.
Step 1 – Is one of the parties a small business?
Small business, according to the Regime, is a business that employs fewer than 20 persons. It seems a fairly arbitrary standard.
Step 2 – What is supplied?
The Regime applies to supply of goods or services, a sale or grant interest in land and financial services. It is a very broad definition. For a small business, that’s really everything they will ever need.
However, there are a few exemptions, such as company and superfund constitution, management investment schemes, most insurance contract and contract concerning marine salvages and carriage of goods by ship
Step 3 – How much money are paid?
Where contract duration is less than 12 months, upfront payment of the services cannot exceed $300,000.00. Where the contract lasts more than 12 months, the upfront payment does not exceed $1,000,000.00. This potentially covers deposit paid for inventory supplies, motor vehicle, acquisition of land or instalment payments.
Step 4 – Is the contract a standard form contract?
Of course, this will cover the pre-printed contracts, where the customer/small business is not given a chance to negotiate. There are also a number of factors that the court will look at to determine whether a contract is a standard form contract. includes:
- If a party have a much stronger bargaining power;
- Whether the contract was prepared before transaction;
- Whether the parties have a right and opportunity to negotiate the terms; and
- Whether the contract was customized for the transaction etc.
Step 5 – When was the contract entered into?
The Regime only applies to:
- Contract entered into on or after 12 November 2016;
- Contract renewed on or after 12 November 2016; or
- Contract varied on or after 12 November 2016 (the Regime only applies to the varied part)
Step 6 – Are the contract terms unfair?
It is only after the above questions are answered can we ask the ultimate question, are the terms unfair? Failing of any of the above criteria will render the Regime non-applicable. There are three criteria provided under the Australia Consumer Law and the ASIC Act:
- Where the contract would cause a significant imbalance in the rights and obligations arising under the contract;
- It is not reasonably necessary in order to protect the legitimate interests of the Party who would be advantaged by the term; and
- Would cause detriment to a party if it were to be applied or relied on.
What is unfair needs to be determined on a case by case basis, but some typical examples are:
- Terms that enable one party (but not another) to avoid or limit their obligations under the contract;
- Terms that enable one party (but not another) to terminate the contract;
- Terms that penalise one party (but not another) for breaching or terminating the contract; or
- Terms that enable one party (but not another) to vary the terms of the contract.
How would it benefit small businesses?
The objective of the Regime is to extend the protection previously afforded to individual customers to small businesses. Undoubtedly the intention was to address the unbalanced bargaining power between small businesses and their megacorporation counter party? After all, in real life, being a “company” does not automatically bring you more power in a transaction.
Small businesses will certainly benefit, where there is IN FACT an unfair contract in a template form, where they can only take it or leave it. It also is a Sword of Damocles swinging over the head of major corporations to remind them to play fair when dealing with small businesses, or otherwise face the risk of a void contract.
But Would it REALLY work?
As the Regime has only kicked in for two months or so, we are not yet aware of any cases determined in accordance with the new Regime, let alone cases that test the boundary of the new Regime. However, by reading the text of the Regime, there are a few questions come immediately to mind.
The most obvious question is the definition of a small business. Is the head count of employee the only factor (or the most important factor) to differentiate a small business and a non-small business? What makes the number “20” (number of employees) so magical that we can use it to differentiate a small business and a non-small business (Interestingly, the United Kingdom Law Commission recommend that 9 employees is the dividing line between small and non-small business)? If a company with 20 employees transact with a company with 19 employees, would it be so unfair for the business with 20 employees to adopt a standard form contract? What if the company with 19 employees is simply too lazy to negotiate the contract term?
Adopting the same line of arguments, why only transaction with less than $300,000.00 (or $1,000,000.00 for over 12 months contract) upfront payment caught by the Regime and a transaction with $300,001.00 up front payment excluded?
You might say that it is too argumentative. But the point is the concept of “fair” or “unfair” is like “justice” or “injustice”. No one ever put a figure on it. It is a relative term and is all based on the context.
It could be imagined that after the kick in of the new Regime, we will see a lot of people try to argue their number of employees in the Court Room (try to get over or below 20 employees depend on which side they are on). It would also be interesting to see how one party is to prove or disprove that the other party has or does not have 20 employees.
At last, I quote a line from the latest season of Sherlock Holmes: “What makes the number 3 so magical that people stop searching after the third one!”