Extension of Unfair Contract Term Protections to Small businesses

The current national unfair contract terms protections found in the Australian Consumer Law (and those that relate to financial services, in the Australian Securities and Investments Commission Act 2001 (Cth)) are expressed to apply to all businesses that use standard form contracts in their dealings with consumers.  Whilst there are some protections for small businesses in Australia’s current statutory, common law and equitable framework, the Commonwealth Government has identified ongoing risk of unfair standard contract terms for small businesses when dealing with larger businesses and corporations (Australian Competition and Consumer Commission data reveals that it received 894 unfair contract term and small business complaints from 1 January 2011-25 November 2013) and has, accordingly, committed to extending the current unfair contract term protections afforded consumers to small businesses.  The focus is on the terms themselves rather than how the contracts are negotiated.  The latter is a subject of the Competition Policy Review.

Matters that may be affected by unfair contract terms impeding the business of small businesses include:

Rights to avoid or limit the performance of the contract, terminate it, vary its terms or renew or not to renew the contract

  1. Rights to change the price or characteristics of the goods or services to be supplied
  2. Determining when the contract has been breached and the extent of liability for breaches
  3. Limits on the parties’ right to sue and the evidence that can be led in proceedings on the contract

Some of the increased costs to small businesses arising from unfair standard term contracts have already been identified, as follows:

  1. Obviously, the increased cost of unfair distributions of risk of the contract to the small business
  2. The transaction costs of avoiding unfair contract terms
  3. Cost flows from potential reduced confidence in contracting generally
  4. The ethical value lost with notions of a violation of the principle of fairness

Although legislative amendment to extend the protections is the Commonwealth Government’s policy commitment, and preferred option, the Australian Treasury, on behalf of Consumer Affairs Australia and New Zealand is nearing the completion of a consultation process to identify the problem and most suitable options to address the problem. Specifically, feedback to key questions has been sought from small businesses, including:

  1. How widespread is the use of standard form contracts for small business and what are their benefits and disadvantages?
  2. What considerations influence the design of terms and conditions in standard form contracts?
  3. To what extent are businesses reviewing standard form contracts or engaging legal services prior to signing standard form contracts? Does this depend on the value or perceived exclusivity of the transaction?
  4. To what degree do small businesses try to negotiate standard form contracts?
  5. Is it the terms or the process by which some contracts are negotiated that is the main concern for small businesses?
  6. What terms are businesses encountering that might be considered ‘unfair’?
  7. What detriment have businesses suffered from unfair contract terms?
  8. What protections do businesses currently have when they encounter unfair contract terms and are they sufficient?
  9. What responses (including by government or industry) could be implemented to help businesses with ensuring contract terms respect the legitimate business objectives and interests of both big and small contracting parties?
  10. Would information disclosure requirements impact on the decision to review standard form contracts and/or consider the terms included in them?
  11. Given the Commonwealth Government’s commitment to extend existing unfair contract term provisions to small businesses, what should be the scope of the protections?
  12. Should the current protections afforded consumers be extended to cover small businesses defined using contracting party characteristics or transaction size? Should small business to small business contracts be included?
  13. Should extension of the current protections provide protection for small business when they both acquire and supply goods or services?
The consultation process ends on 1 August 2014.

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