Grappling with the B2B unfair contract term laws
The prohibition on unfair contract terms in ‘small business contracts’ is here to stay
The prohibition on unfair contract terms in 'small business contracts' is here to stay. Thought to be the largest change to the way businesses practice in decades, the law is something to which all businesses need to turn their minds, and most will need to deal with in their day to day practices.
Unfair contract term (UCT) laws are not new. They were introduced for business to consumer (B2C) contracts as part of the reforms to the then Trade Practices Act in 2010. Application of 'unfair terms' laws to small business has been under consideration since 2009 and the extension was a pre-election commitment of the previous Federal Government. The new laws are intended to address the perceived vulnerability of small businesses and prevent enforcement of unfair contract terms against them.
After considerable consultation throughout 2014 by the Treasury on behalf of Consumer Affairs Australia and New Zealand (as set out in our previous articles), the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 was passed by both houses of parliament on 20 October 2015. The new laws will come into effect on 12 November 2016.
The new laws extend the existing B2C unfair contract terms laws to a business to business (B2B) context.
The new laws will apply to:
- applicable agreements entered into on or after 12 November 2016
- applicable agreements renewed on or after 12 November 2016 – for conduct after that date
- a term of an applicable agreement which is varied on or after 12 November 2016 - for that term.
The laws won’t apply to a pre-existing contract that is ‘assigned’ on or after 12 November 2016 (unless the incoming party enters into a new contract).
Terms of trade that state each supply is a new contract will be caught for each supply after 12 November.
Similar laws will also come into effect for small business contracts for financial products and services, which will be regulated by the Australian Securities and Investments Commission (ASIC).
The Australian Competition and Consumer Commission (ACCC) is publicly stating that the following will be the focus of its initial compliance activities:
- retail leasing
- advertising services
- telecommunications services
- independent contracting (e.g. IT consultants and architects).
The ACCC has said it will be proactive and not wait for a clause to be enforced before it takes action on unfair terms (e.g. we predict that the ACCC will use its audit powers to compel provision of contracts by businesses for them to then be the subject of review and possibly proceedings by the ACCC).
There is also a link on the ACCC website for small businesses to send ‘unfair terms’ in to the ACCC for consideration. Based on previous campaigns by the ACCC (on GST changes and the ‘carbon price’ introduction and roll-back) businesses should expect that this reporting facility will be well used.
Consequences of an unfair term?
The term is void, but the contract will continue to bind the parties if it is capable of operating without the term. The courts will not ‘rewrite’ the deal: so the parties will be held to the remainder of the contract without the benefit of the term that is deemed unfair.
A party to the contract or the regulator (which is the ACCC or ASIC in the case of contracts for financial products or services) can take enforcement action. Other remedies available are:
- orders for redress
- any other orders the court considers appropriate.
Content of the law
The laws are very similar to, and are modelled upon, the UCT Laws that already apply in relation to standard form contracts offered by businesses to consumers.
The essence of the laws are that a term of a 'small business contract' is void if:
- the term is unfair
- the contract is a standard form contract.
A small business contract
The new laws will apply to any 'small business contract'. A contract will be a small business contract if:
- at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons
- 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 million.
Who are employees?
In applying the 20 person test, a casual employee is not to be counted unless he or she is employed by the business on a regular and systematic basis. A head count approach is taken, irrespective of numbers of hours worked. The employee requirement is measured at the time the contract is entered into.
The ACCC has confirmed that even if a party takes steps to find out how many employees the other party has (e.g. by seeking written assurance), the law will still apply if it turns out that the other party in fact has less than 20 employees.
In addition, it is the contracting party that is relevant under the laws as drafted, not related entities such as service companies, which creates the potential for large corporates groups to be caught (which seems to go against the purpose of the legislation).
Regarding what is and what is not an 'upfront price', this was already defined in the B2C UCT laws as being:
- consideration provided for the supply, sale or grant under the contract
- disclosed at or before the time the contract is entered into,
but does not include any other consideration that is contingent on the occurrence or non‑occurrence of a particular event (i.e. has to be certain).
The ACCC has stated it will include in the 'upfront price' contingent payments which are referable to the supply, sale or grant under the contract provided they are disclosed at the time the contract is entered into and able to be calculated at that time. However, whether or not they go to the upfront price, such terms are likely to fall into a carve out from the scope of the legislation (i.e. it cannot be challenged as unfair), provided they were fully disclosed at the time the contract was entered into (see comments below on excluded terms).
If a contingent amount cannot be 'calculated with certainty' at the time of contracting it is 'unlikely' to form part of the upfront price (e.g. a licence fee calculated as a percentage of future sales).
Payments that are not referable to the supply, sale or grant under the contract are not part of the upfront price payable. For example, terms that impose additional fees if a party exits the contract early are not included.
Standard form contracts
The definition of a 'standard form contract' is as per the definition in the existing B2C laws. This means that:
- there is a presumption in favour of a contract being a standard form contract unless another party to the proceeding proves otherwise
- in determining whether a contract is a standard form contract, a court may take into account such matters as it thinks relevant, but must take into account the following:
- whether one of the parties has all or most of the bargaining power relating to the transaction
- whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties
- whether another party was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented
- whether another party was given an effective opportunity to negotiate the terms of the contract
- whether the terms of the contract take into account the specific characteristics of another party or the particular transaction.
The ACCC have indicated that arguing a contract ‘would have been negotiated’ will not be sufficient. Certain agreements are excluded such as:
- constitutions of a company, MIS or other kind of body
- certain marine contracts
- a contract prescribed by a regulation – none yet prescribed.
The ACCC is also taking the position that, generally, if a contract:
- refers to another document as being part of the contract, or requires compliance with another document, that other document will form part of the contract
- must be read in conjunction with another document, the other document forms part of the contract.
As per the B2C laws, the following terms are outside of the scope of the new laws:
- terms that define the main subject matter of the contract
- terms that set the upfront price payable under the contract
- terms that are required, or expressly permitted, by a law of the Commonwealth, a state or a territory, for example, limitations of liability provisions for defective goods.
When a term is unfair
A term of a contract is unfair if:
- it would cause a significant imbalance in the parties’ rights and obligations arising under the contract
- it is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term (there is a rebuttable presumption against this)
- it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
In determining fairness, the court must take into account the extent to which the term is transparent (i.e. in plain English, legible, clear and readily available) and the contract as a whole.
Examples of unfair terms are as follows:
- a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract
- a term that permits, or has the effect of permitting, one party to vary the upfront price payable under the contract without the right of another party to terminate the contract
- a term that permits, or has the effect of permitting, one party unilaterally to vary the characteristics of the goods or services to be supplied, under the contract
- a term that permits, or has the effect of permitting, one party unilaterally to determine whether the contract has been breached or to interpret its meaning
- a term that limits, or has the effect of limiting, one party’s vicarious liability for its agents
- a term that permits, or has the effect of permitting, one party to assign the contract to the detriment of another party without that other party’s consent
- a term that permits, or has the effect of permitting, one party (but not another party) to:
- avoid or limit performance of the contract
- terminate the contract
- vary the terms of the contract
- renew or not renew the contract.
The new laws contain anti-overlap provisions that state the law will not apply to 'small business contracts' where a, '…prescribed law of the Commonwealth, a State or a Territory applies'. However, these anti-overlap provisions are aimed at industry specific law and voluntary codes will not be exempted, as they are just that - voluntary. Further, where remedies under similar laws differ (e.g. Motor Vehicle Dealers and Repairers Act 2013 (NSW) provides the same test for unfairness as the Australian Consumer Law's (ACL) test but different remedies) the new laws will not be on the basis that it is not an equivalent enforceable mechanism. See our previous link of the similarities between these two pieces of legislation here.
Key ways to avoid the application of the new law
- Being regulated by the laws may be undesirable for a number of reasons, primarily due to the uncertainty it will cause. For example, unilateral variations of policies, manuals or standards may be called into question.
- The key ways to avoid the application of new laws, will be as follows:
- structure agreements to take advantage of the monetary thresholds (e.g. via minimum payment/purchase obligations)
- negotiate contracts so they are not 'standard form' by:
- providing a genuine time period for negotiation
- keeping evidence of all negotiations
- being prepared to make concessions.
- Where the application cannot be avoided, businesses will need to:
- consider which counterparties are 'small businesses'
- consider which terms may be unfair and whether they are key terms, and then:
- consider omitting them
- consider making them mutual
- refine the scope of the clause to be more specific and address a clear risk
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