On 12 November 2016, the Australian Consumer Law (ACL)’s unfair contract terms regime began applying to ‘small business contracts’.

This change has the potential to impact local government as it gives ‘small businesses’ the ability to seek a declaration from a court that certain terms in some standard form contracts are void for being ‘unfair’.

We have received a number of enquiries from our Council clients as to how the changes will affect Council contracts and whether any action needs to be taken to avoid contravening the new provisions. This article gives an overview of how the new laws apply at the local government level and what to do in circumstances where they do apply.

How does the new unfair contract terms regime (UCT) operate?

The UCT may apply to Council contracts that tick the following boxes.

The contract:

• is entered into on or after 12 November 2016, or is an existing contract that is renewed or amended on or after that date (for example, where an option to extend the term of a contract is exercised after 12 November 2016)
• constitutes a ‘standard form contract’ (the meaning of which is considered further below)
• is for the supply of goods or services, or a sale or grant of an interest in land
• is between Council and ‘a small business’ (which is defined to mean a business that employs fewer than 20 persons)
• either has:
  • an upfront price payable which does not exceed $300,000, or
  • a duration of more than 12 months and the upfront price payable does not exceed $1 million.

Where a contract satisfies the above criteria, the contractor/ supplier/ consultant (or the relevant consumer protection agency such as the Australian Competition and Consumer Commission or Consumer Affairs Victoria (ACL Regulator)) can apply to the court for a declaration that a term of the contract is ‘unfair’. If they are successful, the relevant term in the contract will be void.

What is a ‘standard form contract’ and what constitutes an ‘unfair’ term?

Neither ‘standard form contract’ nor ‘unfair’ is defined in the ACL. Rather, the ACL provides lists of criteria and examples that courts are to take into account when considering whether a contract is ‘standard form’ or a term is ‘unfair’.

In considering whether a contract is ‘standard form’, a court must take into account whether:

• one or all of the parties has all or most of the bargaining power relating to the transaction
• the contract was prepared by one party before any discussion relating to the transaction occurred between the parties
• another party was, in effect, required either to accept or reject the terms of the contract
• another party was given an effective opportunity to negotiate the terms of the contract
• the terms of the contract take into account the specific characteristics of another party or the particular transaction.

Councils typically use precedent or standard form contracts when seeking quotations or tenders for the supply of goods or services. Where the successful contractor or consultant is a ‘small business’, it is possible that the above criteria will be satisfied if Council does not take appropriate mitigation measures.

The ACL states that a term of a small business contract is ‘unfair’ if it:

• would cause a significant imbalance in the parties’ rights and obligations arising under the contract
• is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term
• would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

In determining whether a term of a small business contract is unfair, a court may take into account the extent to which the term in question is transparent, and the contract as a whole.

The types of contract terms that may be considered unfair in the context of small business contracts include (just to name a few) terms that:

• permit, or have the effect of permitting, Council to terminate the contract (eg. a termination for convenience clause that is only exercisable by Council)
• permit, or have the effect of permitting, Council to unilaterally vary the characteristics of the goods or services to be supplied (eg. a variation clause)
• permit Council to unilaterally determine whether the contract has been breached or to interpret its meaning (eg. consider terms that contain the words ‘in Council’s opinion’)
• limit, or have the effect of limiting, one party’s right to sue another party (eg. a clause that prohibits a contractor from making a claim against Council where it has failed to meet specified time or notice requirements).

Effect of an unfair term

A court can declare a term of a small business contract to be unfair. If this occurs, the term will be void but the rest of the contract will remain on foot (if it can survive without the unfair term). Both small businesses and the ACL Regulator can apply to a court to have a term declared unfair.

Exceptions to the UCT

Even where a contract is a ‘standard form contract’ entered into with a ‘small business’, there are situations where the UCT will not apply. For example, the UCT will not apply to terms to the extent that they:

• define the main subject matter of the contract
• set the upfront price payable under the contract (including any future payments referrable to the supply, grant or sale so long as they are disclosed at or before the time the contract is entered into)
• are required, or expressly permitted, by a law of the Commonwealth, a State or a Territory.

Action to take

The recent changes to the ACL are significant and it is important that Councils understand how they apply to its activities. As part of this process, Council should consider any precedent contracts used to engage small businesses for the supply of goods or services (or a sale or grant of an interest in land) to see whether they contain terms that are likely to infringe the UCT.

Given that these changes are very recent and given the uncertainty as to how the courts will interpret the concept of ‘unfair’, it is premature for Councils to stop using their current contracts due to fear that the UCT will threaten their provisions.

Rather, Council should consider what mitigation measures they may be able to adopt to minimise the risk of contractual terms being challenged. These measures could include:

• issuing conditions of contract with any request for quotation or invitation to tender and inviting respondents to submit proposed departures to the conditions
• avoiding a ‘take it or leave it’ approach in engaging small businesses under these contracts and being open to negotiation with its small business contractors
• keeping records as to why particular conditions of contract are necessary for the protection of Council’s legitimate interests (eg. why Council requires the ability to terminate a contract for its convenience)
• considering whether it can, where appropriate, enter into umbrella agreements with suppliers rather than a series of small contracts (eg. rather than engaging a contractor to conduct maintenance to Council buildings using individual contracts for each location, consider using a single maintenance agreement that covers all locations and buildings).