Unfair Contract Term (UCT) Protections Extended To Small Businesses

Draft Legislation Released

On 28 April 2015 the Minister for Small Business, the Hon Bruce Billson MP announced the release of draft legislation to extend unfair contract term protections to small businesses following a consultation process in mid-2014.

Consumers have been protected from unfair contract terms since 1 July 2010 and the Minister announced that ‘It is time that small businesses, which often face the same vulnerabilities as consumers, receive strong protections when contending with “take it or leave it” contracts.’

The proposed legislation will address the potential for detriment where unfair contract terms are enforced in standard form contracts with small business.

The Meaning of Small Business

The unfair contract term protections are limited to a small business. A business is taken to be a small business if it employs fewer than 20 persons, excluding casual employees not employed on a regular basis. The threshold of less than 20 employees was chosen for this definition as it is a commonly used headcount measure and has been found by the Australian Bureau of Statistics to provide a good proxy of small businesses.

In its submission to the Government, AADA drew attention to the inconsistency and complexity of the definitions of SMEs in income tax and other legislation and argued that the key concept should be the relative size of the parties. The UCT protections should be extended to all franchisee agreements including motor vehicle dealership agreements.

Small Business Contracts and Franchise Agreements

AADA understands the proposed laws can apply to a franchise agreement provided it falls within the definition of a ‘small business’ contract. A contract is a small business contract if, at the time it is entered, at least one party is a small business, and the upfront price payable under the contract does not exceed either $100,000, or $200,000 if its duration is more than 12 months.

Effect of UCT Protections

An unfair term in a standard form small business contract can be declared void and unenforceable. A term will be unfair if:
•   it causes significant imbalance in the parties’ rights and obligations arising under the contract; and
•   the term is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
•   it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

A term that defines the main subject matter or sets out the upfront price of a contract, or a term that is required or expressly permitted by law, cannot be declared unfair by a court.

Date of Effect of New Laws

Once legislation has been passed by the Parliament and receives Royal Assent, there will be a transition period of six months before the protections come into effect, which is expected to be in early 2016.

Industry Specific Protection

AADA’s submission referred to industry-specific mechanisms that prohibit the use of unfair contract terms in standard form contracts, such as the Motor Vehicle Dealers and Repairers Act 2013 (NSW). That Act regulates the relationships between NSW motor vehicle dealers and motor vehicle manufacturers in respect of unfair contracts and unjust conduct.

While the Commonwealth Government was not inclined to extend similar protection across all States and Territories the AADA is looking at a number of options. AADA’s submission to the Treasury can be accessed on either the AADA or Treasury websites.

Please note: This article should not be used as a substitute for professional advice.

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