Kristin Wilson, Senior Associate at Bell Gully, explores the extension of unfair contract terms regime to small business contracts, by examining the Fair Trading Amendment Bill. She will delve further in this topic at the Competition and Consumer Law: Major Changes webinar on Wednesday 17 March 2021.
The Fair Trading Amendment Bill
The Fair Trading Amendment Bill is scheduled to have its second reading this month. Several of the proposed changes are intended to assist small businesses with fewer resources and less bargaining power than their larger counterparts. With change on the horizon businesses should begin reviewing their standard terms well in advance of the Bill coming into force, expected in 2022.
One major change that is proposed in the Bill is the extension of the Unfair Contract Terms Regime (which prohibits the inclusion of unfair terms in standard form consumer contracts) to standard form business-to-business contracts that have a value of less than $250,000 per year. If enacted, this will bring the Fair Trading Act more closely into line with the protections that are afforded to small businesses in Australia.
Consultation undertaken by the Ministry of Business, Innovation and Employment found several areas where an expanded Unfair Contract Terms Regime could assist businesses dealing with organisations that may have disproportionate power to impose terms that could be unfair. Many businesses gave feedback to MBIE, identifying business practices they have been subject to that they felt were unfair and unreasonable, including but not limited to contracts involving unilateral termination rights, extended payment terms, unilateral dictation of price and being ‘locked-into’ contracts for long periods.
The extension of the Unfair Contract Terms Regime to small trade contracts is intended to recognise the fact that many businesses that enter into these types of contracts lack the resources to identify unfair terms, appreciate their significance and determine whether they can manage the risks. These kinds of businesses also have less resources for negotiation and much less bargaining power. It has been argued that small businesses will often have little choice but to accept the terms that are imposed on them by larger or more powerful entities, due to lack of viable alternatives.
Unfair contract terms may cause affected businesses to suffer sudden unexpected costs, interrupting their supply and profitability. This in turn may hinder their ability to expand and succeed, which could result in less competition in the market. The proposed changes are intended to go some way towards evening the playing field when businesses of different sizes, positions, and negotiating power are entering into contracts.
Some of the submissions made to the Select Committee disputed whether the proposed extension of the Unfair Contract Terms Regime to business-to-business contracts was in fact necessary, and argued that this reform could lead to uncertainty in contractual relationships and increase the cost of doing business. While it seems likely that a prohibition against the use of unfair contract terms will be extended to small trade contracts, these changes are not without opposition and the implementation of the regime is unlikely to be straightforward.
How will the prohibition apply?
The changes are intended to be consistent with the Unfair Contract Terms Regime that currently exists – the same process will apply for a declaration of an unfair contract term in a consumer contract to a business contract.
The Commerce Commission may apply to the Court for a declaration that a term is unfair. The Court will make the declaration if:
- The term is in a small trade contract;
- The contract is a standard form contract; and
- It is unfair.
A small trade contract must have a value of less than $250,000 per year when the relationship first arises. This transaction cap recognises that larger contracts are likely to be subject to more sophisticated negotiation, so do not require protection. The protection applies to standard form contracts – those offered on a ‘take it or leave it’ basis, where terms have not been subject to effective negotiation between the parties.
A term will be considered unfair if:
- It would cause a significant imbalance in the parties rights/obligations;
- It is not reasonably necessary to protect the legitimate interests of the party; and
- It would cause detriment to a party if it were applied, enforced or relied upon.
What sort of terms will be considered unfair?
The 3-part test for unfair contract terms is the same as the regime in Australia, which has already extended the protections to small trade contracts entered into by small businesses.
Examples of terms that have been deemed unfair in Australia are:
- Broad limitation of liability or exclusion clauses (even where the larger business caused the loss)
- Broad indemnity clauses (especially where the smaller business did not cause loss)
- Unilateral variations of price and services
- Automatic rollover terms that are not adequately disclosed
- Allowing the large business to terminate the agreement without cause
- Unilateral decision clauses
What can businesses do to prepare?
It is expected that the Bill will come into force sometime in 2022. Businesses should begin reviewing their standard terms well in advance of this, to ensure that they are compliant with the new regime. This will be particularly important for larger businesses who may contract with businesses that have comparatively less bargaining power.
To do this, businesses should first consider whether their contracts are standard form in nature, and whether these have a value of less than $250,000. If so, a comprehensive review should be undertaken to identify terms that may be considered to be unfair. There should then be a consideration as to whether those terms can be defended as being reasonably necessary. If a business is not sure whether a potentially unfair term is truly necessary, it should consider pro-actively amending such a term so as to make it more fair, more reasonable and transparent.
All businesses that may be affected by these changes should continue to monitor the progress of the Fair Trading Amendment Bill, to ensure that they are well positioned to navigate the legislative changes.
Kristin is an experienced litigator with particular expertise in advertising, food law, privacy (including cyber security), media law and intellectual property. She prides herself on providing pragmatic, commercial and timely advice to clients.
She advises on a wide range of food law issues, including marketing, export and import requirements, and regulatory compliance including advising on the Food Standards Australia New Zealand (FSANZ) Code, the Food Act, the Wine Act and related regulations and industry codes. She regularly assists clients with product formulation and labelling queries, advertising and marketing considerations and contractual issues including licensing and complex distribution agreements.
Kristin is also very experienced in advising national and international clients on privacy law and data protection issues.
In addition, Kristin provides general advice on commercial and contractual disputes and litigation with successful outcomes for her clients.