Less than 9 months to comply with the unfair contracts regime? That's unfair

As highlighted in a previous bulletin, the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 will, from 12 November 2016, extend the unfair contract protections currently enjoyed by ‘consumers’ to parties to standard form ‘small business contracts’.  Consequently, you will soon need to be alert to the existence of unfair terms not only when dealing with consumers, but also when dealing with small businesses.

In a timely reminder that the commencement date is fast approaching, ASIC has released Information Sheet 211 (AIS 211), which provides guidance on the application of the unfair contract terms regime to standard form small business contracts for financial products and services. AIS 211 also serves as a call to action for any financial services businesses that are yet to review their existing contracts and address non-compliance.

Does the extended regime apply to you?

With the extension to small business contracts, the scope of the unfair contract terms regime will widen considerably and, from 12 November 2016, will affect participants in a diverse range of industries including financial services, telecommunications, energy, information technology, healthcare and construction to name a few.

To recap on some of the key points:

• The regime applies to standard form contracts. The term ‘standard form’ is not defined, but refers to those types of contracts which are generally provided on a ‘take it or leave it’ basis, or with little scope for negotiation.

• In addition to consumer contracts, the regime will apply to ‘small business contracts’, in other words those contracts where:

  • at least one party to the contract is a business that employs fewer than 20 persons; and

  • the upfront price payable under the contract does not exceed $300,000, or $1,000,000 if the contract duration is longer than 12 months. 

• Terms in standard form small business contracts which are ‘unfair’ will be void. The general indicia of ‘unfairness’ are set out in the Competition and Consumer Act 2010 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth) and include terms which:

  • cause a significant imbalance to parties rights and obligations;

  • are not reasonably necessary to protect the legitimate interests of the party in whose favour they operate; or

  • would cause detriment to a consumer or small business if they were relied upon or enforced.

• Examples of terms likely to attract the attention of the regulator include:

  • terms which allow one party to unilaterally vary the contract;

  • terms which allow one party to unilaterally assign, terminate, or avoid performance of the contract without allowing the other party to terminate the agreement; and

  • terms which impose default fees that are excessive and likely to exceed the amount required to protect the legitimate interest of the party imposing them.

What you need to do

The impact of non-compliance can be significant. A term identified as unfair will be declared void and, if the contract is not capable of operating without that term, may result in the entire contract being unenforceable.

Although the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 will not operate retrospectively, it will apply to any ‘rollover’ of an existing contract which occurs after 12 November 2016.  This means that particular attention must be paid not only to contracts with an automatic renewal due to take effect after 12 November 2016, but also month-to-month or other periodical contracts which may ‘rollover’ after that date.  

If you haven’t already, you should prepare for the commencement of the unfair contracts regime by taking the following steps:

• Determine whether the extended regime is likely to affect any of your existing contracts, by:

  • identifying those contracts which are at risk of being considered ‘standard form’, for example contracts which adopt a ‘one size fits all’ approach or which typically involve very little negotiation;

  • knowing the size of your counterparty - not only at the time of entry into the contract but also at each renewal; and

  • calculating the upfront price payable under each contract to identify those which are valued at less than $300,000 or $1,000,000 if the contract extends for more than 12 months.

• Identify any terms in affected contracts which might be at risk of non-compliance, for example those which cause a significant imbalance to the rights to the parties or would cause detriment to the other party if you relied on them.
  
  

• Consider whether you might be able to justify imposing the identified terms on your counter party, for example by proving that the particular terms are required to protect your ‘legitimate interest’.

In our experience, businesses most often find themselves in difficulty because they fail to adequately consider the key risks they wish to exclude and instead seek to rely on the broadest possible drafting, imposing harsh and inflexible agreements in the process.  We can help you not only to identify the key risks facing your business, but also to protect against those risks in a manner which complies with the unfair contract terms regime and reduces the likelihood that the regulator will come knocking.

Author: Michael Cossetto