Small businesses, in addition to consumers, are protected from unfair contract terms in standard form contracts.  

The protections will apply where:

• The contract was entered into or renewed after 16 November 2016;
• at least one party to the contract is a “small business”;
• the contract is a “standard form contract” for a financial product or service; and
• Either:
  • the upfront price of the contract does not exceed $300,000 (if the contract has a duration of 12 months or less); or
  • the upfront price of the contract does not exceed $1,000,000 (if the contract has a duration of more than 12 months).

What constitutes a small business?

The legislation defines a small business as a business that employs less than 20 employees. The definition includes all full-time, part-time and even casual employees if they are engaged on a regular basis.

What is a standard form contract?

Several factors need to be taken into account in determining if a contract is standard form. Generally, standard form contracts are those which contain standardised and non-negotiated terms, are prepared by one party prior to entering into the transaction and are offered on a ‘take it or leave it’ basis.  Contracts will be presumed to be standard form unless a party proves otherwise.

Examples of common standard form contracts include those for a business loan, credit card or brokering services.

What is an unfair contract term?

A contractual term will be deemed ‘unfair’ where:

• it would cause a significant imbalance in the parties’ rights arising under the contract;
• it would cause detriment to the small business if it were relied upon; and
• the term is not reasonably necessary to protect the legitimate interests of the party seeking to rely on it.

The court will consider such terms in the context of the contract as a whole. If considered ‘unfair’ the term is potentially void and unenforceable.  The affected party may seek to have the unfair term declared void by a Federal Court declaration. The contract will continue to operate, where possible, despite the presence of a void term.

Some exceptions may apply, and some terms are excluded from the unfair contract protections. For example, a term will not be an unfair contract term if the term is required by law, if it defines the main subject matter of the contract or if it sets the upfront price payable. If a term is specifically brought to the attention of the consumer prior to signing, this will make it less likely that the term will later be deemed unfair.

Recent and expected legislative updates  

In April 2021, the protections against unfair contract terms were extended to cover insurance contracts entered into or renewed by small businesses on or after 5 April 2021. 

In August 2021, the Commonwealth treasury released a draft bill in respect of unfair contract terms. This bill proposes several key changes, including:

• expanding the protections to apply to all standard form contracts regardless of the upfront price;
• amending the definition of small business to a business with fewer than 100 employees or an annual turnover of less than $10 million.
• imposing civil penalties for including an unfair contract term; and
• expanding the range of remedies a court can order.

Commercial implications

If you use standard form contracts and deal with small businesses or are a small business yourself, we recommend reviewing contracts to identify any potential unfair terms. Such terms should be carefully considered to ensure compliance with the new legislation and prevent a declaration that the term is unfair and void.

Stay tuned to our website for updates on the proposed legislative changes or get in touch with us to discuss further.