Standard form small business contracts

There has been a significant change in the law affecting small business contracts.

Since 2011, consumers have been protected against unfair standard-form contracts which contain unfair terms: now, the the ‘unfair contract’ provisions of the Australian Consumer Law so that they now apply to (some) business-to–business contracts.

From 12 November 2016, standard-form ‘small business contracts’ entered into or renewed after this date are covered by laws which may void (and hence make unenforceable) parts of contracts which are ‘unfair’.

In addition, a business providing or acquiring products or services to or from small businesses under a standard form agreement which contains ‘unfair terms’ may run into difficulty in enforcing those terms.

The ACCC (the federal competition and consumer watchdog) expects businesses to have reviewed their standard form small business contracts to ensure that there are no unfair terms.

Small agricultural businesses and farmers should be aware that the ACCC is placing a particular focus on agriculture in the implementation of these provisions. This is because it is common in agriculture supply chains for there to be an imbalance in bargaining power. It is important for farmers and other business within the agricultural sector to be aware of these new protections to ensure that any standard form contract entered into with a large business is fair.

How might the new law apply to your contracts?

To take advantage of the new law, you must be a ‘small business’; and the contract must be a ‘small contract’. Therefore, if you provide (or acquire) products or services to (or from) other businesses, be careful to ensure that your contracts are in good shape.

What is a ‘small business’?

It is a business which has fewer than 20 employees at the time of contracting.  This includes permanent or regular casuals, but only if they are employed by the business on a regular or systematic basis.

What contracts are covered?

Essentially, small contracts (or more accurately, ‘small business-contracts’) where the upfront price is –

  • $300,000 or less; or
  • $1 million or less (if the contract runs more than 12 months).

The upfront price includes any payments to be provided for the supply, sale or grant under the contract that are disclosed at when the contract was entered into, or beforehand. The supply of agricultural products or services falls under this definition.

When determining if the up-front price falls within the threshold, it is unlikely to include any amounts that cannot be calculated with certainty at the time the contract was entered into. Therefore, future payments such as protein payments in a grain pool contract, which are unable to be calculated with certainty at the time of contracting would not be included in the upfront price.

Only contracts entered into on or after 12 November 2016 are caught.  If a contract started before that, but is an ‘auto-renew contract’ and automatically rolls over (eg. on a month-by-month basis), then the new law bites on either the newly-renewed contract, or from the first time a new period starts after 12 November 2016.

But some contracts are not caught, such as insurance contracts, or managed investment schemes or such-like.

‘Standard-form contract’

What does this mean? Essentially, it is one prepared by one of the parties and put forward before there has been any discussion about the transaction, on a ‘take-it-or-leave-it’ basis, without the opportunity for or expectation of any negotiation.

There is a presumption that a contract is standard-form. It is up to the party whose contract it is to prove otherwise.

What is an unfair contract?

This is the most difficult question. Examples are loan contracts where there are large and excessive default fees, or other terms providing for payment which exceed the amount required to protect the lender’s legitimate interests. Gym memberships and mobile phone contracts have also been caught in the past.

A term might also be unfair if it allows one party to vary contract terms without the other party’s consent, although this might not raise concerns if that other party can immediately cancel without consequence. If you are a large business, which uses standard term contracts with your suppliers, or your contractors, you must review your contracts to make sure they would meet the fairness test. Your terms may also benefit from restructuring to make sure that in case they come under fire for being unfair, the offending provisions can be chopped off and the rest of the terms can still stand.