The Federal Government has proposed a law that will give small business the same rights as consumers in relation to unfair contract terms.

If you are a business owner and you contract with a small business, you need to review your contracting practices. If this law is passed, you may fall foul and expose your business to increased risk and liability.

Small Business Contract

The draft law, Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015, proposes to extend the unfair contract term protections to small business contracts. A contract falls under the definition of a small business contract if at the time of contracting, at least one party to the contract is a business with fewer than twenty employees and:

  1. the upfront price under the contract does not exceed $100,000; or
  2. if the contract has a duration of more than 12 months, the upfront price under the contract does not exceed $250,000.

The bill will amend the current laws under the Australian Securities and Investments Commission Act 2001 and the Competition and Consumer Act 2010 which only provide protection of unfair contract terms to consumer contracts. This proposed new measure will affect businesses of any type including small builders and contractors.

The Federal Government, in proposing this bill, believes that small businesses are the easy target of unfair terms in standard form contracts as they are often offered contracts on a ’take it or leave it‘ basis. After all, small businesses often have limited ability to resist the inclusion of the unfair terms in contracts. Further, obtaining legal advice or an in-house legal expert for low-value contracts might cost the small businesses more than their expected profit.

As noted by the Productivity Commission, small businesses, unlike consumers, have a dual role in the consumer policy: they are suppliers of goods and services and at the same time, consumers in their own right. As such, when small businesses engage in high-value commercial transactions that are fundamental to their business, they encounter most of the issues individual consumers are experiencing – particularly   unequal bargaining power and the lack of resources to undertake appropriate due diligence. For these reasons, the government moves to amend the current laws on the unfair contract terms and include the small businesses.

Unfair Contract Terms

The bill adopts the definition of unfair contract terms under current consumer protection laws. Under these laws, an unfair contract term is one that:

  1. causes a significant imbalance in the parties’ rights and obligations under the contract;
  2. would cause detriment (whether financial or otherwise) to a party if the contract term was to be relied on; and
  3. is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term.

In case of breach of the bill – meaning an unfair contract term is included in a contract – small businesses are given the remedy to declare the contract void and unenforceable.

Implication of the Bill to Small Business

The proposed new bill aims to promote fairness in contractual dealings with small businesses as well as to minimise risks of loss and damages to small businesses. If the bill will become a law, small builders will be afforded to the following benefits:

  1. Small businesses will be provided with a more efficient allocation of contract risks.
  2. Small businesses will have more confidence entering into high-value contracts with other larger businesses.

As a diligent business owner, you should plan ahead. While the bill is still under development, businesses of any type that are using standard form contracts should review and ensure that their contracts do not include unfair contract terms to avoid the contracts being declared void and unenforceable.

Originally posted on LinkedIn.