By Su-Ann Loh
In our June 2015 edition of Directions, Peter North wrote an article on the government’s continuing drive to extend protections to consumer contracts by proposing amendments to the Australian Consumer Law to capture unfair contract terms. (You can read Peter’s article here).
In October 2015, the bill for the amendment to the Australian Consumer Law and to the Australian Securities and Investments Commission Act 2001 (Cth) was passed through both houses of parliament. It received Royal Assent on 12 November 2015 from which time there is a 12 month transition period for contractors to ensure their standard form contracts comply with the new legal obligations. This means the amended provisions of the ASIC Act and the Australian Consumer Law will come into play on 12 November 2016 and businesses, either as supplier or customer, will have until then to review their contracts. After that time, all contracts entered into post the transition period will automatically be bound by the obligations of the new legislation.
The legislative definition of “small business” is likely to catch many of our clients across various industries. Broadly speaking, “small business” is defined as a business employing less than 20 people. The contractual transaction that attracts the new obligations will be standard form contracts for small businesses. If the term of the contract is for more than 12 months the new legal obligation will apply to transactions where the upfront contract price payable under that contract is up to $1MIL. Where the contract is for less than 12 months, the new legal obligation will apply to transactions where the upfront contract price is up to $300,000.
In our June 2015 article, we outlined what the legislation is likely to define as an unfair term. A term that may be deemed unfair is a term that permits or has the effect of permitting one party to vary the upfront price payable in a contract without giving the other party an opportunity to terminate the contract.
Many of our clients trade on standard form contracts; that is, contracts that are generally pre-prepared before any discussions relating to the transaction and where the terms are not usually negotiable. A clear example of a standard form contract is a credit application used by many of our clients for the provision of services or goods on credit terms. Usually parties trade on those contracts in an on-going manner and beyond 12 months. Depending on the industry, many of those contracts trade under $300,000 and certainly under $1MIL as an upfront payment.
After 12 November 2016, where your business trades on a standard form contract with a small business for less than 12 months and requires an upfront payment of less than $300,000 you will be caught by the new legislation. If your contract contains what are defined as unfair terms, the new law will enable the party you contract with to challenge the validity of some terms in a standard form contract and perhaps the entire contract. If a customer succeeds in a Court application to declare a contract unfair, that contract will be void to the extent that the term is unfair which may lead to an injunction preventing you from relying on that unfair term. At the very least, if some of the terms are potentially unfair, it will give a belligerent debtor customer more scope than they have now to dispute liability for money owed to you.
We expect these changes to have a significant impact on many of our clients’ businesses.
For this reason we suggest you review your current terms and conditions, including the covering sheet to your contracts, such as the front cover of your credit applications, to ascertain if they could be deemed unfair. We further recommend you do this before 12 November 2016, especially where you are likely to sign up more customers in 2017 or vary existing terms around that time.
If you would like advice on whether or not the new changes will affect your trading terms, or if you would like a review of your trading terms, please contact Su-Ann Loh (Senior Associate, Dispute Resolution Practice Group) or Peter North (Senior Associate, Business Practice Group) on 03 9629 9629.