UNFAIR CONTRACT TERMS – WHAT CAN SMALL BUSINESSES DO ABOUT THEM?

By Madeline Wyre (Lawyer), Shannan Welsh (Paralegal) and David Robbins (Principal Solicitor)

For many consumers and small businesses, the current unfair contract terms (UCT) regime is considered sorely lacking. Even if a term of a standard form contract is ‘unfair’ within the meaning of the Australian Consumer Law, there are no real penalties beyond the term being void and unenforceable.

The Treasury Laws Amendment (Enhancing Tax Integrity and Supporting Business Investment) Bill 2022 (Bill) was introduced to Parliament in February 2022, and proposed a number of potential changes to the UCT regime which would have changed the regulatory landscape in favour of small businesses. However, the Bill did not pass the second reading stage in April and has now lapsed. Accordingly, the UCT regime remains unchanged for now.

WHAT ARE THE ISSUES WITH THE CURRENT UCT REGIME FROM A SMALL BUSINESS PERSPECTIVE?

It is common in supply and purchase arrangements for the larger business to provide their standard terms to the smaller business.  Unsurprisingly, those terms are generally weighted in favour of the larger business.

For example, brand owners’ standard form manufacturing agreements often contain terms that require food and beverage manufacturers to comply with “all applicable laws”, whilst the brand owner retains all control over the recipe and label. Should that recipe or label be non-compliant and lead to any kind of legal liability, the brand owner has contractually handed that over to the manufacturer whilst giving the manufacturer no flexibility or control to have avoided it. Why would a manufacturer have signed such an agreement? In a market where retailer private label product is gaining an increasing share, a small manufacturer rarely has sufficient commercial leverage in contract negotiations to remove (what has become) such a common clause. There is also no disincentive for the bigger business to remove it, given the only recourse is for the small business to apply to the Court for the term to be declared “unfair” (a time-consuming and costly process), and only at that point does the term become unenforceable. As a small business, the risk of damaging the commercial relationship may seem more costly than simply accepting the unfair term.

WHAT CHANGES WOULD THE BILL HAVE INTRODUCED?

If the Bill had passed, the legislation would have increased the scope of the UCT regime and protections for small businesses in relation to standard form contracts.

Some of the proposed key changes were:

  • Broadening the scope of contracts to which the UCT regime applies to small business contracts for the supply of goods or services, if at least one party to the contract satisfied either (or both) of the below conditions:
    • the party makes the contract in the course of carrying on a business and at a time when the party employs fewer than 100 persons;
    • the party’s turnover for the last income year is less than $10,000,000.

These changes would have significantly increased the number and size of businesses and contracts to which the UCT regime applies. Currently, to be considered a “small business” the number of employees needs to be less than 20.

  • The Bill would have introduced two new prohibitions on:
    • including unfair terms in contracts; and
    • applying or relying on (or purporting to apply or rely on) an unfair term.
  • New pecuniary penalties would have been able to be ordered against individuals and corporations who breached the above prohibitions. For individuals, a court could order penalties of up to $500,000. Corporations could be subject to penalties the greater of:
    • $10 million;
    • three times the value of the benefit received from the offence; or
    • (if the court is unable to determine benefit obtained) 10% of annual turnover in preceding 12 months.
  • Expanding the court’s role, including giving Courts the power to order non-monetary remedies, such as to:
    • void, vary or refuse to enforce part or all of a contract;
    • issue public warning notices and disqualify persons from managing a corporation; and
    • order injunctions preventing persons from breaching the UCT regime.
  • Introducing a rebuttable presumption that a term is unfair, meaning a term that is alleged to be unfair is deemed unfair, unless proven otherwise.
WHAT DOES THIS MEAN FOR SMALL BUSINESSES?

As the Bill will no longer be proceeding, the UCT regime will remain as it currently stands.

However, the push for legislative reform and making unfair contract terms unlawful indicates that there is a desire for the protections available to small businesses to be expanded, and for courts and regulators to be given more teeth to enforce such safeguards. This is even more evident with the Australian Competition and Consumer Commission also announcing that ensuring small businesses receive the protections of consumer laws will be one of their top enforcement priorities for 2022.

Whilst the Bill will not proceed, this area remains one to watch for future legislative reforms. The attention that this area has received, particularly the proposed move to make big businesses liable for penalties, and potentially subject to other orders, may lead to a rethink in the wording of standard form contracts. For small businesses, including food and beverage manufacturers, this could mean greater leverage when negotiating such contracts.

If you have any questions about the current UCT regime, or need assistance with contract negotiation, please contact a member of our Corporate & Commercial or Competition Law & Regulatory Compliance teams.

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David Robbins Principal Solicitor

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