Will Abbott extend unfair contract laws to small business?

The Coalition comes to power with a strong focus on the interests of the small business sector.  Part of the Coalition's Small Business Policy is a policy to extend 'the unfair contract protections currently available to consumers to cover the small business sector'.  If the Coalition proceeds with this change, it will mean that any term in a standard form contract with a small business that is found to be 'unfair' will be void and therefore unenforceable. 

The Australian Consumer Law (ACL) defines an unfair term as one that causes an imbalance in the parties’ rights and obligations that goes beyond what is reasonably necessary to protect the legitimate interests of the party requiring the clause.  Extending these laws to business-to-business (B2B) contracts could have far reaching effects in a range of areas.  For example:

• many franchisors will need to rewrite their franchise agreements;
• supply agreements - many large suppliers and many large purchasers (such as the supermarkets and department stores) insist on the use of standard form supply contracts.  Where the counterparties are 'small businesses', many clauses in such agreements may have to be redrafted to provide more balanced rights and obligations for both parties;
• many finance contracts, hire agreements and telecommunications contracts will have to be rewritten for small business customers in the same way that the consumer versions of such contracts have recently had to be revised for the existing unfair contract laws;
• landlords of large shopping centres or other commercial premises that insist on standard form leases may find clauses that are too broad or protective become unenforceable; and
• independent contractors will gain a powerful way to challenge unfair terms in their contracts of engagement.

The proposed changes will therefore be controversial.  If they do go ahead, the extent of the impact will very much depend on how 'small business' is defined.  It might be by reference to the turnover of the particular business or perhaps by the value of the contract.  Alternatively, the government may not explicitly restrict the new laws to 'small business' in any way, relying instead on the 'imbalance of bargaining power' element to restrict the new laws' application in practice to dealings between larger and much smaller businesses.  However the changes are drafted, if the Coalition's plan to extend unfair contract terms protection  is implemented, Australia will become the only major jurisdiction where protections against unfair terms apply to business customers. 

All this may sound familiar - when the current unfair contract terms laws were proposed by Labor in 2008, they were initially going to apply to all standard form contracts, including B2B contracts.  The current legislation was only restricted to consumer contracts at the last minute in response to heavy criticism by the business community, including criticism in relation to the considerable uncertainty such laws are likely to create.  We expect similar criticism again once specifics of the Coalition's proposals are released.  Only time will tell if the Coalition will hold its ground and push its proposals through.

Whilst there is currently no timetable for applying unfair contract terms laws to small business contracts, we expect any change to apply only to agreements executed after the implementation of the laws (and possibly to terms of existing contracts that are amended after implementation).

In In addition to the potential expansion of unfair contract terms laws, there may be other changes to Australia's competition and consumer laws on the way.  The Coalition's Small Business Policy also contains a commitment to commence a 'root and branch' review of Australia's 'competition and trade practices framework' within the first 100 days of a Coalition government.  This review has always been a separate and independent proposal to the proposal for expansion of unfair contract terms laws.  Nevertheless, one obvious response to likely resistance to the expansion of unfair contract terms laws might be to delay the changes until they can be considered as part of this broader review.  Whichever way the Coalition proceeds, it is indeed likely to be interesting times ahead in this area of the law.

For information on our Competition and Consumer Group click here.

Important disclaimer: The material contained in this publication is of a general nature only and is based on the law as at 23 September 2013. It is not, nor is intended to be, legal advice. If you wish to take any action based on the content of this publication we recommend that you seek professional advice.