Extending the unfair contract term protections regime to small business contracts

10 November 2016

On 12 November 2016 (commencement date), the unfair contract terms protection regime (UCT regime) will be extended to protect small businesses from unfair terms in standard form small business contracts. The regime already applies to protect consumers in relation to unfair terms in consumer contracts.

The UCT regime will have application to the automotive industry where standard form small business contracts are used. This can include, subject to meeting eligibility criteria, automotive dealer (franchise) agreements and supply agreements.

What is the effect of an unfair contract term?

A court or tribunal can declare a term is unfair. A term that is declared unfair will be void and unenforceable. The rest of the contract will continue to be binding on the parties where it is capable of operating without the unfair term. For example, if sums of money have been charged on the basis of that term, then the term being declared ‘unfair’ may result in you having to repay those fees and in turn, have a significant detrimental impact on your business.

Who can seek relief?

A small business party to a standard form, small business contract, the ACCC or the State Offices of Fair Trading can seek relief under the UCT regime. Insurers who are subrogated to the rights of a party to a small business contract may also be entitled to seek relief on the basis of that subrogation.

What is a small business contract?

A contract will be a small business contract where:

  1. The contract is for the supply of goods or services, or a sale or a grant of interest in land; and
  2. At the time of entering into the contract:
      • at least one of the parties to the contract employs less than 20 persons (part-time and full-time employees counted as one person, casuals are only counted if they are employed on a regular and systematic basis); and
      • the upfront price of the contract is no more than $300,000 in a single year or $1 million if the contract is for more than a year.
What makes a term ‘unfair’?

Under the UCT regime, a term of a standard form small business contract will be unfair if:

  • It would cause a significant imbalance in the parties rights and obligations;
  • It is not reasonably necessary to protect the legitimate interest of the party advantaged by the term; and
  • The term would cause detriment if relied upon.

In determining unfairness, the courts must consider:

  • The extent to which the term is transparent (readily available, clearly presented, legible, in plain English); and
  • The terms of the contract as a whole.

Even if there is a legitimate reason for a clause, the clause may still be unfair if it goes beyond what is reasonably necessary to protect the relevant party’s interests. For example, a supplier under a long term supply contract may be exposed to movements in the costs of inputs. The supplier would therefore have a legitimate interest in requiring a price variation clause. A clause that allowed the supplier to increase prices in line with underlying increases in input costs would therefore be likely to be justified. On the other hand, a clause that allowed the supplier to increase prices at any time by any amount, whether directly related to changes in input prices or not, might be found to be unfair.

Are any contracts or terms excluded from the UCT regime?

Certain terms are not able to be challenged under the UCT regime, including terms that set out the upfront price under the contract or define the product or service being supplied, and terms that are required or permitted by law.

Certain types of contracts are also expressly excluded from the application of the UCT regime. These include shipping contracts, constitutions of companies, superannuation funds or managed investments schemes, and most insurance contracts.

When does the UCT regime commence?

The UCT regime will apply to standard form small business contracts that are entered into on or after the commencement date.

A standard form contract that was entered into before the commencement date (pre-existing contract) will become subject to the UCT regime when it is renewed or enters a holding over period.

Individual terms of a pre-existing contract will also become subject to the UCT regime if they are varied on or after the commencement date.

The ACCC recently stated on their website that a pre-existing contract will not become subject to the UCT regime if it is ‘assigned’ to another party. Despite this, if a transaction involves a ‘novation’ of a pre-existing contract or a new contract being formed (on the same or similar terms as the original contract) then the contract is likely to be subject to the UCT regime.

What is a standard form contract?

A contract will be presumed to be a standard form contract unless the party that seeks to enforce it can prove otherwise. There is no fixed definition of ‘standard form contract’. However, a contract is likely to be found to be standard form if it is offered on a ‘take it or leave it basis’; ie where it is prepared by one party and the other party has no genuine opportunity to negotiate its terms.

As noted above, terms that define the upfront price or the subject matter of the contract are excluded from the scope of the UCT regime. However, the corollary to this is that negotiations in relation to the price or subject matter of a contract will not take a contract outside the scope of the UCT regime- there must be the opportunity for genuine negotiation of the terms and conditions of the contract.

Contracts that are most commonly in standard form include franchise agreements, licence agreements, leases, licences, terms and conditions of purchase or supply (including on websites), terms and conditions of procurement, finance and security agreements, invoice terms, off the plan unit sale agreements, lease arrangements, consultancy agreements, equipment hire agreements, IT and telecommunications contracts.

What is included in the upfront price?

The Australian Consumer Law defines upfront price as:

the consideration that is provided, or is to be provided, for the supply, sale or grant under the contract and is disclosed at or before the time the contract is entered into…. excluding any other consideration that is contingent on the occurrence or non- occurrence of a particular event.

Determining this may be more difficult than you think. To be included, a payment must be certain and ascertainable at the time of contract and not be contingent on the occurrence or non occurrence of a particular event.

Payments such as initial franchise fees, training fees and payments to acquire a fixed quantity of goods or services will therefore be included in the upfront price. On the other hand, payments such as royalty payments, franchise fees and marketing fees which are expressed to be calculated as a percentage of future gross sales are contingent on the occurrence of those sales and therefore not included in the upfront price.

Similarly, if a supply agreement requires a supplier to supply goods in accordance with orders received, the upfront price will be zero because every sale is contingent upon the occurrence of a particular event (ie receiving an order). Such a contract may therefore be subject to the UCT regime even if millions of dollars of product may ultimately be supplied under the contract.

What contract terms are most at risk?

The ACCC does not have the power to conclusively determine what terms are unfair. That is left to the Court and Tribunal. The ACCC has, however, indicated that it will be looking at the following terms:

  • A term giving one party a right to unilaterally vary a contract;
  • A term that allows automatic rollover of the period of the contract at the election of one party;
  • A term that limits a party’s performance or liability for non performance;
  • A term that gives a right to terminate without cause unless it is coupled with another clause, for example, a compensation provision; and
  • A term containing an unreasonably broad indemnity, or which requires a party to indemnify for risks that are within the sole control of the other party.
Franchise agreements:
  • A term that permits the franchisor to make unilateral variations to the franchise agreement, including to unilaterally vary an operations manual and/or policies;
  • A term obliging the franchisee to indemnify the franchisor for all loss/damage, even to the extent that the franchisor contributed to the loss/damage;
  • A term that limits the liability of the franchisor (eg if the franchisor fails to perform its obligations under the agreement);
  • A term that gives the franchisor a first right of refusal if the franchisee is selling the franchise, and allow the franchisor to determine the price it will pay;
  • A term that allows the franchisor to terminate all related agreements (including other franchise agreements) if the agreement is terminated;
  • A broad power of attorney given to the franchisor; and
  • A term that allows the franchisor to use the franchisee’s assets for a period of time after the agreement ends at no cost.
Retail leasing agreements:
  • Terms which place no limits on landlords seeking to recover their own costs from lessees in a variety of circumstances; and
  • Terms allowing landlords to unilaterally vary shopping centre rules such as trading hours.
Other terms:
  • A term that allows one party to unilaterally interpret meanings and determine breaches;
  • A term that permits one party to assign the contract to the detriment of the other party without the other party’s consent; and
  • A term that limits the evidence one party can adduce in proceedings relating to the Contract.

This is not an exhaustive list, it is intended to provide you with an idea of the types of clauses which could be challenged as ‘unfair’ and those specific clauses the ACCC will be targeting. The ACCC is regularly publishing details on its website including FAQs which may help to determine which terms it may consider to be unfair.

Can I contract out of the UCT regime?

No. The parties cannot agree in the contract that the UCT regime will not apply to the contract. A party to a small business contract cannot be compelled to waive any rights it has under the UCT regime as a condition of entering into the contract. This may be an unfair term in its own right and even suggesting this could expose you to a misleading and deceptive conduct claim.

What industries will the ACCC target to seek to change industry wide use of unfair terms?

The ACCC have identified the following industries where they will initially focus their efforts:

Retail leasing, franchising, telecommunications advertising and independent contracting

What should I do now?

Many terms that may be vulnerable to challenge under the new UCT regime may be able to be redrafted in such a way as to be made more resistant to challenge whilst still protecting your interests. The time to do this is now.

If your business uses standard form contracts and deals with companies that may have fewer than 20 employees please contact your HWL Ebsworth Automotive partner who together with our UCT Working Group will review any applicable contracts you propose to use or prepare after the commencement date.

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