Welcome to the second article in our new series ‘UCT 101’, designed to assist businesses in preparing for new reforms to the unfair contract terms (UCT) regime under the Australian Consumer Law (ACL)1 introduced by the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Act). The reforms to the UCT regime under the Act will take effect from 9 November 2023.
In addition to making some important changes to core aspects of the UCT regime, the Act now allows the ACCC to seek civil pecuniary penalties for breaches of the UCT regime. These penalties have also increased significantly as part of the reforms. See here for more information about the changes to penalties.
In our first article of the series (which can be found here), we discussed one of the preliminary foundational questions associated with the application of the UCT regime, namely – what constitutes a standard form contract? In this article, we take a look at another important consideration – what constitutes a small business contract for the purposes of UCT regime?
Why is this important?
The UCT regime will only apply in relation to standard form consumer contracts or small business contracts.2
The definition of consumer contract is relatively straightforward and does not generally give rise to uncertainty, being a contract for the supply of goods or services or a sale or grant of an interest in land, to an individual, wholly or predominantly for personal, domestic or household use or consumption.3
In comparison, the definition of small business contract will in many cases require a deeper analysis of the details of the relevant contract or the contracting parties’ respective business operations, particularly as a result of new changes introduced by the Act.
What is the current definition of a small business contract?
The current definition of a small business contract under section 23(4) the ACL, which will apply up to 9 November 2023 (being the date on which the changes to the UCT regime under the Act will take effect), is a contract that satisfies all of the following criteria:
- the contract is for the supply of goods or services, or a sale or grant of an interest in land; and
- at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons; and
- either:
- the upfront price payable under the contract does not exceed $300,000; or
- the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.
The new definition of a small business contract under section 23(4) the ACL, which will take effect from 9 November 2023 (being the date on which the changes to the UCT regime under the Act will take effect), is a contract that satisfies all of the following criteria:
- the contract is for the supply of goods or services, or a sale or grant of an interest in land; and
- at least one party to the contract satisfies either or both of the following 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 that ended before or at the time when the contract is made is less than $10,000,000.
In summary, the changes introduced by the Act remove the requirement to consider the upfront price payable under a contract, in favour of an assessment of the annual turnover of a party for the last income year, and increase the threshold number of employees from less than 20 to less than 100.
How are employee numbers assessed?
The ACL currently states that in counting the number of persons employed by a business for the purposes of the definition of a small business contract, casual employees are not to be counted unless they are employed by the business on a regular and systematic basis.4 This remains unchanged in the Act, however the Act now prescribes that part-time employees are to be counted as an appropriate fraction of a full-time equivalent (FTE)5. This would mean, for example, that a part-time employee working 3 days per week (out of a 5-day work week) would be counted as a 0.6 FTE for the purposes of an employee headcount.
Are the employee numbers of related bodies corporate taken into account?
It is not stated under the ACL (both currently and as amended by the Act) whether employees of related bodies corporate are to be included when calculating employee numbers for the purposes of the UCT regime. The Federal Government gave consideration to this issue in its Regulation Impact Statement on Enhancements to Unfair Contract Term Protections (Regulation Statement),6 acknowledging that it had been suggested by stakeholders that this could give rise to the possibility of a subsidiary or special purpose entity of a large business receiving the benefit of small business protections under the UCT regime if the relevant entity itself employed less than 20 persons in circumstances where it entered into a standard form contract which met the upfront price payable threshold (per the current law).7
While the Federal Government, in acknowledging this issue, considered the possibility of including a specific requirement for employees of related bodies corporate to be included in determining the headcount of an entity, it also noted that there was no evidence to suggest that there was a need to prevent this particular issue, and that instead, other stakeholders had voiced concerns that adding in such a requirement would add “another layer of complexity to an already complex situation”, given that employee headcount information can be fluid and non-transparent in large corporate groups.8 It appears that this view was carried forward by the newly-elected Federal Government in 2022, who declined to add in any requirement of this nature in the Bill that preceded the Act.
How is a party’s turnover assessed?
As above, the requirement under the current law to consider the upfront price payable of a contract has been removed in favour of an assessment of the annual turnover of a party. The specific value to be determined is a party’s turnover for the last income year (as defined in the Income Assessment Act 1997) that ended at or before the time when the contract was made.9
The Act also introduces a new section into the ACL to assist businesses to determine this figure, which states that a party’s turnover for a period is the sum of all values or all supplies the party made during the period, other than:10
- supplies that are input taxed;
- supplies that are not for consideration (and are not taxable supplies under section 72-5 of the A New Tax System (Goods and Services Tax) Act 1999);
- supplies that are not made in connection with an enterprise that the party carries on; and
- supplies that are not connected with the indirect tax zone.
So what does this mean for businesses?
The effect of the law reform is that more contracts will be considered small business contracts due to the removal of the upfront price payable consideration, the expansion of the definition to include businesses with a higher number of employees and an annual turnover of up to $10 million, and the specific inclusion of part-time employees in the assessment of a party’s employee headcount.
The small business contract flow chart
We have prepared the below flow chart to assist businesses in determining whether a contract is a small business contract from 9 November 2023.*
*The above flow chart is for general guidance only, noting that there are specific contracts to which the UCT regime does not apply and other qualifications and exclusions that may be applicable in certain circumstances. This flow chart should be treated as indicative only.
Next edition
In our next instalment of ‘UCT 101’, we will begin to get into the nitty gritty of the UCT regime, looking at what makes a term an ‘unfair contract term’, and examining the relevant tests and considerations.
How can we help?
We have a dedicated contracting and consumer law team that can assist you with contract preparation and review and can provide you with advice on your rights and obligations under the ACL, particularly in light of recent reforms. We also routinely present to businesses on the Australian Consumer Law and the unfair contract terms regime. Please contact us if you would like more information about the services we provide.
This article was written by Teresa Torcasio, Partner and Zoe Vise, Associate.
1Competition and Consumer Act 2001 (Cth), Sch 2 (Australian Consumer Law or ACL).
2 ACL, s 23(1).
3 ACL, s 23(3).
4 ACL, s 23(5).
5 Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (the Act), s 47.
6 Australian Government Treasury (Cth), Enhancements to Unfair Contract Term Protections, Regulation Impact Statement (September 2020) (Regulation Statement).
7 Regulation Statement, pp 61 – 62.
8 Regulation Statement, pp 61 – 62.
9 The Act, s 47.
10 The Act, s 47.
