The Australian Consumer Law protects small businesses from unfair terms in standard form contracts.
Yes, a small business contract that is covered by an industry code prescribed under the Competition & Consumer Act 2010, such as the Franchising Code, is also subject to the unfair contract terms law. However, if a contract term is required or expressly permitted by that code, the unfair contract term provisions don't apply to that particular term.
A standard form contract is usually one that has been prepared by one party to the contract and where the other party has little or no opportunity to negotiate the terms – that is, it is offered on a ‘take it or leave it’ basis. There is a presumption that a contract is a standard form contract, so the party that prepared the contract has to prove it isn’t (e.g. by demonstrating a real willingness to make requested changes to key terms).
In deciding whether a contract is a standard form contract for the purposes of these laws, a court or tribunal may take into account any matters it considers relevant, but it must take into account:
- whether one of the parties has all or most of the bargaining power in the transaction
- whether the contract was prepared by one party before any discussion occurred between the parties about the transaction
- whether the other party was, in effect, required to either accept or reject the terms of the contract in the form in which they were presented
- whether the other party was given any real opportunity to negotiate the terms of the contract
- whether the terms of the contract take into account the specific characteristics of the other party or the particular transaction.
How are employee numbers calculated for a business that has subsidiaries or employees working across multiple businesses?
The unfair contract terms protections apply to contracts where at least one business employs less than 20 people, including casual employees employed on a regular and systematic basis. The number of people a business employs is counted at the time the contract is entered into. A head count approach is used (regardless of an employee’s hours or workload).
For the purposes of this law, the relevant number of employees is the number of employees of the legal entity that is party to the contract. If a business has subsidiaries (separate legal entities), employees of its subsidiaries will not be included in the employee count.
If a business has an employee that works across multiple businesses, the employee will count as an employee of any of those businesses that they work for on a regular and systematic basis.
It may be difficult to know if you are dealing with a business who employs less than 20 people. Even if you take steps to find out how many employees the other party has (e.g. by seeking written assurance), the law will still apply if it turns out that the other party in fact has less than 20 employees. If in doubt, it’s safest to assume that your contract is caught by the law.
The upfront price payable includes any payments to be provided for the supply, sale or grant under the contract that are clearly disclosed at or before the time the contract is entered into. This includes any contingent payments which are referable to the supply, sale or grant under the contract which are disclosed at the time the contract is entered into.
Some parts of the upfront price payable will not be able to be calculated at the time the contract is entered into. For example, where a payment will be calculated as a percentage of an unknown amount (such as a commission on the sale of a property or a franchise royalty calculated as a percentage of future sales). In these circumstances, the term of the contract that includes the contingent payment is unlikely to be subject to the unfair contract term provisions (i.e. it cannot be challenged as unfair), provided it was fully disclosed at the time the contract was entered into. However, for the purposes of determining whether a contract falls under the relevant threshold ($300 000 or $1 million) to meet the definition of a ‘small business contract’, any amounts that cannot be calculated with certainty at the time the contract is entered are unlikely to be included in the calculation of the upfront price payable.
Example 1 – A franchisee and franchisor enter into a five year franchise agreement. Under the agreement, the franchisee agrees to pay an upfront fee of $500 000 and then a monthly royalty calculated as 5 per cent of the franchisee’s sales. When determining whether the upfront price payable falls under the $1 million threshold the $500 000 franchise fee will be included but the royalty payments will not. This is because future sales cannot be calculated with any certainty at the time of entry into the contract.
Example 2 – Terms in a lease require the tenant to make the following payments each year: a base rent of $100 000 (increasing by CPI + 2% each year), additional rent calculated as 3% of the tenant’s sales, a contribution to the centre marketing fund calculated as 1% of the tenant’s sales, and $10 000 for operating expenses. Each of these payments form part of the upfront price payable under the lease, and so these terms can’t be challenged as unfair.
Payments that are not referable to the supply, sale or grant under the contract are not part of the upfront price payable. For example, terms that impose additional fees if a party exits the contract early are not included.
The protections apply to standard form contracts entered into or renewed on or after 12 November 2016. In addition:
- if a contract was automatically renewed (“rolled over”) on or after 12 November 2016, the protections will apply from the date of the renewal
- if a contract is holding over on a periodic basis (e.g. on a month-to-month basis), or moves from a set term to holding over, it is captured by protections the first time a new period started on or after 12 November 2016 (holding over refers to the practice of continuing to operate as though an agreement exists after it has expired)
- if a contract was varied on or after 12 November 2016, the protections apply to any varied terms, but not to the rest of the contract.
The law doesn't apply to pre-existing contracts that were ‘assigned’ on or after 12 November 2016 (unless the incoming party enters into a new contract).
Example – A tenant entered into a five year lease on 7 January 2012. The lease contains an option to renew for a further five years. If the tenant decides to exercise the option, the contract will be captured by the unfair contract terms protections from the start of the second term (7 January 2017).
The unfair contract terms provisions apply to contracts with a Commonwealth, state or territory body to the extent that it is carrying on a business. A government body that engages in day to day procurement activities, but is not carrying on a business, is not subject to these laws.
Generally, if a contract refers to another document as being part of the contract, or requires a party to the contract to comply with another document, that other document will form part of the contract.
Also, generally, if a contract states that it is to be read in conjunction with another document, the other document will also form part of the contract.
The ACCC and state and territory consumer protection agencies share responsibility for the enforcement of the unfair contract terms protections in relation to consumer goods and services. ASIC is responsible for enforcing the protections in relation to financial products and services.
You can also take your own court action or go to a tribunal to enforce your rights under the law.
While only a court or tribunal can determine whether a term is unfair, disputes over the fairness of a particular term may also be resolved through dispute resolution schemes or industry ombudsmen.
You should talk to a lawyer about your options.
If a court makes a declaration that a term is unfair and a party subsequently seeks to apply or rely upon the unfair term, it is a contravention of the ACL (or the ASIC Act), and the court may grant one of the following remedies:
- an injunction
- an order to provide redress to non-party small businesses
- any other orders the court thinks appropriate.
The ACCC worked with businesses during the 12-month transition period (ending 11 November 2016) seeking voluntary compliance with the unfair contract terms law.
The following industries were the subject of the ACCC’s initial compliance activities:
- retail leasing
- advertising services
- telecommunications services
- independent contracting (e.g. IT consultants and architects)
The ACCC now has the option to take enforcement action if necessary. Our enforcement decisions are made in accordance with our Compliance & Enforcement Policy.
- Ask the other party to remove the term or amend it so it is no longer unfair
- Talk to a lawyer
- Contact your local state or territory consumer protection agency
- Contact the ACCC.
For unfair terms in relation to financial products and services, contact ASIC.