One of the most significant changes in commercial law in 2016 will be the implementation of recent legislative changes extending Australian Consumer Law protections against unfair contract terms to small business operators.
The changes under the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015, will apply to unfair terms in standardised, non-negotiable contracts offered to smaller business transactions. With broad utilisation of standard contracts across all Australian industries, the legislative amendments taking effect in November this year will undoubtedly have implications for the commercial real estate industry.
The changes were introduced as part of the Liberal Abbot government’s policy of securing a “fair go” for Australian businesses, by evening up the playing field between smaller and larger businesses in the marketplace. Under the current regulatory framework, although a “fair go” is ideally desired, the ideal is rarely achieved in practice, with large and powerful dealers and stakeholders in the modern business world holding the greatest bargaining power.
A common way that smaller businesses become caught in the power imbalance is through the inclusion of unfair terms in standardised contracts offered to them by larger operators. One of the most common of these terms is the perpetually renewing, automatic renewal clause. Also known as “evergreen clauses”, these terms empower one party to renew the existing contract at a set date, without requiring further agreement by the other party.
It is important to note that there are instances in which courts will find evergreen clauses fair, for instance where they ensure continuity of essential services to the benefit of the party with lesser power. However, in most instances, these terms will have the effect of disadvantaging the smaller party through committing them to services which may be no longer required, no longer the most affordable offer, or simply no longer the business party they want to be in business with.
Automatic renewal clauses are common in many standard form contracts. The potential unfairness of such terms is derived from the power imbalance that is created by only one party having the right to determine whether a contract will be renewed or not.
Currently, there is little recourse for businesses which find themselves caught in inherently unfair dealings, like the perpetual cycle of automatic contract renewal. However from November 2016, the Small Business and Unfair Contract Terms Act will extend existing consumer protections against unfair contract terms to include standard form contracts offered to small businesses, so long as they meet certain qualifications. This act will empower the Federal Court to declare terms in standard form contracts void if they are deemed unfair. The effect of a term being declared “void” is that so long as a contract can continue to operate without it, only the term itself becomes ineffective.
Only “standard form”, that is non-negotiable agreements offered on a “take-it or leave-it” basis to small businesses will be affected. To be deemed a “small business contract”, at least, one contracting party must be a business employing less than 20 people and the upfront price payable under the contract must be either;
- $1,000,000 or less for agreements longer than 12 months duration; or
- $300,000 or less for all other small business contracts.
The rationale for limiting the changes to standard form contracts is that small businesses in such circumstances lack negotiation power and thus have a greater potential to suffer inequity.
Although the legislative amendments were passed in 2015, it has a twelve-month transitional period, meaning that it will not come into effect until November 2016. From that time, any new contracts and renewed contracts will be subject to the restrictions on unfair terms. Consequently, both existing standardised small business contracts up for review and contracts planned to be entered into this year should be thoroughly assessed for their legal implications with reference to the legislative changes.
Where to now for businesses worried this may affect them?…
If you are using standardised contracts which include automatic renewal clauses, or any similar clauses of questionable fairness, it essential that you reassess your terms now and seek legal advice before the legislative deadline, to avoid your contracts being unenforceable and potential actions being taken against you.
Similarly, if you are running a small business which is engaged in contracts subject to automatic renewal clauses, you should review your existing contracts which are due for renewal and carefully assess any contracts which you enter into this year, seeking legal advice where appropriate.
