Important – Extension of the proposed unfair contract protections to small business

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By Tim Cox, Partner

The Australian Consumer Law (contained in schedule 2 of the Competition and Consumer Act 2010) currently protects consumers from unfair terms contained in standard form contracts, when the consumer has little or no opportunity to negotiate. The government has recently confirmed that it will extend this protection to small business.

“Unfair” terms can include many terms which are commonly accepted in standard form business contracts. An example of such a term, is a unilateral ability to vary terms or price or terminate or renew a contract.  If that term cannot be reasonably justified, it will be deemed unfair and severed from the contract.

The key issue is how a small business will be defined. Currently it is proposed that a small business include enterprises of less than 20 employees.  It has also been proposed in a recent Government media release that it will include transactions under $100,000 or multi-year contracts totalling less than $250,000. In our opinion this will need to be refined to exclude small value contracts with large organisations.

It is unclear how the Government proposes that an organisation will determine whether its customer meets the requirements of a small business. Presumably the organisation will need to make its own investigations about the size of the customer and/or seek a warranty from them about whether they are a small business.  It is likely that the method companies use to determine whether their customer is a small business or not, will be prescribed by the government.

It is unclear when the new legislation will be introduced and whether the government will provide a transition period, however organisations should not underestimate the time a review of their existing contracts may take. Each term will often need to be considered individually to determine whether or not it is at risk of being unfair, and should be removed.

To that end, we recommend businesses engaging with those businesses falling within the scope above, review those terms and conditions and seek advice about what terms may be considered unfair.

For further information, please do not hesitate to contact us.

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