Unfair contract protection extended to small business

Small businesses will receive the same protection from unfair contract terms as consumers, under changes proposed by the Government. Last week Treasury issued a draft bill for consultation, amending the Australian Securities and Investments Commission Act and the Competition and Consumer Act.

The Government rationale, according to an explanatory memorandum issued with draft legislation, is that small businesses, like consumers, are vulnerable to unfair terms in standard form contracts as they are often offered contracts on a "take it or leave it" basis and lack the resources to understand and negotiate the terms.

Unfair terms often allocate risks to the party less able to manage them, usually small businesses. The changes will apply to credit contracts.

The Government said existing laws addressed unfair behavior in business rather than unfair contract terms.

Commenting on the draft, Gadens Lawyers said: "This may have a significant effect on transactions like equipment finance and commercial lending.

"Unfair terms include terms that permit one party but not the other to exercise certain rights, such as the right to renew, vary or terminate a contract."

The proposed extension of the unfair contract terms is limited to low-value contracts that are in a standard form. The price payable under the contract must not exceed A$100,000 if it an upfront payment and $250,000 if the duration is more than 12 months.

The onus would remain on businesses to undertake due diligence when entering into high-value contracts.

A business is taken to be a small business if it employs fewer than 20 people, excluding casual employees not employed on a regular or systematic basis.

Industry-specific law that is equivalent to the unfair contract term provisions can be exempt, but industry self-regulatory provisions are not.