Unfair contract terms – extension to small business

Consumer protection laws currently protect individuals from unfair contract terms.

The current law provides at section 23 of Schedule 2 of the Competition and Consumer Act 2010 (Cth) (“ACL”):

1. A term of a consumer contract is void if:
   1. The term is unfair; and
   2. The contract is a standard form contract.

A ‘consumer contract’ is defined by the ACL as, in essence, the supply of goods or services to an individual for personal, domestic or household use.

Restricting the legislation to individuals and domestic needs ignores the fact that small businesses, like individuals, frequently lack the resources to understand or negotiate contracts.

This is particularly problematic in the construction industry where extremely lengthy highly technical contracts are commonly proposed by owners/principals, shifting significant risk and responsibility ‘down the line’.

Specialist legal input is often required to enable small businesses to fully understand risk. However, obtaining such input increases costs and takes time. There may also be little to no room for ‘negotiating’ based on any advice that is received. Contracts are frequently put to small businesses on a ‘take it or leave it’ basis.

Amendments to the legislation

These issues were recognised in a productivity commission report published on 30 April 2008, which stated:

“Small businesses […] are consumers in their own right. Indeed, in their dealings with larger businesses, small businesses can face many of the same issues as individual consumers, particularly relating to unequal bargaining power and the lack of resources to effectively negotiate contracts.”

As a result of the productivity commission report, from 12 November 2016, the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth) will come into force.

This Act, amongst other things, amends section 23 of the ACL so that it applies to ‘small business contracts’.

A contract is a small business contract if:

1. the contract is for a supply of goods or services;
2. 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
3. either of the following applies:
   1. the upfront price payable under the contract does not exceed $300,000;
   2. the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.

‘Upfront price’ is the price payable disclosed at the time of entering into the contract.

Application of the legislation

If a business has fewer than 20 employees and enters into contracts for no more than $300,000 or (if the contract duration is more than a year) $1,000,000, the unfair contracts provision will apply.

A contract term will then be void if it is contained within a “standard form contract” and is “unfair”.

The ACL does not define what a standard form contract is. As is apparent in the case described below, the considerations will likely be:

• if the contract was prepared by one party, prior to any discussion;
• whether it was provided on a ‘take it or leave it’ basis or whether there was an opportunity to negotiate;
• whether the terms took into account any specific characteristics of the parties or the transaction;
• the relative bargaining powers of the parties.

Section 24(1) of the ACL provides that a term is unfair if:

1. it would cause a significant imbalance in the parties’ rights and obligations […]; and
2. it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
3. it would cause detriment […] to a party if it were to be applied or relied on.

In determining whether a term is unfair, a court may take into account such matters as it thinks relevant, but must take into account the extent to which the term is transparent (ie expressed in plain language, legible and clear) and the contract as a whole. (s24(2)).

The ACL then provides examples of the kind of terms that may be unfair. The examples given include:

• a term that permits one party (but not the other) to avoid or limit the performance of a contract, terminate the contract or vary the contract;
• a term that penalises one party (but not the other) for a breach or termination.

Use of the legislation

Despite the legislation so far being limited in its application, it has already been used successfully.

In the case of Ferme v Kimberley Discovery Cruises Pty Ltd [2015] FCCA 2384, individuals purchased a cruise ticket aboard a catamaran named Discovery One.  The relevant contract term read:

“the passenger accepts that the carrier has the right to vary the itinerary or cancel the Cruise if the carrier considers that this is necessary as a result of some Unexpected Event […] and the passenger accepts that the passenger will not be entitled to any compensation or a refund of the fare paid should this occur […]”

The cruise was subsequently cancelled due to a cyclone and the cruise company refused to provide a refund, relying upon this clause.

The Court determined the contract was a standard form contract on the basis that:

“The forms and the Terms & Conditions in particular were prepared by, or for, the respondent before there was any discussion with any of the applicants.  They were, in that sense, standard, or pro-forma terms.”

“I accept the applicants’ submission that the Terms & Conditions were presented as a “take it or leave it” proposition”.

The cruise line argued that the term was not unfair as the cruise line had incurred significant costs (ie. the vessel had been provisioned for the voyage and after the cancellation the passengers were provided with alternative travel and accommodation arrangements).

The Court determined that the term was unfair, as:

• the appropriate point in time to assess unfairness is the time the contract is formed (rather than by reference to the conduct of the parties and particular circumstances that arose);
• there was significant imbalance as, under the cancellation clause, the respondent would be entitled to cancel the cruise and keep the fares paid by the passengers, regardless of whether any costs had been incurred by the cruise line;
• the clause was not necessary to protect the cruise line’s interests; there was no relationship in the term between costs incurred by the cruise line and the amount forfeited.

Likely application to construction contracts

The change in legislation may have an impact upon construction contracts.  Terms which may be held to be unfair include:

• onerous time bar clauses that extinguish a contractor’s rights if not complied with (ie. in relation to variations and extensions of time);
• clauses that give the principal a right to exercise its a unilateral and absolute discretion against the interests of the other;
• termination clauses which give one party significant and disproportionate termination rights to the other party.

Owner/principals may take steps to engage with contractors when resolving contract terms. Increased contractor engagement will have the added benefit to owner/principals of supporting an argument that a particular contract was not ‘standard form’ and therefore not subject to the unfair contracts provision.

For this reason, contractors should identify onerous clauses and seek that they be removed before signing.  If the clauses are not agreed to be removed by the principal, the unsuccessful attempts may assist contractors in arguing that the relative bargaining positions were skewed / the terms were provided on a “take it or leave it basis”.

However, this is just one example of how parties may seek to protect their positions once the legislation is introduced. The changes will be useful and will help to increase the confidence of smaller contractors.

Contributor:  Sam Burford

Sam is a partner of Fenwick Elliott Grace.  Sam represents clients in complex building and construction disputes and assists clients in contract drafting and contract management.