Unfair contracts affecting small businesses: will they finally become illegal?

by | Jul 7, 2022

This saga – small business trying to get rid of unfair contracts imposed upon them by bigger, more powerful buyers – has reached another milestone. The slow and grinding legal process is reaching War and Peace proportions, but it’s important that we all stick with the program and see this through to the end.

Unfair contract terms in standard form contracts are where there is an advantage for one party under the contract, but the other party does not have the same rights. These were first addressed by the law back in 2016.

Back then, after years of discussion, the Federal Government gave small businesses the same protection against unfair contract terms that consumers had enjoyed for years.

What is an unfair contract term?

Three tests are applied to determine if a contract term is unfair:

  • Does it create an imbalance of power between the two parties?
  • Is it really necessary, to protect the business’s interests?
  • Is it going to cause one side or the other to suffer as a result?

The catch was that small-business owners had to take action against the big company imposing unfair terms. That meant approaching the courts and asking them to make a ruling. That was a huge, gaping hole in the legislation, no doubt as a result of intensive pressure by the big business lobby. Very, very few SMEs would have either the money or the intestinal fortitude to front up for such a court case. The best they could do, which was my approach, was to point out the unfair terms, and hope the big company would agree with you and delete or change them.

The latest changes bring actual penalties

I have flagged this before, but this latest step introduces actual penalties if unfair contract terms are included in a Standard Form Contract. I have summarised the main changes here:

  1. The most important proposed change is to make unfair contract terms illegal in the first place. No more nonsense of putting or keeping an unfair clause in, and waiting for a small business (or the Ombudsman) to call it out. The only downside to the big company is that the offending clause would not be able to be enforced. No penalty. Now, it will be illegal to “propose, apply, or rely on” an unfair contract term.
  2. There will be a monetary penalty for breaches; up to $500,000 for an individual; and a minimum of $10,000,000 for a corporation.
  3. Once a contract term has been declared to be unfair, no other company can use a similar term. That will prevent having the same things presented to the courts over and over again.
  4. The number of contracts that legislation applies to has been increased by removing the maximum contract value threshold.

What does this mean for small-business owners?

At the moment, nothing. The legislation was submitted to Parliament on 9 February 2022. Then, of course, we had a Federal election in May so there will be a significant backlog of parliamentary business for the new government to deal with. So don’t get your hopes up just yet, but I’m confident that this next step will make it through and become law.

If (when?) that happens, it will be another small step along the path of closing the power gap between small business and their big corporate customers. In the meantime, keep watching the standard form contracts presented to you for offending, unfair contract terms.

This post first appeared on https://insidesmallbusiness.com.au on July 04, 2022.