Federal legislation currently under consideration could extend current unfair contract term protections available to consumers to small businesses.

“Why is this relevant to me,” you ask? Well, if you are a contractor and you enter into standard form contracts with subcontractors with fewer than 20 employees, you will need to consider whether your subcontracts could fall afoul of these new protections should they be enacted.

What are the changes?

The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 seeks to amend the Australian Consumer Law and the ASIC Act in order to prohibit inclusion of “unfair” contract terms in standard form “small business contracts.” In the current draft of the Bill, “small business contracts” are defined as contracts where:

  • at the time the contract is entered into, at least one party to the contract is a business with fewer than 20 employees; and either:

a)     the upfront price payable under the contract does not exceed $100,000; or

b)     the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $250,000.

There is some lobbying to remove the dollar threshold, which would vastly extend the application of the prohibitions.

Do you enter into standard form subcontracts?

Contractors that enter into low value standard form subcontracts with small subcontractors (such as painters, plasterers, carpenters, plumbers and so on) will be affected by this Bill. Typically, ‘standard form’ contracts are prepared by one party and provided to the other party on a ‘take it or leave it’ basis. In determining whether your subcontracts might be considered ‘standard form’, ask yourself the following questions:

  • Do you have all or most of the bargaining power?
  • Do you prepare the contract before discussing the transaction with the subcontractor?
  • Do you effectively require the subcontractor to accept or reject the terms of the contract as presented?
  • Do you provide the subcontractor with an opportunity to negotiate the terms?
  • Do the terms of the contract take into account the specific characteristics of the subcontractor or transaction?

Under the current draft of the Bill, with some exceptions, terms contained in these contracts will be considered unfair if they:

  • would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
  • are not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
  • would cause detriment (whether financial or otherwise) to a party if they were to be applied or relied on.

In considering the concept of fairness, the level of transparency of the relevant provisions is also relevant – for example, are they expressed in plain English and easy to understand?

A breach of unfair contracts law can result in aspects of a contract being declared void and unenforceable against the other party, and also in orders for monetary compensation of people affected.

Should the Bill become law, contractors that regularly (or even irregularly) enter into low value standard form subcontracts would need to consider obtaining legal advice as to whether their standard form contracts contain unfair terms.

When will I need to think about this?

The Bill is currently being considered by the Senate and has not yet become law. If passed, however, these protections will not only apply to new contracts – they will also apply to existing contracts that are renewed or varied after the commencement date.

The take home point? Be aware that changes may lie ahead which could substantially affect your subcontracts and ensure that you are ready for them.