The Australian Securities and Investment Commission has issued guidance on the unfair contract term protections for small business which apply to contracts entered into or varied after November 12, 2016.
The laws apply to standard form contracts between businesses where one of the businesses employs less than 20 people and the contract is worth up to $300,000 in a single year or $1 million if the contract runs for more than a year.
They will be enforced by ASIC, the Australian Competition and Consumer Commission and state and territory offices of fair trading.
ASIC has warned businesses it expects them to review their standard form small business contracts now to remove any terms that could be considered to be unfair to ensure compliance before the law comes into effect.
ASIC Commissioner Greg Tanzer says ASIC's guidance follows that issued last year by the ACCC and applies to financial services and products such as loan documents and insurance.
"We are calling on businesses that deal with small businesses to review their standard form contracts now so they don't fall foul of the legislation," he says.
"What we say is that a term is likely to be unfair if it imposes an unfair cost on a business. These are things we do see from time to time in mortgages and financial contracts and under consumer law we can target them. We are putting businesses on notice that where they apply to small businesses they need to be reviewed."
Contract provisions to look out for
ASIC has given three examples of clauses which will potentially be caught by the legislation:
- A small business seeks finance which is secured by a mortgage over the home of the business. The contract contains a term under which a default by the small business borrower results in the small business being liable to pay large and excessive default fees. This may result in a transfer of equity from the small business to the lender.
- Automatic rollover. A small business enters into a fixed-term lease. At the end of the lease term, unless it elects to purchase the goods or has made arrangements to return the goods, the small business is automatically entered into another fixed-term lease. To exit this new lease contract, early termination fees apply.
- Right to unilaterally vary the contract. A small business enters into a loan contract. Under a term of the contract, the lender has the right to vary any term or condition of the contract, including interest or fees, if notice is given in writing. The small business does not have the right to end the contract, even if the lender increases its fees significantly (e.g. by 20 per cent).
The need for diligence
Tanzer says the legislation addresses early concerns that creating an unfair contracts regime for small business would lead to contractual uncertainty.
"Always with legislation you need to be aware of the possibility for uncertainty but the thresholds for the application for this is very clear," he says. "The whole point of this is that there needs to be a bit of flexibility as it depends on what is unfair in the particular circumstances. This is not something unknown, it has been in the consumer law for some time and what is happening here is that it is being extended to small business."
Tanzer says the legislation is "good news for small business people" and should not worry larger businesses that are doing the right thing.
This is not something unknown it has been in the consumer law for some time and what is happening here is that it is being extended to small business.Greg Tanzer
"For larger businesses dealing with small businesses it is not something to be concerned about," he says. "You just need to be diligent and take a look at your standard form contracts."
Pressure to sign now
Peter Strong, chief executive of the Council of Small Business of Australia, says he is concerned that some larger businesses are pressuring small businesses to sign long term contracts now before the legislation applies.
"Of course you sign contracts now but be careful what you sign," he says. "Be aware that some big businesses have form on doing the wrong thing."
Tanzer says ASIC has released its guidance in a bid to increase awareness so this does not happen.
"We are not seeing a significant spike in complaints about this but this is part of releasing this guidance here so people are aware," he says.