Unfair contract term protections for small businesses
In November 2016 the Australian Consumer Law was extended to protect small businesses from unfair contract terms.
This information sheet (INFO 211) explains how the law deals with unfair terms in small business contracts for financial products and services. It describes the protections that are available for small businesses and answers the following questions:
- What is a small business contract?
- Which contracts are covered?
- What is a standard form contract?
- Which contracts and terms are excluded?
- When is a term of a small business contract unfair?
- What happens if a court finds that a term is unfair?
- What can I do if I think a term in my contract is unfair?
- What is ASIC's role in relation to unfair contracts?
A small business contract is a contract for:
- a financial product (e.g. loans or credit cards), or
- the supply or possible supply of financial services (e.g. financial advice or dealing in a financial product).
At least one of the parties to the contract must be a small business. Under the unfair contract term protections, the law defines a 'small business' as a business that employs fewer than 20 people at the time the contract is entered into (including casual staff).
The protections apply only to contracts:
- entered into, or renewed, on or after 12 November 2016
- that are 'standard form contracts'
- where at least one party is a 'small business' that employs fewer than 20 people at the time the contract is signed
- where the 'upfront price payable' does not exceed $300,000 – or $1 million if the contract is for more than 12 months.
A 'standard form contract' is one that has been prepared by one party to the contract, without negotiation between the parties – that is, it is offered on a 'take it or leave it' basis.
Small businesses commonly enter into standard form contracts for financial products and services. Contracts for business loans, credit cards and client or broker agreements, for example, are usually standard form contracts.
In determining whether a contract is a standard form contract, a court must consider whether:
- one of the parties has all or most of the bargaining power relating to the transaction
- the contract was prepared by a party before the transaction was discussed with the small business
- the small business was required to either accept or reject the terms of the contract in the form in which they were presented
- the small business was given an opportunity to negotiate the terms of the contract
- the terms of the contract are specific to characteristics of the small business or the particular transaction.
Individually negotiated contracts are not covered by the unfair contract terms law. Several other exceptions also apply and some of these are explained below.
The unfair contract terms law does not cover:
- insurance contracts regulated under the Insurance Contracts Act 1984
- the constitutions of companies, managed investment schemes or other kinds of bodies.
The following specific contract terms are also excluded:
- terms that define the main subject of the contract (i.e. descriptions of the products or services, or a term that is necessary to supply the products or services)
- terms that set the 'upfront price payable'
- terms that are required or expressly permitted by a law of the Commonwealth, or a state or territory.
What is the upfront price payable?
The 'upfront price payable' means the amount that a small business agrees to pay under the contract and that is disclosed to the small business at, or before, the time the contract is entered into.
The upfront price payable does not include:
- any other fees or charges that are contingent on the occurrence or non-occurrence of an event (e.g. loan default fees)
- any interest payable under credit contracts (e.g. a loan contract).
A small business contract falls under the unfair contract term protections if the upfront price payable does not exceed $300,000 – or $1 million if the contract is for more than 12 months.
Example: Upfront price payable for a small business contract
A small business seeks a loan of $950,000 over 25 years from a large business. The interest rate on the loan is 10% per year.
A late fee of $50 is payable for each late payment.
Because this is a credit contract, the interest is excluded from the upfront price payable when assessing whether the contract falls within the transaction value threshold.
The late fee also does not form part of the upfront price payable as this is a contingent fee payable only in the event of late repayment.
This means that only the $950,000 principal amount is used for the threshold test and, therefore, protections apply.
Only a court can determine whether a contract term is 'unfair'. When deciding whether a term is unfair, a court must consider the 'contract as a whole' and whether the term is 'transparent'.
Meaning of 'unfair'
A term in a standard form small business contract is 'unfair' if:
- it would cause a significant imbalance in the parties' rights and obligations arising under the contract
- the term is not reasonably necessary to protect the legitimate interests of the party that would benefit from its inclusion
- the term would cause financial or other detriment (e.g. delay) to a small business if it were to be applied or relied on.
Transparency of the term
A term is 'transparent' if it is:
- expressed in plain language
- presented clearly
- readily available to any party affected by the term.
Terms hidden in the fine print, or terms that are phrased in legal or complex language, may not be transparent. However, a term that is transparent could still be unfair.
The contract as a whole
The court must also assess the fairness of a term in the context of the contract as a whole. For example, a potentially unfair term may be counterbalanced if additional benefits are offered under the contract to the small business. This means that a term could be unfair in one contract but not unfair in another.
Examples of unfair terms
The following examples contain some small business contract terms that may raise concerns under the unfair contract terms law.
Example 1: Protecting the lender's legitimate interests
A small business seeks a loan which is secured by a mortgage over the home of the business owner. The contract contains a term which requires the small business borrower to pay excessive fees if it defaults. This may result in a transfer of equity from the home of the small business to the lender.
This term is likely to be unfair as it imposes an unfair cost on the small business. The cost to the small business exceeds the amount required to protect the lender from loss.
Example 2: Automatic rollover
A small business enters into a fixed-term lease. At the end of the lease term, unless it elects to purchase or return the goods, the small business is automatically entered into another fixed-term lease. To exit this new lease contract, early termination fees apply.
The term may be unfair as it allows the lessor to automatically renew the contract without the small business giving its consent.
The term is less likely to be unfair if the small business can end the new lease without consequence.
Example 3: 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 in unspecified ways, including interest or fees, if notice is given in writing to the small business. The small business does not have the right to end the contract, even if the lender increases its fees significantly (e.g. by 20%).
The term is likely to be unfair as it allows the lender a broad discretion to unilaterally vary any terms or conditions in unspecified ways, without giving the small business any opportunity to exit the contract without consequence.
If a court finds that a term is unfair, it can make a range of orders, including:
- declaring all or part of a contract to be void
- varying a contract
- refusing to enforce some or all the terms of a contract or arrangement
- directing a party to refund money or return property to the small business affected
- directing a party to provide services to the small business affected at the party's expense.
If a court finds that a term in a standard form contract is unfair, the term is void. This means that the term is treated as if it never existed. However, the contract will continue to bind parties if it can operate without the unfair term.
If a court has declared that the term is unfair and a party subsequently seeks to apply or rely on the unfair term, it will be treated as a contravention of the Australian Securities and Investments Commission Act 2001. The remedies available include:
- an injunction
- an order to provide redress to the small business affected
- any other orders the court considers appropriate.
If you think that a financial services provider has used or relied on an unfair contract term, you can lodge a report of misconduct online with ASIC. Generally, ASIC does not take action on behalf of individual businesses. However, there are a number of options available to enforce your rights.
You can make a complaint directly to your financial services provider. If they cannot resolve your complaint, you may be able to take your complaint to an external dispute resolution scheme, such as the Australian Financial Complaints Authority (AFCA).
If you have a dispute with a financial services provider, you can seek assistance from the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) who provides dispute resolution support.
You can also get legal advice from a lawyer about whether your contract terms are unfair and to help you challenge the terms (for example, by taking court action against the financial services provider).
Read our Information Sheet 174 Disputes with financial firms (INFO 174) to find out more about disputes with financial firms.
Small business contracts that are covered by an industry code, such as the Code of Banking Practice administered by the Australian Banking Association (ABA) or the Customer Owned Banking Code of Practice, may also have other protections, including protections that are similar to those provided under the unfair contract terms law.
ASIC is responsible for enforcing the unfair contract terms law in relation to financial products and services, for example business loans and credit card contracts. For other goods and services (e.g. franchising), enforcement of the unfair contract terms law is shared between the Australian Competition and Consumer Commission (ACCC) and the state and territory consumer protection agencies.
Further strengthening unfair contract term protections
The Government will consult on options to expand the unfair contract terms regime to further strengthen legislative protections for small businesses. See the media release on Treasury's website for more information.
- Media Release (18-073MR) ASIC reports on changes to small business loan contracts by big four banks (15 March 2018)
- Report 565 Unfair contract terms and small business loans (REP 565)
- Unfair contract terms: A guide for businesses and legal practitioners – an industry report by the ACCC, ASIC and state and territory consumer protection agencies
Please note that this information sheet is a summary giving you basic information about a particular topic. It does not cover the whole of the relevant law regarding that topic, and it is not a substitute for professional advice. You should also note that because this information sheet avoids legal language wherever possible, it might include some generalisations about the application of the law. Some provisions of the law referred to have exceptions or important qualifications. In most cases, your particular circumstances must be taken into account when determining how the law applies to you.
This is Information Sheet 211 (INFO 211), issued in February 2016 and updated in August 2019. Information sheets provide concise guidance on a specific process or compliance issue or an overview of detailed guidance.