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Unfair contract term protections for modest businesses

In November 2016, the Australian Consumer Law was extended to protect minor businesses from unfair contract terms. The unfair contract terms protections apply to insurance contracts from five Apr 2021.

This information sheet (INFO 211) explains how the law protects small businesses from unfair terms in contracts for fiscal products and services.

Information technology describes how small businesses can challenge a term under the unfair contract terms constabulary in the Australian Securities and Investments Commission Act 2001 (ASIC Act), what happens if a term is unfair, and what ASIC can do.

When does the unfair contract terms law apply?

What makes a contract term unfair?

What happens if a term is unfair?

What a small business organization can practice if they think a contract term is unfair

What ASIC can do near unfair contract terms

When does the unfair contract terms law apply?

The unfair contract terms law applies to a term in a small business contract if:

• at least one political party to the contract is a 'small business organization'
• the contract is a 'standard form contract'
• the contract is for a financial product or service, and
• the contract was entered into or renewed on or after 12 Nov 2016, or a term in an existing contract was varied on or after 12 November 2016.

For an insurance contract, the unfair contract terms constabulary will utilise if the insurance contract is entered into or renewed on or after five April 2021, or a term in an existing contract is varied on or later 5 April 2021.

Small business contract

A contract is a small business organisation contract if:

• at least ane party to the contract is a 'small business' – that is, a business that employs fewer than xx people at the time the contract is signed (including casual employees employed on a regular or systematic basis), and
• the upfront cost payable under the contract does not exceed $300,000 (or, if the contract is for more than 12 months, $one million) (the 'cap').

Individual consumers are also protected by the unfair contract terms constabulary: encounter Data Canvass 210 Unfair contract term protections for consumers (INFO 210).

Standard form contract

The unfair contract terms law covers standard form minor business contracts for fiscal products or the supply, or possible supply, of fiscal services.

A 'standard form contract' is a contract that has been prepared by one party to the contract (the business offer the product or service) without negotiation between the parties. In other words, information technology is offered on a 'accept it or exit information technology' basis.

Small businesses normally enter into standard form contracts for financial products and services such as contracts for business loans, credit cards, insurance cover or broker agreements.

If a small business organization alleges that a contract is a standard form contract, the contract is presumed to be a standard form contract unless proven otherwise.

In determining whether a contract is a standard course contract, a court may take into account any relevant affair, but must consider whether:

• the business organisation offering the product or service has all or most of the bargaining power relating to the transaction
• the contract was prepared by the business before whatsoever word with the small business concern nearly the transaction
• the small business organization was in effect required to either accept or turn down the contract equally it was offered (i.eastward. on a 'take it or go out it' basis)
• the modest business organization was given an effective opportunity to negotiate the terms of the contract, and
• the terms of the contract have into account the specific characteristics of the small-scale business organisation or the particular transaction.

Contracts and terms that are not covered

The unfair contract terms police in the ASIC Act does not cover the following contracts:

• individually negotiated contracts
• the constitutions of companies, managed investment schemes or other kinds of bodies
• medical indemnity insurance contracts, or
• insurance contracts that are non contracts for financial products or services under the ASIC Act, including contracts for private health insurance, compulsory tertiary political party insurance, and workers compensation insurance.

There are also specific types of contract terms that are excluded: encounter Table 1.

Tabular array i: Terms that are not covered past the unfair contract terms law

Type of term	Description
Terms that ascertain the main subject area matter of the contract	The 'master subject area matter' of a contract is the product or service acquired under the contract (i.east. the footing for the existence of the contract). For insurance contracts, the master subject matter is limited to what is being insured. For example, under a comprehensive motorcar insurance policy, the main subject thing is the automobile that is being insured. The term that describes the machine cannot be considered nether the unfair contract terms constabulary.
Terms that gear up the upfront price payable	The 'upfront price payable' is the amount disclosed to the minor concern for the supply of the product or service at or before the time the contract is entered into. Information technology does non include any fees or charges for something that may or may not happen during the contract. For example, for a business organisation loan contract the upfront price includes the amount borrowed (principal), the interest rate, and any establishment fees disclosed when the contract is entered into, but non loan default fees every bit these fees are contingent on the borrower defaulting. Annotation: Interest is disregarded when calculating the upfront price payable for the purpose of determining whether a contract does not exceed the cap for a small business organization contract. Information technology should otherwise be regarded as forming part of the upfront cost. For insurance contracts, the upfront price payable is the premium. The corporeality of premium is also affected by the amount of the excess or deductible payable. While the excess or deductible does not class part of the upfront toll payable, the excess or deductible is also not covered by the unfair contracts terms law if the amount is transparent and conspicuously disclosed before or when the contract is entered into.
Terms that are required or expressly permitted by a law of the Republic, or a country or territory	These terms cannot be considered under the unfair contract terms law.

The following are examples of terms that cannot be considered under the unfair contract terms law.

Example one: Upfront toll payable for a loan contract

Ria runs a small business and seeks a loan of $950,000, repayable over 25 years, from a lender. The interest rate on the loan is 10% per year. There is an establishment fee of $v,000, and a tardily fee of $l is payable for each late payment.

For the purpose of determining whether Ria's loan contract meets the threshold exam to be covered past the unfair contract terms law, the upfront price payable is calculated by including the amount borrowed (principal) and the establishment fee. The involvement rate is disregarded. The $950,000 and the establishment fee of $five,000 together fall beneath the $one million upfront price payable under the contract, so the contract is covered past the unfair contract terms law.

Terms that state the upfront price payable (which includes the amount borrowed and the establishment fee of $5,000) and are disclosed when Ria takes out the contract cannot themselves be considered unfair. These terms set the upfront price payable and define the main subject thing of the contract.

Although the interest charge per unit is to be disregarded when calculating the upfront price payable for the purpose of determining whether a contract is a modest business contract (see note in Table 1), it should otherwise be considered as a part of the upfront price payable. It is therefore the main field of study matter of the contract, then information technology besides cannot exist considered unfair.

Even so, late fees and any other contingent fees could even so be considered unfair under the unfair contract terms police force.

Case 2: Transparency of the excess of an insurance contract

9876 Pty Ltd is a small business and it applies for a business concern interruption insurance policy. The first yr's premium is $one,800 and the corporeality of the backlog payable if 9876 Pty Ltd makes a claim is specified in the policy schedule. The amount of the excess would clearly be disclosed at the time 9876 Pty Ltd enters into the insurance contract, and therefore information technology cannot be considered under the unfair contract terms law.

What makes a contract term unfair?

Only a court can determine whether a contract term is 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 nether the contract
• is non reasonably necessary to protect the legitimate interests of the party that would benefit from the term, or
• would cause detriment (financial or otherwise) to a small business if it were to be applied or relied on.

Transparency

When a court decides whether a term is unfair, it must consider the extent to which the term is transparent. A term is 'transparent' if it is legible, expressed in reasonably plain linguistic communication, presented clearly, and readily available to whatever party afflicted by the term.

A term may not be transparent if, for example, it is hidden in the fine impress or written in legal or complex linguistic communication.

Transparency is, however, merely one of a number of factors a court will consider. A term that is transparent could still be unfair.

Context

The court must assess the fairness of a term in the context of the contract as a whole.

A potentially unfair term may be counterbalanced by additional benefits being offered to the small business concern. This means that a term could be unfair in one contract but not unfair in another.

The court may also consider whatsoever other matters information technology thinks relevant, and will determine whether unfairness arises in a particular contract on a instance-by-case basis.

Examples of unfair terms

The following are examples of small business contract terms that may exist unfair nether the unfair contract terms law.

Example 3: Excessive default fees

Jose'due south small business obtains a loan of $xx,000 from a lender, to be repaid with involvement in monthly instalments on the terminal day of each month. The loan is secured by a mortgage over Jose'southward habitation. The contract contains a term which requires Jose'due south business to pay a fee of $5,000 to the lender if it defaults on the loan.

Despite always meeting his repayment obligations on time in the by, Jose'south business fails to pay the monthly instalment on June 30. Although Jose intends to make the repayment in early July, and the loan is secured by his home, the lender demands Jose'south business pay the default fee of $v,000 for failing to make a monthly repayment nether the loan.

This term is likely to be unfair if it imposes a cost on Jose's business organization that exceeds the amount required to protect the lender from loss.

Example 4: Obligation to pay for lacking goods or services

Zahra's small business enters into a lease for shop fittings. A term of the contract provides that the lessor is not responsible for whatever inherent faults with the goods and the lessee must proceed to make repayments for the residue of the lease term, regardless of whether the appurtenances operate as intended.

This presents an imbalance in the parties' rights because it is something over which the lessor, simply non the small business, has control. The small business is likely to endure detriment as a result.

Case 5: Correct to unilaterally vary the contract

Mai's minor business organization 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, if the lender gives Mai'south business organization five days' notice in writing. The contract permits this even if the lender, for example, increases its fees significantly.

The term may be unfair every bit it gives the lender broad discretion to unilaterally vary any term or condition in unspecified ways, without giving Mai'south business a real and reasonable opportunity to exit the contract without penalty rather than accept the variation. For example, if Mai's business organization needs to refinance or sell assets to exit and repay the loan, this is probable to accept more than v days.

What happens if a term is unfair?

If a court finds that a term in a standard form contract is unfair, the term volition exist void. This means that the term is treated as if it had never existed. However, the contract volition continue to bind the parties if it tin can operate without the unfair term.

If a court finds that a term is unfair, it tin make a range of orders, including to:

• declare all or part of a contract to be void
• vary a contract
• refuse to enforce some or all the terms of a contract
• direct a fiscal services provider to refund money or return holding to the small business affected, or
• direct a financial services provider to provide services to the modest business organization affected, at the provider'southward expense.

If a court has declared that the term is unfair and a fiscal services provider subsequently seeks to utilize or rely on the unfair term, information technology volition contravene the ASIC Deed.

A court can then:

• grant an injunction
• society the financial services provider to provide redress to the modest business organization afflicted, or
• make any other orders the court considers appropriate.

What a modest business can do if they think a contract term is unfair

If a modest business thinks that a term in their contract is unfair, they tin claiming it.

A beneficiary nether a pocket-size business insurance contract tin also claiming a term in a small business contract if they think it is unfair. A beneficiary under an insurance contract is a political party who is non expressly stated on the certificate of insurance to be the insurance policyholder but who stands to benefit directly from a merits under a policy. For example, if a small sporting association enters into a small concern contract to insure against personal injury incidents of its members, a fellow member of the sporting association can challenge a term in that contract if they think that the term is unfair.

Here is what a small business (or beneficiary) can practise if they want to challenge a term of their contract:

• Step 1: Mutter to the financial services provider
  Commencement, they can make a complaint to the financial services provider they have the contract with to try to get the consequence they want.

  They can as well seek help from the Australian Pocket-size Business organization and Family Enterprise Ombudsman (ASBFEO), which provides dispute resolution support.

  Small business organization contracts that are covered by an industry code may have boosted protections, including protections similar to those provided under the unfair contract terms law. Examples of industry codes are:

• the Lawmaking of Banking Exercise administered by the Australian Cyberbanking Association
• the Customer Owned Banking Lawmaking of Practice administered by the Customer Endemic Cyberbanking Associatio
• the General Insurance Code of Practice administered by the Insurance Council of Australia, an
• the Life Insurance Code of Practice administered by the Financial Services Council
• Step two: Mutter to the Australian Financial Complaints Dominance
  If the financial services provider cannot resolve the complaint, they may be able to complain to the Australian Financial Complaints Authorization (AFCA). AFCA provides consumers and small businesses with a complimentary and independent dispute resolution scheme to assist with resolving fiscal complaints.
• Step 3: Apply for a courtroom to declare the term unfair
  Depending on the effect of the complaint to AFCA, they can use to a court for a declaration that the term is unfair. If they are successful, the term will be void.

For more data, meet ASIC Moneysmart'due south guidance on How to mutter and Information Sheet 174 Disputes with financial firms (INFO 174).

What ASIC tin practise about unfair contract terms

To make a complaint to ASIC nigh an unfair contract term, a small business organization can gild a report of misconduct online: see Data Sheet 153 How ASIC deals with reports of misconduct (INFO 153).

We do not generally take action for a minor business unless it is in the wider public interest, and nosotros tin only have action if the thing is within our area of responsibility.

We cannot endorse contract terms or declare that they are unfair. Simply a courtroom tin decide whether or non a term is unfair.

ASIC, as well every bit any party to the contract, or a casher under an insurance contract, can utilize to a court to accept a term declared unfair.

Since the unfair contract terms regime for minor businesses came into effect, ASIC has successfully negotiated to take unfair terms removed from some standard form small business contracts. For details, come across the media releases listed at the end of this information sheet.

ASIC is responsible for enforcing the unfair contract terms police merely for financial products and services. For other goods and services (e.yard. franchising), responsibility is shared betwixt the Australian Competition and Consumer Commission (ACCC) and the country and territory consumer protection agencies.

For more information near unfair terms in contracts for not-financial products and services, contact the ACCC.

Farther strengthening unfair contract term protections

Every bit at August 2020, the Government has consulted on options to expand the unfair contract terms authorities to further strengthen legislative protections for minor businesses. Meet the media release on Treasury'southward website for more information.

Where to get more than information

For more information on the unfair contract terms law, see these guides and releases:

• Study 565 Unfair contract terms and small-scale 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 (as at October 2020, this guide did not reflect the extension of the unfair contract terms protections to insurance contracts)
• Media Release (20-123MR) Court declares Bendigo and Adelaide Bank contract terms unfair (29 May 2020)
• Media Release (nineteen-239MR) ASIC sues Bendigo and Adelaide Bank for utilize of unfair contract terms (4 September 2019)
• Media Release (19-238MR) ASIC sues Bank of Queensland for use of unfair contract terms (4 September 2019)
• Media Release (xviii-262MR) Prospa removes unfair loan terms for small-scale business borrowers and guarantors (7 September 2018)
• Media Release (xviii-073MR) ASIC reports on changes to small business loan contracts by big four banks (15 March 2018)
• Media Release (17-278MR) Big 4 banks change loan contracts to eliminate unfair terms (24 August 2017)
• Media Release (17-139MR) ASIC and ASBFEO hold banks to business relationship on unfair contract terms (xvi May 2017).

You can also call ASIC on 1300 300 630 or inquire a question online.

Of import observe

Please note that this information canvas is a summary giving you lot basic information about a particular topic. It does not cover the whole of the relevant police regarding that topic, and it is not a substitute for professional person advice. You should also note that because this data sheet avoids legal language wherever possible, information technology might include some generalisations about the application of the law. Some provisions of the law referred to have exceptions or of import qualifications. In most cases, your item circumstances must be taken into business relationship when determining how the law applies to you.

This is Information Canvass 211 (INFO 211), issued in February 2016 and updated in Oct 2020. Information sheets provide concise guidance on a specific process or compliance issue or an overview of detailed guidance.

An amendment to Tabular array 1 was published on 23 October 2020 to clarify the upfront cost payable for insurance contracts.

Source: https://asic.gov.au/about-asic/what-we-do/our-role/laws-we-administer/unfair-contract-terms-law/unfair-contract-term-protections-for-small-businesses/

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