Views on the proposed changes
As outlined in the previous chapter, the bill amends the ASIC Act and
the ACL. It does so by:
extending the consumer unfair contract term protections in the
ASIC Act and the ACL to small business contracts that meet the prescribed
making provision for exempting small business contracts that are
subject to prescribed laws that are deemed equivalent to the unfair contract
term protections in the ASIC Act or the ACL, and which are enforceable.
Submitters expressed a range of views on these changes. In particular,
concerns were raised about the definition of a 'small business contract' and
the exemption process. Submissions touching on the scope of the bill,
rebuttable presumptions, the proposed transitional period and the existence of
a mandated review into the operation of the bill subsequent to its passage were
With regard to the bill as a whole, views ranged across the entire
spectrum from supportive to not supportive. On one end, the Franchise Council
of Australia (FCA) declared their 'grave concern' with the bill as it
and the Housing Industry Association (HIA) considered it an 'unwarranted and
unnecessary interference in commercial contracting'.
The Retail Council also indicated their in-principle objection to the bill. In
their view, extending consumer protections to small businesses introduces a
moral hazard by discouraging small business owners to 'operate in a
professional manner including undertaking appropriate due diligence and
obtaining professional advice when signing contracts'.
While the Shopping Centre Council of Australia (SCCA) opposed the intention of
the bill, it recognised that the government has a mandate to enact it.
At the other end of the spectrum, Independent Contractors Australia (ICA)
supported the concept of the bill but—on 'strategic' grounds—recommended
rejecting it because it does not go far enough.
Along the same lines the Combined Small Business Alliance of Western Australia
recorded their 'abject disappointment' with—what they saw as—the limited
protections for small businesses that the bill offers.
The Council of Small Business Australia took a more moderate line. The Council
supported this 'ground breaking legislation' to more equitably allocate the
bargaining power between small and large businesses, but recognised that the
government needed to 'tread carefully in its first flush'.
When is a term 'unfair'?
The bill proposes to protect small businesses from 'unfair' contract
terms. It does this by extending the protections already available under the
ASIC Act and the ACL. Under those Acts, a term is 'unfair' if it:
causes a significant imbalance in the parties' rights and
obligations under the contract; and
is not reasonably necessary to protect the legitimate interests
of the party advantaged by the term; and
would cause detriment to a consumer if it were relied on.
The ASIC Act and the ACL make clear that the determination of a contract
term as 'unfair' is a holistic exercise. Both Acts provide that a court may
take into account such matters as it thinks relevant, but must take into
account the extent to which the term is transparent; and the contract as a
Each Act also includes the same list of 14 examples of unfair terms.
Significantly, the bill retains provisions in the ASIC Act and the ACL
that provide that certain key terms of a standard form contract cannot be
deemed unfair. For example, the unfair contract term protections do not apply
to terms that define the main subject matter of the contract, or set the
upfront price payable under the contract.
The Credit & Investments Ombudsman supported the enactment of the
bill. Its primary concern however, was in relation to small businesses being
able to avail themselves of the protection. The Ombudsman strongly recommended
that providers of goods and services under standard form contracts to small
businesses be required to join a recognised external dispute resolution scheme
in order to ensure small businesses could exercise their rights under the bill.
What is a 'standard form' contract?
The bill will only apply to 'standard form' contracts. The Explanatory
Memorandum notes that standard form contracts are 'a commonly used and cost
effective option when conducting business, as they avoid the transaction costs
associated with negotiated contracts'.
The Motor Trades Association of (MTA) Queensland argued that the use of
standard form contracts has 'introduced benefits to the economic environment
that operates in Australia'.
These benefits include 'cost savings, efficiencies and consistency in the
management of commercial risk in transactions'.
Nevertheless, as the Explanatory Memorandum goes on to state:
...standard form contracts are often offered on a 'take it or
leave it' basis, can be one-sided and have terms that are embedded in fine
print. As some parties can lack the resources or skills to fully understand the
implications of contract terms, businesses that offer standard form contracts
have an incentive to include 'unfair' terms, that is, terms that advantage
their position beyond their legitimate business interest and, if exercised, can
cause detriment to the other party.
MTA Queensland agreed that standard form contracts can be problematic:
The downside of the standard form contract is that there is
anecdotal evidence that it can be misused to impose market power on small to
medium enterprises through unfair clauses. In transactions where one party is dominant;
there is greater propensity for market power to manifest through the inclusion
of unfair terms in standard form contracts. Further, small medium businesses
(SMEs), because of their lack of market status through small scale or lower
velocity of transactions do not have an ability to defend themselves against
such unfair contractual terms and conditions.
There was some concern about the effect of this legislation on the use (by
business) of standard form contracts. The Business Council of Australia noted
that these amendments may discourage the use of standard form contracts and
thus reduce efficiency and increase transaction costs.
The Housing Industry Association noted that Commonwealth legislation
tends to assume that all standard form contracts 'are presented in a "take
it or leave it" fashion'. However, the HIA explained that, 'for many
commercial building transactions, standard form contracts are simply used as a
template document which the parties work off and use as a basis for further
negotiation'. In their view, the bill should be amended so as to ensure that
terms that are individually negotiated, whether or not in standard form
contracts, are exempt.
What is a 'small business contract'?
The definition of a 'small business contract' proved a touchstone for
commentary. As noted in Chapter 1, proposed s. 12BF(4) defines a small business
contract by reference to two limbs: the number of employees; and, the value of
(4) A contract is a small business contract if:
(a) at the time the contract is entered into, at least one party to
the contract is a business that employs fewer than 20 persons; and
(b) either of the following applies:
(i) the upfront price payable under the contract does not exceed
(ii) the contract has a duration of more than 12 months and the upfront
price payable under the contract does not exceed $250,000.
Many submissions raised concerns with each of these limbs.
Section 12BF(4)(a) defines a small business contract by reference to the
number of employees of the business. A business with fewer than 20 persons
qualifies as a small business, and—assuming the value of the contract satisfies
s. 12BF(4)(b)—will be protected by the Bill. A business with more than 20
persons, notwithstanding the value of the contract, will not be. The employee
headcount is thus critically important.
The bill adopts the definition of small business used by the Australian
Bureau of Statistics (ABS)—fewer than 20 employees. The Explanatory Memorandum
notes that this figure 'is a commonly used headcount measure and has been found
by the ABS to provide a good proxy of small businesses'.
However, many submissions noted that the proposed employee headcount
threshold is inconsistent with other small business definitions. For example,
the Australian Small Business and Family Enterprise Ombudsman Bill 2015 (Cth)
defines a small business as a business with fewer than 100 employees or revenue
under $5 million in the previous financial year.
Although not referring to this bill, the South Australian Small Business
Commissioner considered that setting the threshold at 20 employees would be
'unnecessarily restrictive', and should be raised to a 'more realistic number'.
The Australian Finance Conference (AFC), on the other hand, considered
the headcount figure of 20 employees' excessive. In its view, this definition
would potentially see '97 per cent of all commercial entities in Australia fall
within its parameters and therefore potentially able to claim its protection'.
The Explanatory Memorandum explains how the number of persons a business
employs will be calculated. It states:
In calculating the number of persons a business employs, a
head count approach (regardless of an employee's hours or workload) is used.
Casual employees are to be counted only if they are employed on a regular or
systematic basis, to account for seasonal variations. This is the approach used
in the Fair Work Act 2009.
The Victorian Small Business Commissioner suggested that it may be
difficult for a business to know if their casual staff are 'regular' or not. In
his view, 'it may be preferable to only include full and part time staff to
remove the uncertainty of which casuals to include.'
In particular, the Commissioner explained that the application of the proposed
protections will vary according to the businesses' mix of full time and part
For example, a business may decide to change its mix of
employees from 18 full time staff to 15 full time staff and 6 part time staff
(at 0.5 time) in response to employee demand. The business and its activity
levels are unchanged, yet standard form contracts entered into as an 18 employee
business are protected against unfair terms, while as a 21 employee business
they are not.
The Commissioner noted that using a FTE count would 'overcome this
The South Australian Small Business Commissioner agreed that a FTE count should
be used. However, the South Australian Small Business Commissioner was more
concerned with increasing the overall threshold of employees.
How can a business tell the size of
its contracting partner?
Some submissions were concerned that any definition of a small business
that relied on the number of employees would be problematic. The Shopping
Centre Council of Australia considered that 'considerable time and expense will
be involved...in determining the number of employees of a party with which they are
while the Queensland Law Society argued it would be 'onerous'.
The Insurance Council of Australia agreed, arguing that employee headcount is
too 'fluid' and requiring businesses to ascertain the number of employees of
another business would be 'impractical' for that figure is 'non-transparent'.
In their submission to the Exposure Draft, Arnold Bloch Leibler explained the
difficulties that businesses may face in this regard:
If the parties have an ongoing business relationship, they
may have some idea of the size of each other's workforce. However, for one-off
transactions—such as purchases over the internet—where standard form contracts
offer considerable efficiencies, a business would have no idea how many
employees its counterparty has.
The Victorian Small Business Commissioner also recognised this as a
potential problem. He considered that a record should be made at the time of
the contract execution noting 'whether or not the unfair term protections apply
to that contract'.
The Shopping Centre Council of Australia recommended that a safe harbour
provision be inserted. The Council submitted that businesses should be able to
rely on what they are told by their counterparty about the number of persons
that that business employees.
The Franchise Council of Australia and the Queensland Law Society supported
Such a safe harbour arrangement may be particularly necessary when a
question arises as to the appropriate time that the employee headcount number
should be determined. The Australian Finance Conference considered that it
appears the number should be established 'at point of entry into the contract'.
But, as the AFC explained:
The provision of funds may not occur under a commercial
finance arrangement until a point after that date. The outcome might see an
entity at contract execution falling outside the definition, but through an
employee's resignation see the number of [employees] drop to 19 at the time the
funds are extended.
Are related companies included?
There was some confusion as to whether larger businesses could avail
themselves of the protections afforded under the bill by creating small
subsidiaries or related companies of less than 20 employees with which to
contract. Submissions which questioned whether this was possible were unanimous
in their view that, if it was, changes should be made.
The Queensland Law Society highlighted:
Anomalies arise in relation to whether the test of
"fewer than 20 employees" can be exploited by structural
manipulation of a contracting entity. For example where the bill may give
relief to a subsidiary of a large company/joint ventures or to Government owned
corporations where they simply interpose a contracting entity they control but
with fewer employees.
The Shopping Centre Council of Australia explained that this concern was
real in their industry:
Some large retailers, for example, undertake their leasing
through a separate service company which often employs fewer than 20 persons.
This can also be true of major shopping centre landlords. For example, the
responsible entity (lessor) of many institutionally owned shopping centres in Australia
does not have any employees.
The Shopping Centre Council of Australia remarked that it 'would
obviously be nonsensical if such entities were able to seek relief under the
The Council recommended amending new section 3A of Schedule 2 to include 'any
related body corporate' so as to avoid this potential problem.
Arnold Bloch Leibler noted a similar concern, arguing that, in addition to
being 'arbitrary', the employee headcount threshold may be 'open to
Arnold Bloch Leibler explained:
...as the threshold is something that is within the control of
business, it may encourage behaviour to try to take advantage of the laws
inappropriately. For example, a large company could set up a small subsidiary,
employing fewer than 20 persons, to carry out its procurement activities.
Should an employee headcount
threshold be used at all?
The practical difficulties examined thus far led a number of submissions
to question whether an employee headcount threshold was either practicable or effective
as a measure of bargaining capacity and vulnerability. Many submissions
regarded annual turnover as a fairer or clearer indicator—particularly where
businesses whose staffing levels fluctuate might find that over the course of a
year some contracts are protected and others are not.
The Business Council of Australia (BCA) suggested drawing back to first
principles. In their view not all business employing fewer than 20 persons are
necessarily vulnerable; as such, the small business definition should be
'limited to businesses that are vulnerable or in a comparable position to
The Housing Industry Association agreed with this approach, explaining that an
employee headcount threshold would be problematic in the residential
It is not unusual for a relatively large building company to
have relatively few employees as the majority of on-site construction activity
is performed by independent trade subcontractors.
In the HIA's view, a 'better indicator of a businesses' financial and
bargaining capacity' would be annual turnover. Although the HIA did not suggest
a proposed figure, the Association noted that the 'ATO defines a small business
as one with an annual turnover less than $2 million.'
The Australian Bankers' Association supported this approach and the ATO's $2
arguing that 'this is supported by and is consistent with the business survey
data included in the [Regulation Impact Statement] for the Bill'.
The committee acknowledges the difficulties involved in defining a small
business and that different regulatory regimes may do so differently.
Nonetheless, the committee considers that the use of the ABS definition is
appropriate. The committee also considers that, in practice, ascertaining the
number of employees of a counterparty will not be too onerous. Businesses
should simply ensure that before signing a contract both parties indicate the
number of employees that they have and therefore, whether the contract will be
subject to the unfair terms regime.
2.33 The committee acknowledges and notes the concerns raised by various
parties during this inquiry, and encourages the government to take these
concerns into account in the course of implementing the extension of unfair
contract term protections as set out in the bill.
Section 12BF(4)(b) defines a small business contract by reference to the
monetary value and duration of the contract. A contract is a small business
contract–and thus protected under the Bill–if, either, the 'upfront price
payable' under the contract does not exceed $100,000, or if the contract has a
duration of more than 12 months, the upfront price payable does not exceed
$250,000. As Mr Hank Spier of Spier Consulting noted, 'the critical issue is
the threshold level where the law applies to business to business contracts'.
The Queensland Law Society considered that the proposed value was
'arbitrary, arguably too low and may be unnecessary'.
They contended further that the value of a contract does 'not necessarily
equate to bargaining power'.
The Explanatory Memorandum to the bill notes that feedback from the
consultation process suggests that approximately 80 per cent of small business
survey respondents would be covered by the proposed threshold.
However, not all submissions agreed with this claim. In particular,
Independent Contractors Australia argued that this figure has 'no substance in
fact', and in any case, '...even if the 80 per cent claim were
accurate, why exclude 20 per cent of small business people from the
The Victorian Small Business Commissioner identified another issue. The
Commissioner noted that 'over time, the threshold amounts will be eroded by
inflation or significant changes to the cost of certain activities'. The
On this latter point, for example, we have identified the
existence of "unfair" contract terms in many contracts in the waste
collection/disposal sector. Should the cost of waste management services
significantly increase through (eg.) increased landfill costs, contract prices
may move from being under the threshold to being over it.
In the Commissioner's view, it would be preferable to establish the
threshold values by regulation rather than legislation in order to 'enable
greater responsiveness to external factors eroding the relevance of the
thresholds over time'.
The thresholds should be increased
These thresholds attracted the attention of many submissions, with a
majority arguing that the limitation of the protection from unfair contract
terms to contracts worth less than $100,000, or $250,000 if longer than 12
months, is a mistake.
The Explanatory Memorandum notes that the threshold values are intended
to reinforce 'the onus on small business to undertake due diligence for high
The Queensland Law Society, however, argued that this justification is not
particularly convincing. In their view, due diligence 'does not provide an
answer to, or relief against, the imposition of an unfair contractual term on a
'take it or leave it' basis'.
The Tasmanian Small Business Council considered that the proposed
thresholds are 'manifestly inadequate'.
The South Australian Small Business Commissioner agreed, arguing that the 'very
low thresholds are extremely artificial and totally unjustified'.
Indeed, the Commissioner questioned why a monetary threshold was required at
all. The Commissioner argued that:
...an unfair term is unfair because of its nature, and
excluding contracts because of an inappropriate and artificially low threshold
means that unfair contract terms in those excluded contracts will continue to
adversely impact on small businesses being excluded under the initiative.
In the Commissioner's view they should be removed in the first instance,
or increased substantially.
Independent Contractors Australia agreed with this position. ICA explained that
the consumer unfair contract term protections do not consider the price of a
contract a determinative factor of fairness or unfairness.
The Australian Newsagents' Federation Ltd (ANF) considered that the
legislation 'needs to cover the majority of small businesses who are likely to
be vulnerable to the effects of unfair contract terms, especially in
industries...where small businesses are fairly captive to main suppliers and are
susceptive to this type of behaviour'. In its view, this 'requires a
transaction value threshold in the Bill that would encompass most small
The Federation recommended increasing the thresholds to $300,000 for contracts
of a duration less than one year, and $1 million for multi-year contracts.
Independent Contractors Australia was also concerned with the threshold
amounts. The ICA 'strongly support and advocate for the concept of
extending the consumer unfair contracts protections to the 5.3 million
individuals running Australia's small businesses' yet 'strongly oppose the
In the view of the ICA:
The limitation of the protection to contracts worth less than
$100,000 ($250,000 for contracts longer than 12 months) will significantly
neuter the application of the protections for the 5.3 million people who should
have those protections.
Independent Contactors Australia suggested that the committee should
either recommend 'the removal of the contract value limitation of the Bill' or,
if the limitations are not removed, reject the Bill.
The Australian Newsagents' Federation Ltd and the SME Business Law
Committee of the Law Council of Australia noted how the proposed thresholds may
have a perverse effect.
Contractual terms with larger suppliers can often be the most
difficult to negotiate yet due to the value they might fall outside the
threshold. On the other hand smaller suppliers with less influence will fall
within the threshold.
Consequently if the two categories use the same potentially
unfair terms, which is quite possible, one will be struck out, the other will
As the Explanatory Memorandum notes, this was not the intention of the
The thresholds would not work for
Many submissions indicated their concern that the proposed thresholds
would not work for particular industries. The Tasmanian Small Business Council
contended that a $100,000 threshold would not work for shopping centre leases
despite the fact that such leases are not 'high-value' contracts but simply
small retail leasing.
The Council of Small Business Australia also considered that the
proposed thresholds are too low. In the Council's view these thresholds 'will
not pick up some of the worst contracts imposed upon small business from big
business, including leases, newsagent contracts and franchises'.
Spier Consulting agreed:
In my view the thresholds are somewhat low and will exclude
many small business contracts and particularly those with main suppliers and
main customers which involve goods or goods and services.
The SME Business Law Committee, Law Council of Australia agreed. In
an expansive submission, the Law Committee explained how the proposed
thresholds would operate in relation to seven industries:
A medium size independent grocery store will have many
suppliers but there will be one main grocery wholesaler.
Purchases from the main grocery wholesaler will be many
millions of dollars annually, no matter the size of the store. In addition, in
many States, a subsidiary of the wholesaler will supply liquor products, and
again in the millions of dollars annually.
Other major suppliers to grocers will be poultry suppliers,
dairy products, bakers, and all will in most cases be in the millions of
dollars annually, not to mention rent and utilities.
Many of the supply contracts will be for more than one year.
A typical contract, for instance, is for 5 years.
A small suburban newsagency might spend some $250,000
annually on magazines, spread over three suppliers, but two dominate.
Newspapers and phone cards will be approximately $100,000 as will rent.
Most of the supply contracts will be for more than one year.
Most will have more than 20 employees and annual contracts
with suppliers such as brewers and liquor wholesalers will be over the
Many brokers would get over $1 million dollars annually in
commissions, many would get less but very few would get below $100,000.
Where the service station operator buys the fuel the annual
amount will in most cases be many millions of dollars.
New motor vehicle dealers
Again dealers buy motor vehicles (trucks and cars) for resale
and the upfront cost for goods for resupply will be many millions of dollars.
Interestingly in NSW the Motor Dealers and Repairers Act does not set a
monetary threshold for a new motor vehicle supply contract to be regulated by
their UCT protections.
They deal with two wholesalers and annual or multiyear
contracts would be well above the threshold level.
Direct Selling Association of Australia (DSAA) also argued that the
proposed thresholds would not work for their members. However, in its view, a
lower threshold of $1,000 should be introduced for 'single contracts that are
not regularly renewable'. According to DSAA 'this will ensure small contractual
dealings can be undertaken without ambiguity as to the validity of the contract
in cases such as a one–off very low value commercial agreement'.
Too easy to avoid protections
Submissions argued that the defined monetary thresholds detracted from
the intention of the bill and made it too easy for businesses to artificially structure
their contracts in such a way so as to avoid the protections offered.
Independent Contractors Australia noted:
...large organizations will be able to manipulate contracts
into 'appropriate' timeframes so that the 'upfront price' of a contract exceeds
the $100,000 (or $250,000) limits set in the Bill. This will remove the
contract from any consideration of unfairness. The large organization may have
no intention to honour the notional time limit that has been set. All the contract
then needs to have is an 'at whim' contract termination clause favouring the
large organization. The contract can and will be as 'unfair' as the large
organization wishes—but the organization will have legally avoided the reach of
the unfair contract provisions for small business people.
Not only is this scenario likely, but we believe that it will
occur (with variations on the foregoing theme) and occur on a wide and systemic
Australian Newsagents Federation agreed, suggesting that large
businesses could offer standard form contracts with a value of $100,001 in
order to avoid the protections of the bill.
A related concern of many submissions revolved around whether many small
contracts with the same business may be added together in order to avoid the
protections of the bill. The HIA supported the thresholds applying to one total
contract, arguing that the provisions should be amended to ensure the
'cumulative value' is intended, i.e. 'if the contractor is engaged on 3
projects at a combined value that exceeds the $100,000 threshold then the ACL
should not apply'.
The SME Business Law Committee, Law Council of Australia and Spier
Consulting rejected this approach.
The proposed thresholds should be retained
Not all submissions argued that the proposed thresholds should be
increased, with some submissions arguing strongly in favour of retaining the
proposed thresholds. Arguments advanced here centred on reducing the scope of
red tape, the importance of contractual certainty, the obligation of all
commercial operators to undertake appropriate due diligence before signing
contracts and the risk that expanding the thresholds (and consequently the
scope of the protections) will introduce a moral hazard.
The Shopping Centre Council of Australia declared their support for the
proposed thresholds, indicating that the Council is 'strongly oppose[d]' to
In the SCCA's view, expanding the thresholds will reduce the incentive on small
businesses to conduct due diligence and risk moral hazard. Mr Milton Cockburn,
Shopping Centre Council of Australia, explained:
In other words, people basically enter a business
relationship and say, 'I'm protected by the government anyway, so I really
don't have to do my own due diligence. I'll go into this and will sign the
lease' or do whatever. Moral hazard is obviously a very real issue.
The Business Council of Australia contended that all businesses engaging
a contract above the proposed threshold should undertake due diligence. The
There is no strong policy case for increasing the threshold:
any transactions over these amounts are sufficiently high to warrant seeking
additional legal or financial advice by small businesses. Increasing the
threshold further would also add to the regulatory costs associated with the
The National Retail Association agreed with the BCA and the government.
The NRA supported the proposed thresholds and agreed that 'it is reasonable for
individual business owners to undertake their own due diligence' for larger
The ICA strongly disagreed, considering that suggestions that small
businesses should simply undertake their due diligence are 'value judgment[s]'
that 'do not match the realities of the commercial world'.
The Australian Newsagents' Federation Ltd agreed, arguing that it is:
overly simplistic and ingenuous to assume that by taking
legal advice and doing due diligence that a small business operator will necessarily
be able to inject equity and fairness into their contracting
relationships with several multinational organisations who they contract with,
or to easily walk away without losing their business, particularly on renewal.
The South Australian Small Businesses Commissioner echoed these
submissions, arguing that many small businesses have difficulty 'dealing with
What does 'upfront price' payable mean?
There was concern among some submissions over the meaning of 'upfront
price' payable. As the monetary thresholds under s. 12BF(4)(b) revolve around
this phrase, its definition is particularly important. The Australian
Newsagents Federation considered that the phrase is 'confusing and vague'.
The Regulation Impact Statement to the bill makes clear that 'upfront
price' is meant to exclude payments that are contingent upon the occurrence or
non-occurrence of an event, but does include the totality of the consideration
that is paid under the contract:
The upfront price also applies to the totality of the
consideration that is paid for a supply, sale or grant under a contract. For
example, where a contract provides for the supply of multiple goods or
services, the upfront price will be the consideration for the total supply
under the contract. ...
The upfront price also excludes 'other consideration' that is
contingent on the occurrence or non-occurrence of a particular event. This is
intended to exclude payments which do not relate to the supply under the
contract, for example, payments associated with non-price terms such as termination
fees, or late payment fees.
However, the Competition and Consumer Committee, Law Council of
Australia explained that there are many forms of contingent payments that
underpin the business model of small businesses that are not termination or
late payment fees. For example, sales commissions, fees for services, franchise
agreements, as well as dealership and distributor arrangements. Under the
proposed approach, while the overall transaction value may be in excess of the
thresholds, the exclusion of contingent payments means that high-value
contracts may fall within the regime. In the Competition and Consumer Committee's
view, 'upfront price' should be substituted in favour of 'total consideration'.
The Queensland Law Society also considered that the drafting of 'upfront
price' can be clarified. In its view, as currently worded, the provision
detracts from the object and purpose of the bill.
The Minister's clear stated policy intent is to limit the
protections to lower value contracts where there is potential for an unfair
allocation of contractual risk. The mechanism in the bill for determining the
'upfront price' lends itself to higher value transactions being captured simply
because the payment arrangements are couched in language where the obligation
to pay is considered contingent.
Telstra reiterated the concerns of the Competition and Consumer Committee,
Law Council of Australia and the Queensland Law Society'. Telstra argued that
the way that the upfront price is calculated may mean that the proposed
thresholds are too high by capturing 'high value contracts well in excess of
the prescribed thresholds'.
In its submission, the 'upfront price' should be amended to the estimated total
cost of the contract.
The Federal Chamber of Automotive Industries was not concerned with the
proposed thresholds as such. However, the Chamber noted its concern about 'two
assumptions that are implicit in the definition of "upfront price"'.
In particular, the Chamber questioned whether consideration of a non-monetary
kind would be included, and whether consideration not directly for the benefit
of one party would be included. The FCAI explained:
When a dealer enters into a dealer agreement with one of our
members, the consideration (in a legal sense) is often not directly for the
benefit of our member—for example the dealer might promise to carry out certain
work such as renovating facilities. In this instance there is no reason why the
cost of carrying out the works, which is paid to a third party, should
determine whether or not the contract is of 'low value' and therefore subject
to the Bill.
In addition, invariably a dealer agreement will require the
dealer to promise to represent and promote the distributor's brand to the best
of the dealer's ability (or words to that effect). In a legal sense, this
promise can also be categorised as 'consideration' and it is likely to fall
within the definition of 'upfront price'. The issue—and our members' concern—is
how will this promise be valued for the purposes of determining the 'upfront price'?
In our view, the simple answer is that the Bill is not intended to capture this
type of consideration: it is only concerned with consideration which has a
Time within complaints can be raised
The bill does not propose to limit the time that complaints can be
raised. In this absence, ordinary statute of limitations legislation operating
in the relevant jurisdiction would apply. The Franchise Council of Australia
suggested that this approach may exacerbate problems inherent in the
The FCA indicated its concern that the bill may increase the likelihood
that parties would rely on litigation. Mr Stephen Giles, Franchise Council of
Australia, informed the committee that in their industry under the Franchising
Code of Conduct 'about 80 per cent of the disputes are resolved by mediation'.
Mr Giles suggested that measures could be introduced to limit the
potential growth in costly litigation.
What if someone could make a complaint about an unfair
contract, but they could only do it in a short time? If some says, 'I've got an
unfair contract,' they should not have three years or six years to make the
claim. Give them 60 days or let them do it before they sign the contract so
they sign under the protest.
In the view of the Franchise Council of Australia, this
additional measure would increase contractual certainty.
The committee accepts the view of Independent Contractors Australia and
the South Australian Small Business Commissioner that an unfair contract term
is unfair irrespective of the value of the contract. The committee also
acknowledges that small businesses may have difficulties in undertaking their
due diligence and seeking out specialist advice when deciding whether to
execute a contract with a counterparty. However, the committee is equally
concerned with avoiding interfering in commercial contracts and adding to the
regulatory burden suffered by all businesses and creating a moral hazard by removing
the incentive for small businesses to seek specialist advice. By creating a
threshold, the bill places the onus on small businesses to undertake due
diligence for high-value transactions. The committee considers this the fairest
The committee recognises that for specific industries or particular
small businesses the size of the threshold may present difficulties. However,
the committee relies on the extensive consultation process undertaken in 2014,
which indicated that the proposed transaction value threshold would encompass
most small business transactions. The committee therefore considers, at this
stage, the proposed transaction thresholds appropriate. The committee also
considers that as part of a future review process, consideration may be given
to adopting these thresholds as a regulation to enable greater responsiveness
to external events, if appropriate.
The committee appreciates concerns that the term 'upfront price' is
confusing. However, the committee believes that the Explanatory Memorandum is
clear: the upfront price applies to the totality of consideration paid under a
contract. It does not include 'other consideration' that is contingent on the
occurrence or non-occurrence of a particular event. As such, it is not limited
to monetary consideration and does include consideration in–kind as questioned
by the FCAI.
Despite its in-principle objection to the bill, the Retail Council
welcomed the employee headcount and monetary threshold limitations examined
above. The Council noted, however, that the existence of these restrictions
'necessitates them being widely promoted to small business owners'.
The Council suggested an educational awareness campaign so that small
what a standard form contract is;
the dollar limits on contracts that are covered by these
the definition of a small business for the purposes of these
what an unfair term is—i.e. it is a specific term in a specific
contract that has been ruled unfair by a court: not a term that the small
business does not like or thinks is unfair;
that key terms of the contract, such as the price, cannot be
deemed unfair; and
that even if a term is deemed to be unfair that does not mean
that the whole contract is automatically void.
The Retail Council considered that such a campaign would 'help minimise
the risk that small business owners will never seek advice when signing any
contract in the mistaken belief that these provisions cover all contracts that
they are involved in'.
The committee appreciates that an education campaign may be worthwhile.
However, the committee considers that small businesses should conduct their own
due diligence to ascertain whether the contract that they are signing will be
covered by the bill's protections.
The bill exempts small business contracts that are subject to prescribed
laws that are deemed equivalent to the unfair contract term protections in the
ASIC Act or the ACL, and which are enforceable. The Minister's Second Reading
Speech provided the policy rationale for the exemption mechanism:
This mechanism recognises the importance of avoiding
regulatory duplication and unnecessary compliance costs in sectors where there
are equivalent and enforceable protections against unfair contract terms.
Indeed, as noted in Chapter 1, the bill is designed to 'enhance rather
than impede or duplicate existing industry regulatory protections'.
Many submissions questioned whether the proposed formula precisely
achieved this purpose or whether slight changes needed to be made.
Equivalent or comparable protections
Before the Governor-General makes a regulation exempting an industry
code or standard from the operation of the unfair contract terms protections,
the Minister must be satisfied that the law provides enforceable protections
that are 'equivalent' to the protections provided by the bill.
Many submissions questioned whether 'equivalence' is too high a standard.
The Shopping Centre Council of Australia informed the committee that
their legal advice states that few, if any, existing laws would be exempted
under the proposed standard, and as such, the 'objectives of avoiding
regulatory duplication and unnecessary compliance costs will not be achieved'.
The SCCA also quoted from a submission to the Exposure Draft Bill from Baker
and McKenzie, an independent legal firm who reached a similar conclusion:
The proposed test would prevent the Minister from applying an
exemption to small business contracts covered by existing industry-specific
legislation designed to meet similar objectives, and having similar (but not
necessarily equivalent) protections.
According to Baker and McKenzie, the use of the word 'equivalent' sets a
very high standard. But, as Baker and McKenzie pointed out, further problems
This, together with the fact that it refers to enforcement
and remedies as well as to contractual terms, will make it extremely
unlikely that the Minister will be in a position to allow any such exemption.
In the SCCA's view, the exemption standard should be reduced to permit
the Minister to exempt laws that provide 'fair and adequate protections for
small businesses' rather than equivalent protections.
The Business Council of Australia, Telstra and the HIA agreed with the
SCCA. The BCA contended that 'equivalence' is too narrow and that the exemption
provisions should be redrafted to expand it.
Telstra argued that the Minister should be permitted to grant exemptions to
industry codes where there is 'reasonably comparable protection, even if it is
not equivalent in all respects'.
Direct Selling Association of Australia went further, suggesting that
the bill should be amended to allow 'the Minister to make general exemptions
for any reason'.
Terms required by law
The bill also provides that the unfair contract term protections do not
apply to a contractual term to the extent that the term is a term required by a
law of the Commonwealth, a State or a Territory.
The Shopping Centre Council of Australia argued that this exemption
mechanism is also too limited to achieve the objectives of the bill. The
Council had their lawyers, Speed and Stracey, review the provision:
Having regard to the sample of lease clauses and retail lease
provisions reviewed Speed and Stracey concluded that the wording of the
proposed exemption does not satisfactorily exempt all terms of a retail lease
(that otherwise comply with State and Territory retail lease legislation) from
the operation of the UCT provisions.
The SCCA noted that, if correct:
This raises the possibility that a term in a retail lease
which has been contemplated by, say, the Parliament of NSW, and is considered
satisfactory by that Parliament, could subsequently be declared void by a
Federal Court judge. This is an outcome which must be avoided.
The SCCA explained that the nature of retail tenancy laws in Australia
rely on minimum standards. Therefore Mr Milton Cockburn, Shopping Centre
Council of Australia, continued:
...we think a very minor amendment to section 26(1)(c) would
pick up that fact to make it clear that if it meets the minimum standards of a
state law or a territory law or even a Commonwealth law then, in fact, the [unfair
contract terms] protections would not apply.
In the words of Mr Angus Nardi, Shopping Centre Council of Australia,
this amendment would better achieve the objectives of the bill by 'avoid[ing]
Exemption or a defence
Although arguing that the bill should not include a ministerial
exemption procedure at all, the Australian Newsagents Federation agreed in
substance with the SCCA. In the view of the ANF, contracts prescribed by law or
mirroring a mandatory code should be a defence to a claim under the bill.
The SME Business Law Committee, Law Council of Australia agreed with the
ANF, contending that it would be better to frame exemptions as a defence:
The SME Committee's view is that the alternative proposed is
preferable because Codes do not prescribe an entire contract and to exclude a
sector on the basis of the existence of a mandatory Code, such as, franchising,
The possibility that the Minister may exempt specific industry codes
from the operation of the bill was seized on by some submissions to argue for a
blanket exemption. The Explanatory Memorandum notes the background to this
In response to concerns in some industry sectors regarding
the prevalence of unfair contract terms and contracting practices more broadly,
several industry-specific measures have been introduced that protect against
unfair contract terms.
The Franchise Council of Australia and the Direct Selling Association of
Australia argued that the bill should be amended to provide blanket exemptions
for their respective industries, in accordance with the requirements of their
industry codes of conduct.
The Insurance Council of Australia felt the same, arguing that small business
insurance contracts should be 'explicitly prescribed as exempt',
as equivalent protections already exist under the Insurance Contracts Act
The Housing Industry Association followed this approach too. The HIA
cited the Decision Regulation Impact Statement of the bill, which found that
the Independent Contractors Act 2006 (Cth) 'provides a substantial level
In the HIA's view, contractual certainty should require that the bill be
amended to 'specifically exclude contracts already covered by the ICA from
coverage under the ACL'.
The Competition and Consumer Committee, Law Council of Australia suggested
that the bill should make specific exemption for industry codes already
prescribed under s 51AE of the CCA.
These codes are: the Unit Pricing Code; the Franchising Code of Conduct; the
Oil Code; and the Horticulture Code of Conduct.
The committee considers that the proposed exemption process is
appropriate. The overwhelming rationale of the bill is to protect small
businesses in a vulnerable position from the predatory activities of larger
businesses through standard form contracts. Exempting the application of the
bill to industries offering 'comparable' but not 'equivalent' protections
defeats this purpose.
Further, the committee considers that the current process of Ministerial
exemption is appropriate. Rather than legislating for blanket industry–specific
exemptions, businesses should persuade the relevant Minister to declare certain
enforceable codes equivalent. This will ensure that industry continues to
develop their own codes and standards of conduct.
Scope of the bill
Some submissions indicated their concern with the scope of application
of the bill. As it stands, the unfair contract term protections apply whether a
small business is a purchaser or supplier of goods and services.
Direct Selling Association of Australia acknowledged 'the potential for
small business to experience unfairness in acquiring goods and services for
business purposes and understands the government's objectives in applying
unfair contract terms to these transactions'. However, DSSA argued that 'the Bill
extends these existing policy protections that relate to consumables further so
that they also cover contracts that do not involve the supply or acquisition of
goods and services but are purely commercial relationships'.
The Business Council of Australia argued that the bill should only apply
when small businesses are purchasers, not suppliers.
The BCA noted that the policy rationale for the bill—'that there is a potential
imbalance in resources, understanding or bargaining power when a small business
is presented with a standard form contract by another party'—is unlikely to
apply when a small business is a supplier.
Rather, extending the protections for these circumstances would reduce the use
of standard form contracts and result in higher transaction costs for both
The Shopping Centre Council of Australia and the Housing Industry
Association agreed, arguing that the bill should exclude contracts between two
small businesses from its coverage.
In the HIA's view, 'it is not the government's role to interfere in commercial
contracts between two small businesses'.
Arnold Bloch Leibler agreed with HIA's approach. However, ABL also
suggested that the bill should be limited further. In their view, the bill
should only apply to the sale of consumer products to small businesses, that
To a supply of goods or services, or a sale of an interest in
land, 'to a person [which can be an individual or company] where the goods or
services are of a kind ordinarily acquired for personal, domestic or household
use or consumption'.
In addition, ABL argued that the bill should be consistent with the New Zealand
unfair contract term regime that commenced in March 2015. This approach would
limit the application of the bill so that the unfair contract terms would not
goods or services that are acquired for the purpose of
re-supplying them in trade, consuming them in the course of a process of production
or manufacture or, in the case of goods, repairing or treating, in trade, other
goods or fixtures on land.
No other submissions raised this point.
On the other hand, the Australian Automotive Dealer Association
suggested that the scope of the bill could be widened. In its view, contracts
between franchisors and franchisees should be automatically protected,
regardless of the definition of a small business contract under the
The committee appreciates that the operation of the bill in relation to
small business to small business contracts may appear inconsistent with the
policy rationale. However, the committee does not believe that this is the
case. The bill intends to protect vulnerable small businesses by prohibiting
unfair contract terms in standard form contracts. A small business may be
vulnerable notwithstanding that it is contracting with another small business.
Onus of proof
Two rebuttable presumptions under the CCA are retained under the bill.
Some submissions argued that these presumptions are not justified in a
Standard form contract
Under the CCA, a rebuttable presumption exists which shifts the onus of
proof on the defendant in determining whether a contract is a standard form
contract. Section 27(1) of Schedule 2 provides that:
If a party to a proceeding alleges that a contract is a
standard form contract, it is presumed to be a standard form contract unless
another party to the proceeding proves otherwise.
This provision is retained under the bill.
The Shopping Centre Council of Australia argued that while the reversal
of onus of proof 'may be justified in a business-to-consumer contract where a
reasonable assumption can be made that a business would have greater resources
than an ordinary consumer to prove a contract was not a standard form contract',
it is not justifiable in a business-to-business relationship, which is
'obviously commercial in nature'.
The Franchise Council of Australia agreed, considering it 'unfair and
unreasonable to reverse the onus of proof in business contracts'.
The SCCA and the FCA went further. The SCCA argued that including this
presumption may give rise to 'moral hazard' by discouraging small businesses
from seeking specialist advice, and could leave businesses vulnerable to
'vexatious or whimsical legislation',
while the FCA considered it may 'encourage spurious claims' and damage
Term reasonably necessary to
protect legitimate interests
Section 24(4) of Schedule 2 of the CCA contains a second rebuttable
presumption. It provides:
For the purposes of subsection 1(b), a term of a contract is
presumed not to be reasonably necessary in order to protect the legitimate
interests of the party who would be advantaged by the term, unless the party
The Franchise Council of Australia considered that retaining this
provision in the bill may leave businesses vulnerable to 'commercial
The Shopping Centre Council of Australia agreed that the rebuttable presumption
was unnecessary in a business-to-business relationship. The SCCA considered:
In the case of retail leases particular terms are included in
a lease because years of operational and legal experience have found them
necessary to protect the lessor's legitimate interests. They are not included
simply to make the lease document as thick as possible. If it is to be left to
the discretion of judges (most of whom lack commercial experience or expertise)
to decide what is in the best interests of the owners or investors in a
shopping centre (or any other large complex business), then the usual onus of
proof should apply.
The Housing Industry Association
and the Queensland Law Society supported this position; arguing that it was
'unfair' and the burden of proof should lie with the complaining party.
The committee appreciates the concerns of the Franchise Council of
Australia and the Shopping Centre Council of Australia. However, the committee
considers that the operation of the rebuttable presumptions is appropriate in
The bill comes into force six months after receiving the Royal Assent,
in order to allow businesses to review and amend their standard form contracts
and operational procedures in order to comply with the new legislation.
Nevertheless, some submissions argued that the transitional period
should be extended to allow businesses more time to comply. The Australian
Bankers' Association and the Australian Finance Conference recommended
extending the transition period to 12 months,
and the Insurance Council of Australia to 18 months.
The committee accepts the need for a transitional period between the Act
receiving the Royal Assent and its coming into force in order for businesses to
review their compliance. The committee understands the concerns of the
Australian Bankers' Association and the Insurance Council of Australia, but in
light of the government's pre-election commitment to this legislation and the
significant consultation process that has already been undertaken, considers
that a six–month transitional period, as set out in the bill as it currently
stands, is appropriate.
Some submissions recommended that the operation of the bill be reviewed
after its entry into force in order to ascertain whether it has struck the
appropriate balance between protecting small businesses from unfair contract
terms and has not inequitably increased regulatory burdens.
The Australian Newsagents Federation recommended review within 12 months,
and the Business Council of Australia after 3 years.
The Motor Trades Association of Queensland suggested reviewing the operation of
the Act in 2 or 3 years.
The committee considers that this legislative amendment has raised
considerable attention. In light of the significant number of small businesses
that will be affected, the committee considers it appropriate to review the
operation of these legislative amendments after 3 years. This review process
should enable a future Parliament to accurately ascertain the effect of the
legislation and enact appropriate reforms, if necessary, to better reflect the
2.121 The committee recommends that the legislative amendment be reviewed
after 3 years.
2.122 Noting Recommendation 1 and 2, the committee recommends that the
Senate pass the bill.
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