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Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015



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ISSN 1328-8091

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BILLS DIGEST NO. 7, 2015-16 12 AUGUST 2015

Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 Paula Pyburne Law and Bills Digest Section

Contents

Purpose of the Bill ............................................................... 3

Structure of the Bill ............................................................. 3

Background ......................................................................... 3

Commitment to the Bill ....................................................... 4

First consultation ..................................................................... 4

Second consultation ................................................................ 4

Unfair contract provisions .................................................... 4

Court decisions ........................................................................ 5

ACCC industry review .............................................................. 6

Committee consideration .................................................... 6

Selection of Bills Committee.................................................... 6

Senate Standing Committee for the Scrutiny of Bills .............. 6

Statement of Compatibility with Human Rights .................... 6

Policy position of non-government parties/independents ..... 7

Position of major interest groups ......................................... 7

Arguments for extending the protection ................................ 7

Arguments against extending the protection ......................... 7

Financial implications .......................................................... 7

Key provisions ..................................................................... 8

Australian Securities and Investments Commission Act ......... 8

Nature of a small business contract ...................................... 8

Exclusions .............................................................................. 8

Declarations by the Court...................................................... 8

Application of the Bill ............................................................ 9

Date introduced: 24 June 2015

House: House of Representatives

Portfolio: Treasury

Commencement: Sections 1-3 on Royal Assent; Schedule 1, six months after Royal Assent.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website.

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Competition and Consumer Act .............................................. 9

Application of the Bill ............................................................ 9

Key issues ......................................................................... 10

Key issue—what constitutes a small business transaction .......................................................................... 10

Number of employees ....................................................... 10

Upfront price payable ....................................................... 10

Key issue—small business-to-small business contracts ...... 11

Key issue—financial products and services ......................... 12

Key issue—operation of the exclusions .............................. 12

Concluding comments ....................................................... 13

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Purpose of the Bill The purpose of the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 (the Bill) is to amend the Australian Securities and Investments Commission Act 20011 and the Competition and Consumer Act 20102 to extend the unfair contract term protections that are currently available to consumers, to those businesses with less than 20 employees. The protections relate to the terms of standard form contracts valued at less than a prescribed threshold.

Structure of the Bill The Bill comprises a single Schedule which contains amendments to the Australian Securities and Investments Commission Act and the Competition and Consumer Act.

Background On 11 December 2006, the Treasurer, Peter Costello, requested that the Productivity Commission undertake an inquiry into Australia’s consumer policy framework.3 The final report of the Productivity Commission, published on 30 April 2008, recommended the introduction of a single national generic consumer law.4 In particular, it stated that ‘the new law should include a provision voiding “unfair” contract terms that have caused consumer detriment’.5

The Productivity Commission was satisfied that:

Small businesses have a dual role in consumer policy: as well as being suppliers of goods and services, they are consumers in their own right. Indeed, in their dealings with larger businesses, small businesses can face many of the same issues as individual consumers, particularly relating to unequal bargaining power and the lack of resources to effectively negotiate contracts.

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That being the case, a consultation paper on the draft consumer law stated, amongst other things:

The draft provisions on unfair contract terms will apply to business-to-business transactions in the same way as other key provisions in the TPA do, such as those dealing with unconscionable conduct and misleading and deceptive conduct. 7

[emphasis added]

However, by the time the Trade Practices Amendment (Australian Consumer Law) Bill 2009 (Australian Consumer Law Bill No. 1) was introduced into the Parliament on 24 June 2009, the unfair contract provisions had been framed so that they would apply only to business to consumer transactions.8 The Government of the day argued that the question of whether business-to-business contracts—and particularly those involving small businesses—should be included under the unfair contract terms provisions, was subject to the outcome of reviews of both the unconscionable conduct provisions of the Trade Practices Act and also the Franchising Code of Conduct and that it would ‘further consider this issue when these reviews are completed’.9

1. Australian Securities and Investments Commission Act 2001, accessed 30 July 2015. 2. Competition and Consumer Act 2010, accessed 30 July 2015. 3. P Costello, Productivity Commission inquiry into Australia’s consumer policy framework, media release, 132, 11 December 2006, accessed 3 August 2015.

4. Productivity Commission, Review of Australia’s consumer policy framework, Inquiry report, 45, Productivity Commission, Melbourne, 30 April 2008, volume 1, p. 18, accessed 3 August 2015. 5. Ibid., volume 1, p. 2. 6. Ibid., volume 2, p. 318. 7. Treasury, The Australian Consumer Law: consultation on draft provisions on unfair contract terms, Commonwealth of Australia, 11 May 2009,

p. 8, accessed 30 July 2015. 8. Parliament of Australia, ‘Trade Practices Amendment (Australian Consumer Law) Bill (No. 1) 2009 homepage’, Australian Parliament website, accessed 30 July 2015. 9. C Emerson (Minister for Small Business, Independent Contractors and the Service Economy, Minister Assisting the Finance Minister on

Deregulation and Minister for Competition Policy and Consumer Affairs), ‘Second reading speech: Trade Practices Amendment (Australian Consumer Law) Bill 2009’, House of Representatives, Debates, 24 June 2009, p. 6981, accessed 3 August 2015.

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Commitment to the Bill In the lead up to the September 2013 Federal election, then Shadow Minister for Small Business, Competition Policy and Consumer Affairs, Bruce Billson, articulated the Coalition’s commitment, if elected, to extend the unfair contract protections to small business.10

Following that election, as Minister for Small Business, Mr Billson outlined the Government’s plans to extend the protections, already in place for consumers under the Australian Consumer Law, to the small business sector:

Small businesses often receive standard form contracts from business on a “take it or leave it” basis, and encounter the same disadvantage as individual consumers when it comes to negotiating contracts.

For example, we understand that primary producers are increasingly contracting directly with the large supermarkets, and that in many instances, supermarkets insist on standard form contracts.

We agree that many benefits flow from using standard form contracts — they save time and keep costs down. But they can also be used to shield a business from risk unfairly …

In extending these protections, we recognise though that there may be several issues to work through. A thorough consultation process is going to be essential if we all want to get this reform right. 11

First consultation Consistent with this commitment, on 23 May 2014 the Government released a discussion paper inviting public comment on the proposed extension of the unfair contract terms protections to small businesses.12 Announcing the release of the discussion paper, the Minister stressed the importance of ‘getting the balance right between protecting small businesses against unfair contract terms, while at the same time not imposing unnecessary burden on business’.13

Second consultation Having settled on a model for the amendments, the Government issued an Exposure Draft for comment from stakeholders.14 The Bill reflects the outcome of that consultation process. Whilst the text of the Bill introduced into the Parliament differs slightly to that of the Exposure Draft, in substance, the Bill and the Exposure Draft are of equivalent effect.

Unfair contract provisions The Australian Securities and Investments Commission Act and the Competition and Consumer Act contain unfair contract provisions which are in broadly equivalent terms which came into effect on 1 July 2010.

The relevant provisions in the Australian Securities and Investments Commission Act apply to a financial product or to a contract for the supply, or possible supply, of services that are financial services. The unfair contract protections attach to a consumer contract to which at least one of the parties is an individual whose acquisition under the contract is wholly or predominantly an acquisition for personal, domestic or household use or consumption.15

10. B Billson, Change of PM doesn’t change the game for small business as carbon tax goes up, media release, 1 July 2013; B Billson, The nation can’t afford Rudd’s cash splash on borrowed money, media release, 1 September 2013, accessed 30 July 2015. 11. B Billson (Minister for Small Business), Address to the Australian Food and Grocery Council Industry Leaders Forum, speech, Canberra, 30 October 2013, accessed 30 July 2015. 12. Department of the Treasury, Extending unfair contract terms protections to small businesses, consultation paper, Treasury, Canberra, 23 May

2014, accessed 30 July 2015. 13. B Billson (Minister for Small Business), Ministers agree to push for small business protections, media release, 23 May 2014, accessed 30 July 2015. 14. Department of the Treasury, Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015: Exposure Draft, Treasury

website, 28 April 2015, accessed 30 July 2015. 15. Australian Securities and Investments Commission Act, section 12BF.

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The relevant provisions in the Competition and Consumer Act apply to a consumer contract for a supply of goods or services or a sale or grant of an interest in land to an individual whose acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption.16

A term of a consumer contract is void if the term is unfair17 and the contract is a standard form contract.18

The unfair contract term protections operate as follows:

• an unfair term is one which would cause a significant imbalance in the parties’ rights and obligations arising under the contract, is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term and would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on19

• in deciding whether a contract is unfair a court must take into account the transparency of the term—that is, whether it is expressed in reasonably plain language, is legible, is presented clearly and is readily available to any party affected by the term20

• the exceptions to the unfair contract term provisions are terms that:

- define the main subject matter of the contract - set the upfront price payable under the contract or - are required, or expressly permitted, by a law of the Commonwealth, a state or a territory.21 The upfront price payable is the amount that is provided for the supply or sale under the contract. It is disclosed at, or before, the contract is entered into. It does not include any other consideration that is contingent on the occurrence or non-occurrence of a particular event.22

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.23 The relevant Acts list a number of matters which a court may take into account in determining whether a contract is a standard form contract.24

Court decisions Although the unfair contract provisions have been in operation since 1 July 2010, it was not until July 2013 that a case relating to those provisions was the subject of determination by the Federal Court. Upon application by the Australian Competition and Consumer Commission (ACCC), the Federal Court declared, by consent, that various clauses of ByteCard’s (also known as NetSpeed Internet Communications) standard terms and conditions were unfair contract terms. The unfair contract terms:

• enabled ByteCard to unilaterally vary the price under an existing contract without providing the customer with a right to terminate the contract

• required the consumer to indemnify ByteCard in any circumstance, even where the contract has not been breached and the liability, loss or damage may have been caused by ByteCard’s breach of the contract and

• enabled ByteCard to unilaterally terminate the contract at any time with or without cause or reason.

The terms were considered unfair as they:

• created a significant imbalance in the parties’ rights and obligations

• were not reasonably necessary to protect ByteCard’s legitimate interests and

• if applied or relied upon by ByteCard, would cause detriment to a customer.25

16. Competition and Consumer Act, schedule 2, clause 23. 17. Section 12BH of the Australian Securities and Investments Commission Act and clause 25 of Schedule 2 to the Competition and Consumer Act list examples of terms that may be unfair. 18. Australian Securities and Investments Commission Act, section 12BF; Competition and Consumer Act, schedule 2, clause 23. 19. Australian Securities and Investments Commission Act, subsection 12BG(1); Competition and Consumer Act, schedule 2, subclause 24(1). 20. Australian Securities and Investments Commission Act, subsection 12BG(3); Competition and Consumer Act, schedule 2, subclause 24(3). 21. Australian Securities and Investments Commission Act, subsection 12BI(1); Competition and Consumer Act, schedule 2, subclause 26(1). 22. Australian Securities and Investments Commission Act, subsection 12BI(2); Competition and Consumer Act, schedule 2, subclause 26(2). 23. Australian Securities and Investments Commission Act, subsection 12BK(1); Competition and Consumer Act, schedule 2, subclause 27(1). 24. Australian Securities and Investments Commission Act, subsection 12BK(2); Competition and Consumer Act, schedule 2, subclause 27(2).

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The Federal Court affirmed that within the particular internet services contract in question, the terms enforced by ByteCard were ‘deemed unfair and therefore void’.26

ACCC industry review In March 2013, the ACCC published the results of its review of standard form consumer contracts in the airline, telecommunications, fitness and vehicle rental industries, as well as some contracts commonly used by online traders. A select number of standard form contracts used by prominent travel agents were also examined.27

The ACCC identified eight key issues during the industry reviews, being:

• contract terms that allow the business to change the contract without consent from the consumer

• terms that cause confusion about the agency arrangement that apply and seek to unfairly absolve the agent from any liability

• terms that unfairly restrict the consumer’s right to terminate the contract

• terms that suspend or terminate the services being provided to the consumer under the contract

• terms that make the consumer liable for things that would ordinarily be outside of their control

• terms that prevent the consumer from relying on representations made by the business or its agents

• terms seeking to limit consumer guarantee rights and

• terms that seek to remove the consumer’s right to a credit card chargeback facility when buying the service through an agent.28

The ACCC report indicates that many of the reviewed businesses chose to make improvements to their standard form contract terms by amending or deleting the problematic terms raised during the review.29 However, it is clear from the issues highlighted during the review that the use of standard form contracts could disadvantage small businesses in the same way that it disadvantages consumers.

Committee consideration Selection of Bills Committee At its meeting of 25 June 2015, the Standing Committee for the Selection of Bills resolved to recommend that the Bill not be referred to Committee for inquiry and report.30

Senate Standing Committee for the Scrutiny of Bills At the time of writing this Bills Digest the Standing Committee for the Scrutiny of Bills had not published any comments in relation to the Bill.

Statement of Compatibility with Human Rights As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.31

The Parliamentary Joint Committee on Human Rights considers that the Bill does not raise human rights concerns.32

25. Australian Competition and Consumer Commission (ACCC), Court declares consumer contract terms unfair, media release, 30 July 2013, accessed 12 August 2015. 26. P van Esch, ‘Extending unfair contract term provisions for standard form contracts to small businesses’, Alternative Law Journal, 40(2), 2015, pp. 93-96 at p. 94, accessed 12 August 2015. 27. ACCC, Unfair contract terms: industry review outcomes, ACCC, Canberra, March 2013, p. 1, accessed 11 August 2015. 28. Ibid., p. 6. 29. Ibid., pp. 1-2. 30. Selection of Bills Committee, Report no. 8 of 2015, The Senate, Canberra, 25 June 2015, accessed 30 July 2015. 31. The Statement of Compatibility with Human Rights can be found at page 105 of the Explanatory Memorandum to the Bill.

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Policy position of non-government parties/independents At the time of writing this Bills Digest, the Bill had been introduced into the House of Representatives but had not been the subject of a second reading debate.

Position of major interest groups The Franchise Council of Australia has expressed concern that the Exposure Draft (and thus the final form of the Bill as introduced to the Parliament) does not deliver on stated policy objectives, and that it:

• will not provide sufficient mechanisms for business parties to contract with certainty. Without additional exemptions the party to a contract with a small business will always have a potential claim hanging over its head

• will make lenders less willing to deal with small business either directly, as loan documentation will be included, or indirectly when financing transactions

• does not take into consideration the fact that third parties frequently rely on, or are affected by, business contracts. Third parties can include financiers, landlords, suppliers, franchisees, contractors and employees

• will create additional disputation and steer parties towards the courts rather than towards mediation and other less costly alternative dispute resolution mechanisms and

• will see small business excluded from business opportunities, including opportunities such as tenders and major projects which typically operate on a standard form contract basis.33

Arguments for extending the protection Arguing in favour of the Bill, the Queensland Law Society has said:

… it is self-evident that the majority of small businesses do not have the same level of bargaining power as larger businesses … extending the unfair contract terms protections to small businesses merely improves access to justice for another group that has been identified as being at risk, or alternatively marginalised as a result of diminished access to justice.

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Arguments against extending the protection The case against extending the unfair contract term protections to small business is put succinctly by the Business Council of Australia:

We remain concerned about the additional regulatory burden on business from new compliance costs, regulatory uncertainty, the increased risk of litigation, and disincentives to use standard form contracts. Conversely, while there may be benefits to some small businesses from the changes, these are unquantified and the decision Regulation Impact Statement (RIS) does not demonstrate that these benefits offset the costs of the new legislation.

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Financial implications According to the Explanatory Memorandum:

The Australian Competition and Consumer Commission was provided $1.4 million in the 2014-15 Budget to support the implementation of this Bill. The enforcement of the unfair contract terms law may require regulatory resources,

32. Parliamentary Joint Committee on Human Rights, Twenty-fifth report of the 44th Parliament, The Senate, Canberra, 11 August 2015, p. 2, accessed 11 August 2015. 33. Franchise Council of Australia, Submission to Treasury, Extending unfair contract term protections to small businesses: draft legislation, May 2015, p. 1, accessed 11 August 2015. 34. Queensland Law Society, Submission to Treasury, Extending unfair contract protections to small business—consultation, 6 August 2014, p. 2,

accessed 10 August 2015. 35. Business Council of Australia, Submission to Treasury, Extending unfair contract term protections to small businesses: draft legislation, May 2015, p. 2, accessed 10 August 2015.

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including use of the court system, however it is expected that the majority of complaints will be resolved administratively and not through litigation. 36

Key provisions Australian Securities and Investments Commission Act Items 1-18 of the Bill amend the Australian Securities and Investments Commission Act.

The function of the Australian Securities and Investments Commission (ASIC) is to monitor and promote market integrity and consumer protection in the Australian financial system.37 Part 2 of the Australian Securities and Investments Commission Act sets out ASIC’s consumer protection role in relation to financial services. As stated above, the unfair contract provisions attach to a consumer contract for a financial product or to a contract for the supply, or possible supply, of services that are financial services.

Nature of a small business contract The Bill amends Part 2 of the Australian Securities and Investments Commission Act by adding a new class of contract; a small business contract.38 A contact is a small business contract if:

• 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 either:

- the upfront price payable under the contract does not exceed $100,000 or - the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $250,000.39 In determining whether the number of persons employed by a business is fewer than 20, a casual employee is not to be counted unless he or she is employed by the business on a regular and systematic basis.40

Where the contract is a contract under which credit is to be provided the upfront price payable does not include any interest payable under the contract.41

Exclusions The unfair contract protections will not apply to a contract in specified circumstances. These are:

• where the contract is the constitution of a company, managed investment scheme or other kind of body42 and

• where a prescribed law of the Commonwealth, a state or a territory applies to the small business contract.43

The Bill stipulates that before the making of a regulation prescribing a law, the Minister must be satisfied that the law provides enforceable protections for businesses employing fewer than 20 persons that are equivalent to the protections provided by the Bill. In doing so, the Minister must consider any detriment to businesses of that kind resulting from prescribing the law, the impact on business generally resulting from prescribing the law and the public interest.44

Declarations by the Court The Bill provides that a Court may declare that a term of a small business contract that is a standard form contract for a financial product, or for the supply of financial services, is an unfair term, upon application from a

36. Explanatory Memorandum, Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015, p. 4. 37. Australian Securities and Investments Commission Act, section 12A. 38. Items 3 and 8 of the Bill. 39. Australian Securities and Investments Commission Act, proposed subsection 12BF(4). 40. Australian Securities and Investments Commission Act, proposed subsection 12BF(5). 41. Australian Securities and Investments Commission Act, proposed subsection 12BF(6). 42. Australian Securities and Investments Commission Act, proposed subsection 12BL(1). 43. Australian Securities and Investments Commission Act, proposed subsection 12BL(2). 44. Australian Securities and Investments Commission Act, proposed subsection 12BL(3).

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party to the contract, or ASIC.45 A party to the relevant contract may only make such an application if, at the time that the contract was entered into, the party was a business that employed fewer than 20 persons.

Application of the Bill The amendments to the Australian Securities and Investments Commission Act which are contained in the Bill apply to contracts that are entered into on, or after, the commencement of those provisions.46 However, the amendments will apply to a contract which was entered into before that date if the contract is renewed or varied on or after the date that the provisions commence. In that case, the unfair contract protections will apply on and from the date of the renewal or variation.47

Competition and Consumer Act Items 19-47 of the Bill amend the Competition and Consumer Act. The amendments extend to both the body of the Act and to Schedule 2 to the Act which contains the Australian Consumer Law.

The amendments to the Competition and Consumer Act are in near equivalent terms to those in the Australian Securities and Investments Act, so that:

• a new class of contract, being a small business contract, is inserted into Part 2-3 of the Australian Consumer Law which relates to unfair contracts.48 As with the definition of small business contract to be inserted into the Australian Securities and Investments Act, it specifies that at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons. The amount limits for the upfront price payable under the contract are also the same. However, for a small business contract under the Competition and Consumer Act the amount of the upfront price payable will include any interest payable under the contract

• the unfair contract protections will not apply where a prescribed law of the Commonwealth, a state or a territory applies to the small business contract49

• before a regulation is made so prescribing a law , the Commonwealth Minister must be satisfied that the law provides enforceable protections for businesses employing fewer than 20 persons equivalent to those provided by the Bill. In doing so, the Commonwealth Minister50 must consider any detriment to businesses of that kind resulting from prescribing the law, the impact on business generally resulting from prescribing the law and the public interest51 and

• a court may declare that a term of a small business contract that is a standard form contract is an unfair term upon application from a party to the contract or the regulator, the Australian Competition and Consumer Commission.52 A party to relevant contract may only make such an application if, at the time that the contract was entered into, the party was a business that employed fewer than 20 persons.

Application of the Bill The amendments by the Bill to the Competition and Consumer Act apply to contracts that are entered into on or after the commencement of those provisions.53 However, the amendments will apply to a contract which was entered into before that date if the contract is renewed or varied on or after the date that the provisions commence. In that case, the unfair contract protections will apply on and from the date of the renewal or variation.54

45. Australian Securities and Investments Commission Act, proposed subsections 12GND(2) and (3). 46. Item 18 of the Bill inserts proposed Part 22 into the Australian Securities and Investments Commission Act which sets out the application of the provisions of the Bill once enacted. 47. Australian Securities and Investments Commission Act, proposed subsection 301(2). 48. Competition and Consumer Act, Schedule 2, proposed subclauses 23(4) and (5). 49. Competition and Consumer Act, Schedule 2, proposed subclause 28(4). 50. Clause 2 of Schedule 2 of the Competition and Consumer Act defines the term Commonwealth Minister as the Minister who administers

Part XI of the Competition and Consumer Act. 51. Competition and Consumer Act, proposed subsection 139G(2A). 52. Competition and Consumer Act, Schedule 2, proposed subclauses 250(2) and (3). 53. Item 47 of the Bill inserts proposed Part 1A into Chapter 6 of Schedule 2 of the Competition and Consumer Act, which sets out the application

of the provisions of the Bill once enacted. 54. Competition and Consumer Act, proposed subclause 290A(2).

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Key issues Key issue—what constitutes a small business transaction

Number of employees There are a number of definitions used in current Commonwealth legislation to describe a ‘small business’. The key definition of small business used by the Australian Bureau of Statistics (ABS) is largely based on the number of employees, with a small business defined as an ‘actively trading business with 0-19 employees’.55 The Bill is consistent with that definition.

The Australian Securities and Investments Commission Act currently defines a small business as a business employing fewer than 100 people if the business is, or includes, the manufacture of goods, or a business employing fewer than 20 people otherwise.56 The definition of small business in the Corporations Act 2001 is in equivalent terms.57 The terms of reference for the Financial Ombudsman Service and the operation of the Code of Banking Practice are based on that definition.

However, the Bill’s definition of small business contract is narrower in its application. The Financial Ombudsman Service recommends that, to ensure that the protections afforded to small business are applied consistently, the Bill should use the existing definition.58

Section 152AGA of the Competition and Consumer Act defines a small business customer as a customer who is a small business employer (within the meaning of the Fair Work Act 2009, being an employer with fewer than 15 employees).59 However this definition is used only in relation to the telecommunications access regime in Part XIC of the Competition and Consumer Act.

Another concern with the definition of small business contract arises in relation to ‘the level of due diligence that contracting parties will be required to undertake to determine whether the unfair contract terms apply’.60

Upfront price payable When the unfair contract protections were first announced in 2009, then Minister for Competition Policy and Consumers Affairs, Chris Bowen, announced that the protections would not extend to ‘a standard-form contract where the upfront price payable for the services (including financial services), good or land supplied under the contract exceeds $2 million’.61 The amount of the upfront price payable under the Bill is significantly less than this amount.

The Small and Medium Enterprise Business Law Committee of the Law Council of Australia has expressed its concern that the price payable criteria set out in the Bill’s definition of a small business contract ‘only applies to low value contracts for goods’ and that this ‘may result in the proposed legislation not achieving its objective to balance the playing field by removing the impact of such unfair terms on small businesses’.62

The Competition and Consumer Committee of the Business Law Section of the Law Council of Australia has raised two issues:

• first, whether an entire contract will be subject to the unfair terms regime if there is a supply of multiple goods or services under the contract, one of which is priced at less than $100,000 or $250,000 (as the case may be). For example an agency or dealer agreement may provide for a range of payments for different

55. Australian Bureau of Statistics (ABS), Small business in Australia, 2001, cat. no. 1321.0, ABS, Canberra, 23 October 2002, accessed 31 July 2015. 56. Australian Securities and Investments Commission Act 2001, subsection 12BC(2), accessed 31 July 2015. 57. Corporations Act 2001, subsection 761G(12), accessed 10 August 2015. 58. Financial Ombudsman Service, Submission to Treasury, Extending unfair contract term protections to small businesses: draft legislation,

15 May 2015, p. 2, accessed 10 August 2015. 59. Fair Work Act 2009, section 23, accessed 11 August 2015. 60. Baker and McKenzie, Submission to Treasury, Extending unfair contract term protections to small businesses: draft legislation, 12 May 2015,

p. 3, accessed 10 August 2015. 61. C Bowen (Minister for Competition Policy and Consumer Affairs), The national unfair contract terms law, media release, 5 June 2009, accessed 10 August 2015. 62. Small and Medium Enterprise Business Law Committee, Law Council of Australia, Submission to Treasury, Extending unfair contract term

protections to small businesses: draft legislation, 12 May 2015, p. 2, accessed 10 August 2015.

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goods and services under the contract including a licence fee, advertising support fees and commission payments and

• second, it is not clear how the upfront price concept is intended to apply in circumstances where the total value of payments expected to be made under a contract is dependent upon the level of goods or services supplied or acquired under that contract. For example, if there is a contract for the supply of goods for $500 per good and there is no minimum order requirement.63

In relation to the second of these matters, the Business Council of Australia considers that the $100,000 upfront price payable under the Bill risks inadvertently capturing high-value contracts. This is because the upfront price of a contract or the unit price of a good or service may be low, but regular payments made over the contract period may make it a high-value contract.64

Key issue—small business - to - small business contracts The rationale for the extension of the unfair contract protections to small businesses is that they are ’vulnerable to unfair terms in standard form contracts’ which may be offered on a ‘take it or leave it’ basis.65

The Queensland Law Society has questioned ‘whether [those protections] should apply to a contract with a small business regardless of the counterparty, or whether [they] should only apply to a contract with a small business where the counterparty is a corporation (or other business) that is not a small business’.66 The Bill has broad application so that it will apply to contracts between small businesses. The Competition and Consumer Committee of the Business Law Section of the Law Council of Australia has suggested that the Bill should stipulate that the unfair contract protections ‘apply to contracts involving either the supply of goods or service by a small business, or acquisition of goods or services by a small business’.67

According to the Shopping Centre Council of Australia:

Any notion that small business to small business contracts should be regulated should be emphatically ruled out. The only justification for regulating business to business contracts is an assessment that there is some aspect of market failure, such as an imbalance in bargaining power. We are unaware of any evidence that suggests that there is a market failure in markets where small businesses are dealing with small businesses.

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The absence of any stakeholder submissions indicating that there is a problem in small business to small business transactions would appear to support this view. The Australian Chamber of Commerce and Industry has also expressed the view that ‘small business to small business contracts should not be included in the proposed regime’ on the grounds that the threshold criterion of ‘unequal’ bargaining is ‘unlikely to arise in contractual negotiations between small businesses’.69

From another perspective, it has been suggested that ‘it is conceivable that a contracting business with fewer than 20 employees with significant assets or income will potentially be afforded protections for unfair terms despite having resources to undertake proper risk management, take legal advice and bear risk under the contract’. 70 In any event, the extension of the unfair contracts protections in this way may be an unintended consequence of the Bill.

63. Competition and Consumer Committee of the Business Law Section of the Law Council of Australia, Submission to Treasury, Extending unfair contract term protections to small businesses: draft legislation, 12 May 2015, p. 5, accessed 10 August 2015. 64. Business Council of Australia, Submission to Treasury, Extending unfair contract term protections to small businesses: draft legislation, op. cit., p. 5. 65. Explanatory Memorandum, Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015, op. cit., p. 7. 66. Queensland Law Society, Submission to Treasury, Extending unfair contract protections to small business—consultation, op. cit., p. 2. 67. Competition and Consumer Committee of the Business Law Section of the Law Council of Australia, Submission to Treasury, Extending unfair

contract protections to small business—consultation, 5 August 2014, p. 19, accessed 11 August 2015. 68. Shopping Council of Australia, Submission to Treasury, Extending unfair contract protections to small business—consultation, 1 August 2014, p. 7, accessed 10 August 2015. 69. Australian Chamber of Commerce and Industry, Submission to Treasury, Extending unfair contract term protections to small businesses: draft

legislation, 12 May 2015, p. 1, accessed 11 August 2015. 70. Law Society of South Australia, Submission to Treasury, Extending unfair contract term protections to small businesses: draft legislation, 14 May 2015, p. 2, accessed 10 August 2015.

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Key issue—financial products and services The amendments to the Australian Securities and Investments Commission Act in relation to financial products and services provided to small business were not well received by stakeholders in the finance industry.71 Of concern is that the effect of the Bill will be to give rise to uncertainty about the enforceability of financial contracts.72

The Australian Bankers’ Association has highlighted the legal tension which may arise should the unfair contract protections be extended in accordance with the proposed amendments to the Australian Securities and Investments Commission Act. Because banks are subject to prudential oversight by the Australian Prudential Regulation Authority (APRA), there are special terms and conditions which are required to be included in credit contracts by the regulator. These include ‘events of default by the business covering insolvency and pre-insolvency events; material adverse changes in its financial condition; non-compliance with financial covenants; default interest clauses; changes in a bank’s regulatory capital requirements and increased costs clauses’.73 The Australian Bankers’ Association is concerned that any and all of these terms could be challengeable under the proposed amendment. However, ‘these types of clauses are necessary to ensure compliance with the banks’ legal and prudential obligations and to ensure the agreed return on their investment’.74

In order to neutralise this tension, the Australian Securities and Investments Commission Act may require an additional amendment to carve out those contract terms which are required by APRA.

Key issue—operation of the exclusions The exclusion of the unfair contract protections from small business contracts to which a prescribed law of the Commonwealth, a state or a territory applies is particularly relevant to the Competition and Consumer Act.

Currently Part IVB of that Act contains the definitions of industry code75 and mandatory industry code.76 Essentially, a corporation must not, in trade or commerce, contravene an applicable industry code.77

A number of stakeholders have argued that the existing mandatory industry codes should be prescribed.78 According to the Law Council of Australia:

While each of the … Codes is stated to be for the purpose of regulating "conduct" between participants in the applicable industries, what they in fact regulate is the dealings between parties to specified contracts. For example, the Franchising Code and the Oil Code each stipulate requirements or restrictions on the terms of (respectively) franchise agreements and fuel re-selling agreements in relation to conditions affecting assignment, termination, dispute resolution, limitations of liability and the conduct of marketing or cooperative funds; the Horticulture Code stipulates specific requirements for the terms of trade offered by traders and the provisions of horticulture produce agreements.

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In relation to the amendments to the Australian Securities and Investments Commission Act proposed by the Bill, the Insurance Council of Australia has stated that whilst it considers that insurance contracts will be excluded

71. See for example, Commercial Asset Finance Brokers Association of Australia Limited, Submission to Treasury, Extending unfair contract term protections to small businesses: draft legislation, 12 May 2015, accessed 10 August 2015. 72. Arnold Bloch Leibler, Submission to Treasury, Extending unfair contract protections to small business—consultation, 1 August 2014, p. 4, accessed 10 August 2015. 73. Australian Bankers’ Association Inc., Submission to Treasury, Extending unfair contract term protections to small businesses: draft legislation,

14 May 2015, p. 4, accessed 10 August 2015. 74. Ibid.

75. The voluntary industry codes include the Food and Grocery Code of Conduct, accessed 11 August 2015. 76. The mandatory industry codes are the Franchising Code of Conduct, the Oil Code, the Horticulture Code of Conduct, the Port Terminal Access (Bulk Wheat) Code and the Retail Unit Pricing Code, all accessed 11 August 2015. 77. Competition and Consumer Act, section 51ACA. 78. The Queensland Law Society has argued against the extension of the unfair contract protections to franchise agreements, ‘on the basis that

these agreements are already subject to a mandatory industry code prescribed by the Commonwealth’. Queensland Law Society, Submission to Treasury, Extending unfair contract protections to small business—consultation, op. cit., p. 3. The Franchise Council of Australia also considered that franchise agreements should be automatically excluded from the operation of the unfair contract protections. Franchise Council of Australia, Submission to Treasury, Extending unfair contract term protections to small businesses: draft legislation, op. cit., p. 1. 79. Competition and Consumer Committee of the Business Law Section of the Law Council of Australia, Submission to Treasury, Extending unfair

contract protections to small business—consultation, op. cit., p. 11.

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from the unfair contract protections proposed by the Bill in accordance with section 15 of the Insurance Contracts Act 1984,80 it believes that for the avoidance of doubt the exclusion should be stated explicitly.81

Concluding comments Many stakeholders have expressed concern about the factors that make up a small business contract under the Bill. The Small Business Commissioner for Western Australia has suggested that the Federal Government:

… undertake a post-implementation review of the legislation (and any associated case law) within two years to ensure that protections are operating effectively and not leading to uncertainty, increased litigation and higher costs to small businesses. This is particularly the case in areas that cross-over with other regulated contractual relationships, most notably in the case of retail leases and franchise agreements.

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80. Insurance Contracts Act 1984, accessed 11 August 2015. 81. Insurance Council of Australia, Submission to Treasury, Extending unfair contract term protections to small businesses: draft legislation, 14 May 2015, p. 2, accessed 11 August 2015. 82. Small Business Development Corporation, Submission to Treasury, Extending unfair contract term protections to small businesses: draft

legislation, 12 May 2015, p. 2, accessed 10 August 2015.