Farm Weekly

Unfair contract term reforms: Big changes to help small businesses

Unfair contract term reforms: Big changes to help small businesses

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On February 9, 2022 the Treasury Laws Amendment (Enhancing Tax Integrity and Supporting Business Investment) Bill 2022 (Bill) was introduced to Federal Parliament. The Bill seeks to strengthen provisions which protect consumers and small businesses from unfair contract terms (UCTs) in standard form contracts.

The Bill follows concerns from the Australian Competition and Consumer Commission (ACCC) that the current regime does not deter businesses from using UCTs. One area of focus for the ACCC, when reviewing the use of UCTs, is agriculture.

Most agriculture businesses are small, or family owned, and will frequently deal with standard form contacts from larger organisations.

What is an unfair term?

Under the UCT regime, an 'unfair' term:

1. causes a significant imbalance in the parties' rights and obligations;

2. is not reasonably necessary to protect the legitimate interests of the party advantaged by the term; and

3. causes financial or other detriment to the other party if relied on.

Examples of these terms include: unilateral variation, indemnity, penalty and termination clauses, automatic renewal clauses, and some exclusivity clauses.

In 2019, proceedings were brought against Mitolo Group Pty Ltd (Mitolo) relating to contracts with its potato growers. The proceedings resulted in several terms in those contacts being declared unfair.

These included rights for Mitolo to unilaterally vary the price paid to growers for their potatoes, to declare potatoes 'waste' without a proper process being outlined, and prohibitions on farmers selling to other buyers.

In the Mitolo case pecuniary penalties were applied; due to breaches of the Horticulture Code of Conduct. Currently penalties are not an available remedy under the Australian Consumer Law (ACL).

What contracts are covered by the UCT regime?

The regime only applies to standard form contracts. Farmers and agriculture businesses will be familiar with standard form contracts, which may apply when buying machinery, selling produce or engaging an agent.

These are contracts prepared by one party, usually a larger business, with little or no scope for negotiation on the terms. These contracts can disadvantage smaller businesses, who may have little choice than to except the terms offered.

However, the regime also only applies to small business contracts:

a. where one of the parties has fewer than 20 employees; and

b. the upfront price payable under the contract does not exceed $300,000 (or $1m if the contract duration is over 12 months).

Proposed changes

The Bill seeks to deter the use of UCTs, through stricter remedies for breaching UCT provisions, and widening the class of contracts covered by the regime.

Small business contracts would include:

a. where one party has fewer than 100 employees (rather than 20); or

b. where one party has an annual turnover of less than $10,000,000. (The upfront contract price criteria is removed).

A penalty regime would be introduced, whereby, if a business proposes, applies or relies on an UCT, a pecuniary penalty may be given. Under the ACL, a penalty of $500,000 may be ordered for individuals and, for corporations, the greater of:

  • $10,000,000;
  • three times the value of the benefit received, or
  • 10 per cent of the party's annual turnover.

Courts will also have expanded powers when making orders in relation to unfair terms.

What to do?

It's important that smaller businesses, that may be more vulnerable to unfair terms, fully review any contracts they enter. If there are terms that don't seem fair, ask the other party to amend or remove them. There are also options to report any UCTs, either within the State or to the ACCC.

For businesses using standard form contracts, now is a good time to review and assess whether there could be any offending terms.

Make sure that you are aware of common unfair terms under the regime and understand the criteria for assessing whether a term may be considered unfair. Although the proposed changes will not apply straight away, reviewing and assessing contracts can be a complex and time-consuming task.

If you need advice on unfair contract terms, or assistance reviewing your standard form contracts, please contact HHG Legal's agribusiness lawyers on (08) 9322 1966 or email reception@hhg.com.au.

Visit https://hhg.com.au/sectors/agribusiness for further information.

Written by:

Matthew Lilly, Special Counsel | HHG Legal Group | matthew.lilly@hhg.com.au

Kimberly Jones, Lawyer | HHG Legal Group | kimberly.jones@hhg.com.au

Unfair contract term reforms: Big changes to help small businesses