The long-awaited shake-up is aimed at stopping big business squeezing small business partners such as through changing supply contracts without approvals, suddenly terminating contracts and the auto-renewal of contracts without an agreement, and enforcing long lead times to cancel.
Big business had lobbied against the tougher unfair contract laws, warning it would increase red tape and raise costs for large companies.
The government originally extended unfair contract term protections for consumers to small business in 2016.
However, the law only allows big businesses to be taken to court to have the relevant terms declared unfair and void. Even if the contract term is proven to be unfair, it is not illegal and there is no penalty to big business.
Labor, the competition watchdog and the small business ombudsman have pressed the government to make unfair contract terms between big and small businesses illegal and subject to penalties.
Commonwealth, state and territory ministers responsible for consumer affairs met last week and agreed to strengthen unfair contract term protections.
These reforms will improve consumer and small business confidence when entering into contracts.
— Assistant Treasurer Michael Sukkar
Assistant Treasurer Michael Sukkar said: “Evidence gathered through public consultation indicates that unfair terms remain prevalent in standard form contracts and there is uncertainty around the scope of the existing protections.
“These reforms will improve consumer and small business confidence when entering into contracts.”
The shake-up will include making unfair terms unlawful and giving courts the power to impose a civil penalty.
The definition of small business will be expanded from less than 20 employees to less than 100 employees and an annual turnover test of less than $10 million will be introduced as an alternative threshold for determining eligibility.
The proposed law change will also improve clarity on when the protections apply, including on what is a “standard form contract” and consider whether a small business had an effective opportunity to negotiate the contract.
Courts will have more flexible remedies when they declare contract terms unfair.
KHQ Lawyers principal Iain Irvine said the broader application of the laws and threat of a civil penalty would encourage businesses to review their contracts.
“There will be more of an incentive for companies to go back and look at the standard form contracts they are using and make sure they are even-handed when applying to consumers and small businesses.”
‘A huge step’
Australian Small Business and Family Enterprise Ombudsman Kate Carnell said the new small business thresholds would ensure that 99 per cent of businesses were covered by the tougher unfair contract rules.
It would stop big business “screwing small business, efficiently and legally”.
“This is a huge step in the right direction and the challenge is to make this happen quickly because it’s been a long haul,” she said.
The proposed financial penalty has not yet been established.
“Penalties need to be big enough to be a real deterrent,” Ms Carnell said.
She said governments – and not just big business – should be added to the unfair contract laws.
“Some of the worst contracts with unfair clauses come from governments,” she said.
Reluctant to pursue litigation
The courts will be the arbiter, not the ACCC as the ombudsman proposed.
Small business has often been reluctant to pursue litigation against big business customers, for fear of damaging commercial relationships and because of a lack of time and resources.
Australian Competition and Consumer Commission chairman Rod Sims said last month there was a “problem” with the existing unfair contract regime.
“Making unfair contract terms illegal and subject to penalties would be an enormous boost to small business,” Mr Sims said.
The ACCC has taken action against large businesses for unfair clauses in standard contracts, such as clauses that allow large businesses to change the pricing unilaterally or remove any recourse even if the larger business is at fault.
“The significant problem here is that, while many companies have changed their contractual terms voluntarily, others only do so on the court steps, if at all,” Mr Sims said.
“The ACCC has to do all the work to put each matter before the court, and gains minimal wider deterrence benefit from these actions.”
“Why change your unfair contract terms if you can get the benefit of them until the ACCC calls and does all the work to be able to take court action.”
Treasury will develop exposure draft legislation that is expected to be released next year for consultation.
The move is the latest example of the Morrison government siding with small business over big business, following forcing big companies to disclose the amount of time it takes to pay small business suppliers, insolvency law changes and review of the franchising code.