Big business to pay penalties for unfair contracts under national plan to better protect SMEs

Small businesses will soon be better protected when entering into contracts with big business after federal and state governments made a joint agreement to outlaw unfair contract terms.

Unfair contract protections were extended to small businesses back in 2016, however, under current laws, unfair contract terms are not illegal, which means contract terms can be voided by courts but civil penalties cannot be imposed.

This week’s agreement will give courts the power to impose penalties when a breach occurs, and follows a lengthy consultation process.

Assistant Treasurer Michael Sukkar announced on Tuesday the government has secured the agreement of state and territory consumer affairs ministers to strengthen protections for SMEs, saying the changes will:

• make unfair terms unlawful and give courts the power to impose a civil penalty;
• expand the definition of small business and removing the requirement for a contract to be below a certain value; and
• clarify what is a ‘standard form contract’ and when the protections apply.

Sukkar said Treasury will now develop draft legislation for the changes, which will then be subject to a consultation process.

Australian Small Business and Family Enterprise Ombudsman Kate Carnell welcomed the national agreement, saying financial penalties will be “a real disincentive” for large businesses to have unfair contract terms.

Importantly, Carnell says the new guidelines will see a significant expansion to the size of businesses covered by the protections.

“It used to be under twenty employees, now it’s under $10 million turnover, or up to one hundred employees,” Carnell tells SmartCompany.

The new guidelines for standard term contracts will also remove any caps on the value of the contract.

“Before there was a cap on a single contract and there were lots of contracts that could be bigger than that, particularly in industries such as milk and dairy production,” Carnell says.

While Carnell is pleased that courts will be able to impose civil penalties on big businesses, she would have preferred the Australian Competition and Consumer Commission (ACCC) to have played that role because pursuing legal action is “a costly, stressful and time-consuming exercise”.

“We would have preferred the ACCC to have that power but it’s a huge step in the right direction,” she says.

“Previously an unfair contract term wasn’t unlawful and all that happened is that if a clause was found to be unfair was it became null and void, so it fell out of the contract and you couldn’t enforce it. But you also couldn’t give it penalty either,” Carnell explains.

“The reality is that a penalty will hopefully be a real disincentive to have unfair contract terms in contracts,” she says.

Carnell’s office has been engaged in this issue for over five years and that even though the current unfair contract terms legislation was a step in the right direction, there has been limited capacity for small businesses to dispute clauses in standard form contracts.

“There has always been arguments from some big businesses that certain contracts weren’t standard form contracts because there was some capacity to negotiate them. So having greater clarity on what is a standard form contract is useful,” Carnell says.

“We look forward to seeing draft legislation to ensure these necessary reforms come to fruition as a matter of urgency.”